Gold, Influenced By Silver, And Oil, Gets Dragged Down

Instead of staying steady like I thought, gold tumbled in late morning - and the greenback didn't have much to do with it. WTI crude oil went for a tumble before a little before gold was impacted, but silver was pulled down at the same time. Gold and silver tracked each other down fairly well: the grey metal got to as low as $39 and spent the afternoon in a $39-$40 range. Gold fell into a $1,510-$1,520 range, although it was below the former number at its nadir. The current pullback is now more than a fall out of bed. Gold's declined for the third day in a row; today's loss of more than twenty dollars puts the metal more than sixty dollars below its $1,578.20 record made last Sunday.

The metal did fairly well at the start of today's regular trading, although that good start proved to be misleading. After poking up above $1,540 on a disappointing ADP payrolls report, which showed only 179,000 private-sector jobs added during April, the metal peaked at $1,544.40 around 8:30 AM ET. Although falling back, it stayed in the high 1530s with recurrent pokes above $1,540 until 10:20. It was at that time that the tumble started, with gold slipping below $1,535. The decline in silver and earlier tumble in oil caught up with it. The trigger for the tumble was a recovery in the greenback, but that recovery didn't push the currency up above 73.15. The overnight high was more than 73.3.

Having breached $1,535, momentum selling came in and the metal fell for the next two hours. At its nadir, it touched $1,505.50. Finally shaking off the tumble, the metal spent the rest of the afternoon climbing slowly and hesitantly in a relief rally that had no spring-back. After poking above $1,520 at 3:00, it settled into the high 1510s for the rest of the afternoon. As of the close, the spot price was $1,516.50 for a drop of $20.60 on the day. The Kitco Gold Index split the loss into -$20.45 for predominant buying and -$0.15 for a strengthening greenback. As the latter figure indicates, the U.S. Dollar Index ended up almost where it was at yesterday's close.

Gold's six-month chart, from Stockcharts.com, shows its current pullback being stronger than the last four:



Needless to say, gold is no longer overbought. The metal's Relative Strength Index, found at the top of its chart, is well below the overbought level; in fact, it's approaching the 50 neutral level. In a sense, gold's current pullback was inevitable give how long and strong gold had rallied. (I myself had the jitters when it was overbought.) Again the question of how far it will go remains. Gold's had a really nice run since the end of January, but the seasonality winds are changing. The old maxim "sell in May and go away; don't come back 'til Labour Day" is beginning to sink in. What to watch for is where the pullback ends, and how well gold does subsequently. If the metal has trouble breaking its new record, and can't get above $1,600 when the climbing is fast and free of obstacles, then the gold market is offering short-term traders a second chance to get out.

As for the U.S. Dollar Index, it managed to fall to a new thirty-one month low of 72.685 just after 10:00. Peaking just before regular trading began, at 73.1, it started falling slowly but then accelerated before slowing down again. That new record low made for a climactic bottom, after which the Index reversed itself. Climbing in late morning and early afternoon to as high as 73.1, it slipped back to 72.95 before fording up to a higher level in later afternoon. As of 5:15, it was stepping sideways at 73.12.

Its own six-month chart, also from Stockcharts.com, shows it stuck:



The Index is still oversold, but less so than beforehand. Instead of a sharp jump, it's been paused for the last four trading sessions centered around 73.0. Although it continues to make new lows, those lows are spikes that haven't been followed through. Its interday highs are close to others in that timeframe. It's as if the Index doesn't know what to do. Given its still-extant oversoldedness, the risk of a jump remains but its oversold condition may simply drain away as it refuses to fall further. I wouldn't count on the latter, though.

For the third day in a row, gold has clocked in a serious loss. My hope for a gain today was far from coming to pass. Evidently, this pullback is more serious than the last two: gold may go below $1,500 before it's over. It's gone to the point, though, where pulling out would miss the opportunity of a second-chance rise. If late spring and early summer follow the script, there'll be more damage done over the course of the next couple or few months. But, gold will be primed for another autumn run once the damage has been done.