Tuesday, May 10, 2011

Gold Manages To Shake Off Morning Drop And Close With Small Gain

Accompanied by a decent gain in silver and a larger gain in WTI crude oil, gold continued to recover from last week's rout. Both gold and silver were helped by bargain hunting and short covering, as uncertainty over European sovereign debt returned. The greenback had less influence on gold's gyrations than in the recent past, although the influence was still there. Thanks to a steady afternoon after a mid-morning recovery, gold closed with a small gain on the day.

Regular trading didn't start out all that well, because of a decline that visited the metal at 8:20 AM ET. Not abating until 9:05, the selling pressure shoved it down to $1,506. Gold then picked itself up and climbed back to around $1,510. After resting through inconclusive movements, the metal then found the strength to march up to $1,516. There it stayed until a late-morning slip took it down to $1,513.

Climbing back up, it again rambled around $1,516. A smaller dip at 1:15 PM prepared it for hefting itself up to $1,520.80 right at 2:00. Losing its drive, it slowly shuffled back down to $1,516 where it dawdled for the last hour of trading. As of the close, the spot price was $1,516.10 for a gain of $3.00 on the day. The Kitco Gold Index split the gain into +$0.70 for predominant buying and +$2.30 for a weakening greenback.

Gold's six-month chart, from Stockcharts.com, shows its recent string of gains dwindling:

Measuring from interday peak to trough, the recovery since last Thursday's bottom has gone a little less than half-way. From close to close, it's gone a little more than a third of the way. If gold is destined to fall apart after enjoying a relief rally, now would be a plausible time for it to turn around and get back to sinking. If so, or if the metal turned down after climbing a bit more, what to watch for is where it bottoms. A close of a little below $1,475 would signal a lower low after a lower high; an interday low of $1,465 would do the same. So far, gold hasn't shown any hint of preparing for such an extensive dive. If it manages to fall and then turn around after making a higher low, then we're looking at another consolidation phase.

Turning to the greenback, the U.S. Dollar Index ended up lower than where it started after another morning run that burned out at a lower level than yesterday's. After sinking to 74.55 when regular trading started, it jumped up to a little above 74.85 and in so doing helped push down gold. Then it lost traction, and slipped back down to 74.65 while gold recovered. After scrabbling back up above 74.75 in late morning and early afternoon, it again lost its footing and slipped down to 74.55. As the day came to an end, its fluctuations diminshed to near-stillness. As of 5:15, it was loitering at 74.545.

Its own six-month chart, also from Stockcharts.com, shows it racking up another small loss aftter making a lower interday peak:

Interestingly, the Index didn't make a lower interday low today; yesterday's was lower. Its action over the last two days has been consistent with exhaustion after its leaps last Thursday and Friday. Its Relative Strength Index (RSI), found at the top of its chart, has sunk back to the 50 neutral level. Normally, the Index's RSI has peaked around 50 because of its downtrend, although the rule has been bent for some countertrend rallies. If the rule more or less holds up this time 'round, then the jump late last week wil prove to have been a monumental fake-out. For this scenario to play out, the Index would have to sink again and make a new thirty-one month low. As of now, it's not even close to doing so.

Despite some morning volatility, gold put on a good show today. Again, its action at the start of regular trading proved to be misleading. The upcoming overnight trading session will provide a clue about whether gold is going to tail back and resume sinking. If it does, or if it ends up a wash, then $1,500 is the level to watch if the metal does turn down. If that level holds, then gold may not resume its plummeting after all.

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