Tuesday, May 31, 2011

Gold Slumps Despite Greenback's Tumble

The creep-up that took place on razor-thin trading during yesterday's holiday reversed itself this morning, despite the greenback tumbling last night. WTI crude oil managed to gain $2 a barrel, and silver put on close to 40 cents an ounce from yesterday, but gold failed to follow in either of those other commodities' wakes. The holiday hiatus over, the metal dropped to $1,537. After a challenge of the $1,540 resistance level, which got it well above $1,540, it sunk to $1,535 and fluctuated in the high 1530s. Around 4 AM ET, with the greenback slumping again, gold again challenged the $1,540 resistance level and got up to $1,541.40. Again, that challenge would be defeated: the metal slumped down to the high 1530s and stumbled around. Not helping gold, but helping the Euro, was a report that May Eurozone twelve-month trailing inflation unexpectedly slipped to 2.7% from April's 2.8%. Although the official explanation has not been given, the most common-sensical reason is a drop in oil prices. That slip is not expected to stop inflation from peaking above 3.0%; nor is it expected to deter another rate hike by the European Central Bank.

As noted above, gold didn't get any real boost from the usual source even though two other inflation-linked commodities did. As of 8:15, the spot price was $1,536.10 for a drop of $3.00 on the day. The Kitco Gold Index attributed -$9.30 to predominant selling and +$6.30 to a weakening greenback. Link
The U.S. Dollar Index, as indicated above, greeted the return of normal trading with an extended skid as the Euro recovered to erase about half of the loss it sustained early this month. From around 74.95, it first slipped and then tumbled last evening to bottom around 74.45 last night. A recovery climb topped out at a little above 75.65 which was reached at 3:10 AM ET. After that peak, the Index slid to 74.475 but double-bottomed there. It then climbed up to 75.65 it settled into a range. As of 8:24, it was slipping back at 74.60.

A Reuters report said that gold was pulled in two different directions by nervousness over Grecian sovereign debt and a rise in oil, which the article said held gold back. The Euro was lifted by a Wall Street Journal report saying that the German government may make concessions to facilitate another bailout of the Grecian one. Still, gold's down on the month and is having a tough time climbing.
"We have the Greek and the U.S. debt issues, it is all supportive, but what is going to make gold go back up to the highs of the year? Can it achieve that just by renewed interest or does it require some big-impact event?" said Mitsubishi analyst Matthew Turner.

"We've seen after a brilliant start to the year, the global economy has slowed quite quickly, partly due to Japan but also because of a slowing China and a slowing U.S. and so on ... the question is can the economy recover on its own or will it get worse, or will we see more stimulus measures?"
Speculators increased their holdings of gold contracts for the first time since mid-April last week. Gold ETFs, although still down on the year, have attracted more cash than other commodity ETFs this month. Because of the Memorial Day holiday, holdings of the SPDR Gold Shares Trust were unchanged yesterday at 1,213.17 tonnes.

A Wall Street Journal report said that spot gold came close to making a four-week high on Eurozone concerns. The article saying that the German governnment may drop its demand for Grecian sovereign debt to be rescheduled as the price of the second bailout, helped the metal somewhat.
In a monthly report, Swedish bank SEB said the persistent speculation over the debt crisis, including the recent impasse over Greece's funding needs as well as the increasing risk of contagion within the euro zone, is lending strength to the market.

Continuing demand for the metal as a hedge against inflation in China is also supportive for gold and should help the market to "easily" pass above $1,600 per ounce in the short term, the bank said.
Gold ETF holdings are also creeping up.

With no economic data to influence it, gold sunk to the low 1530s after regular trading started. Although initially holding above $1,535, it sunk below on the greenback reversing direction and making a run at 74.65. As of 8:42, the spot price was $1,533.90 for a drop of $5.20 on the day. The Kitco Gold Index assigned -$11.35's worth of change to predominant selling and +$6.15's worth to greenback weakening. After making that jump, the U.S. Dollar index slipped back after encountering resistance, but it got its strength back and tried again. As of 8:46, it had slipped again at 74.61.

Yesterday's gains were reversed, which isn't that much of a surprise since trading was very thin and unrepresentative of a normal day. Despite two tries at breaking $1,540, gold fell further below its close last Friday once 8:30 arrived. It's not a very auspicious start to the shortened week, but the first half hour of regular trading isn't often representative of the rest. Still, gold is going to endure some volatility today as the greenback shakes off last night's tumble. With luck, there'll be another try at $1,540 but the odds don't seem good for a sustained break above that resistance level.

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