Monday, May 16, 2011

Pushed By Greenback, Gold Goes On Round Trip

Thanks to the U.S. dollar finally tumbling after getting exhausted, gold had a nice run upwards from $1,490 to $1,505. The upward part started before regular trading did, at 6 AM ET, and continued until late morning. The downward part lasted until the end of regular trading, although it petered out considerably in later afternoon as support came in around $1,490. Both waves largely mirrored the greenback. At the end, gold was left with a five-dollar loss on a largely bittersweet day. Some consolation comes from silver doing worse: the gray metal closed at fifty cents below its early-morning low. WTI crude oil closed at just above $97, seventy-five cents below its early morning low. By comparison to the other two, gold did fairly well.

The early part of gold's rally was interrupted by a sell-off as the pit session began. From above $1,497, the metal sold down quickly to below $1,495. A recovery climb was interrupted by a further slip to below $1,494. Double-bottoming at that level, around 9 AM, gold then took off as the greenback resumed sinking. Within seventy-five minutes, the metal had gotten to $1,505. Selling pressure made the metal pull back and then double-top at 11:00.

From then, it was mostly downhill. Instead of mirroring the greenback, gold's initial fall anticipated the currency's turnaround which started at 12:45. Gold had climbed back to $1,499 at that time, but not before sliding to $1,495. The greenback recovering, the metal slid swiftly down to the low 1490s and stayed there for the rest of the session except for a brief climb above. Gold having anticipated the recovery, although it could be argued that the metal overanticipated, it fell little as the greenback continued to climb in later afternoon. As the end of the electronic-trading hitch approached, the metal briefly blipped below $1,490 but support buying kept making that level an effective if spongy buttress of support. As of the close of regular trading, the spot price was $1,489.80 for a drop of $5.40 on the day. The Kitco Gold Index attributed -$7.80 to predominant selling and +$1.80 for a weakening greenback.

Gold's six-month chart, from, shows the metal's decline coming to a halt a little above where its recent declines left it:

Although the pattern gold's making may be a chart artefact, where I see something pretty that's of no significance, gold seems to be coming to a halt in the lower part of its plummet range and waiting for something to happen. In chart jargon, it's making a symmetrical triangle. From the standpoint of economic theory, a symmetrical triangle represents an asset veering in on a temporary equilibrium price. Should the asset trade in a narrow range after forming the triangle, the equilibrium price discovery was fairly accurate over that stretch of time. In charting, which takes into account the twists and turns of a world filled with rapid changes (as well as crowd-think), a symmetrical triangle is deemed to forecast a continuation of the prior move. In gold's case, the prior move was downwards. A further tumble, or even plummet, is not fated to visit the metal. However, given late spring's unaccomodating seasonality and the prior plummet, gold is at risk for a further downturn.

As for the U.S. Dollar Index, it didn't quite make a round trip but its fall this morning was something to behold. From above 75.8 just before regular trading started, it fell to below 75.3 before managing a recovery climb around 11:20. Dipping to below 75.25 in a final slip, it then reversed and climbed - although unevenly - to above 75.6 by the end of the session. As of 5:15, it was topping out at 75.62.

Its own six-month chart, also from, shows its fall coming after a new interday high:

The Index was pushed up to that interday high by a fall in the Euro that accompanied the arrest and arraignment of Dominique Strauss-Kahn. The currency markets evidently decided that his arrest wasn't a rational reason for the Euro to sell off, so it recovered in later morning. Despite today's fall, the Index's short-term recovery is still going strong. There may be further pullbacks in the days ahead, but its short-term recovery is beginning to look like an intermediate-term climb. Should the Index fall and trough at a higher low, which it's likely to do, it should muster the strength for another upward move.

I admit that gold didn't show the downward volatility I thought it would this morning, but its morning rise was cancelled out and it did end up lower at the end of regular trading than at the start. Its comparatively good performance with respect to oil and silver shows there's some sustained buying interest around $1,490. If luck holds, this buying interest will prove to give durable support to the metal. If not, then the dog days of summer have arrived early.

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