Perhaps a quick breather for the Gold Bull

During yesterday's session gold behaved pretty normally given market conditions. On Monday, in typical gold fashion, December (front month) futures made a high of 1799.9. Yesterday (Tuesday) it made a high of 1799.8, only to retrace before eventually breaking through 1800. What was interesting was the end of day action. Volume had been light the whole day, and as settlements came out around 1:45 pm just below 1800 gold started to come off. It has not been uncharacteristic for gold to make moves higher or lower after settlements come out, but at its trough (post settle) gold made a new low on the day near 1779... a near 20 dollar drop. For the kind of volume that had traded, and the relatively contained intraday moves, this was quite surprising to me. It is true that the low volume while reaching a high  that we experienced today (we are at the highs since September in gold) is reminiscent of the volume we saw when gold made all time highs before falling off a cliff. This is worth bearing in mind, though I do think it is worth considering that the equity market volume has also been very light as of the last two days. The low volume across markets makes me take the light volume we saw in gold at the top with a grain of salt, when otherwise it might set off sell warning signals.

Still I cannot say that my short term outlook for gold has not turned more bearish. In the middle of the day I was thinking to myself about all of the people who become wrapped up in "what the market is supposed to do" and how their steadfast feelings can only be hurtful at times like this. Then, I caught myself saying the same things post settlement. I called friends seeing if there was any news out that I was unaware of. At the time, it looked like Berlusconi was going to be resigning... I couldn't really see how this would be so bearish for gold. The Euro rallied on that news, meaning weaker dollar, so unlikely that should cause a sell off at all, let alone a 20 dollar sell off. Then I learned that the Chinese 2 and 10 year bond yields had become inverted (generally indicates possible recession ahead). So I thought I had found my reason. But it turns out copper, which has its price tied more to the Chinese economy than either gold or silver was not making new lows as gold was. And the equity markets? They were making new highs on the day. 

Today was one of those days where I just have to admit I have not the slightest clue as to what caused this divergence, as very little that I can see in the news or trading action can help me explain it. As such, while I think that the Euro situation is very bullish for gold, I cannot help but take this afternoons price action as a short term bearish signal for gold. As successful traders have often told me, you have to look at what the market is telling you. This is a short term move at this point, and as such it is a short term call. And while the bull in me would love to buy the dip and say it is unwarranted, prudence tells me it is better to be flat to short this market.