Dear CIGAs,

Gold showed a good deal of resiliency this morning even in the face of a stronger dollar as it bounced from near the intersection of upsloping trendline support and horizontal support near the $810 level. Whether the bounce in crude oil from off of support had anything to do with its strength is unclear but the fact that it managed this is friendly nonetheless.

The dollar’s gains were supposedly related to the improvement in the balance of trade picture although  some of its strength against the Euro in particular was in association with ratings agency warnings about some euro-zone countries’ credit worthiness. Yesterday it was Spain that made that news- today it was Ireland and Greece. There was even chatter about a breakup of the EMU (European Monetary Union) as a result. Jim has long said that the Euro is really a basket of junk that owed its strength to the fact that is was simply NOT the Dollar. This has been proven correct as there are now forces at work in Euroland which are creating stresses in that monetary union. Germany in particular has become a sort of safe haven among Euro debt buyers with money flowing into German bunds shoving yields there lower while other nations are seeing rising yields. This should prove to be quite interesting as the year progresses. The point in all this is that perhaps some of the money that might have been flowing into Euro debt is now making its way to gold. That would explain the strength in gold even in the face of the weaker euro. At some point in this endgame, nearly all of these paper currencies are going to end up forfeiting investor confidence as the chinks in their façade become more and more visible to even casual observers.

Speaking of the balance of trade – The numbers for November 2008 were released this morning and they showed a remarkable shrinkage of the trade deficit to $40.44 billion where the average consensus number was $51.30 billion. Both exports and imports were down with imports dropping a whopping 12% versus the previous month coming in at $183.25 billion, the lowest reading since November 2005. It is evident that the slowing economy severely curtailed consumer spending. The resulting slowdown impacted even the trade deficit with China which shrank to $23.06 billion versus October’s deficit of $27.96 billion.

The trade deficit number was the lowest since November 2003.

Looking at the numbers in a bit more detail, we find that in November, the import price of crude oil fell 27.5% to an average of $66.72/barrel versus that of October at $92.02. The US- OPEC trade deficit number for November was $5.61 billion – that is the lowest number since April 2004 when it came in at $5.3 billion. Nothing like cheap oil to bring down the trade numbers… wait until next month!

My thinking is that were it not for the stronger dollar, the deficit would have narrowed even more. Exports in dollar terms were $142.8 billion versus $151.54 billion in October. In the ag sector for instance, some would-be grain buyers are watching the dollar and are putting off buying as the US grains become more expensive due to it strength. Same goes for some of our domestically produced meat. Exported related businesses here want a weaker dollar while importers love a stronger dollar. The former makes our goods cheaper overseas and stimulates buyers to act while the latter helps consumers here at home by making the cost of imported goods lower.

Open interest showed a sharp drop in yesterday’s session as more than 15,000 contracts were liquidated. That was expected given the size of the sell off. I do believe however that some of this fall off in the open interest is related to the commodity index fund rebalancing that continues to occur. Index funds, instead of rolling out of the February into the April ahead of the delivery period for the Febs simply chose not to re-establish longs in the April in order to bring their portfolio holdings into line with the new weightings for gold. Keep in mind that the percentage weighting of gold was lowered in some of the indices and that means either longs are liquidated outright or new purchases are simply skipped. Either way to see gold moving higher in the face of this is again encouraging. It shows that there are other buyers are work besides the index funds.

The mining shares were up slightly today and while this is friendly, nothing conclusive can be drawn from today’s price action.

Bonds are acting a bit uncertain as to what they want to do right now. They are caught between poor economic numbers and the indisputable fact that a huge supply of the things is coming at the market with the fury of a hurricane at some point in the not-too-distant future.

Platinum and palladium were both lower along with the commodity currencies among which the New Zealand Dollar was notably weaker. For today at least, commodities are out of vogue once again. Even natural gas was dumped today and that came in the face of some of the coldest weather this year in store for the upper mid West. Some places in Minnesota and in North Dakota had thermometer readings of -35 below! With those temps I wonder if the heaters ever actually shut off or if they run all day and all night. I think the bears have the right idea – just sleep the winter away – that way we would not have to sit here and watch the stupidity that passes for market price action each day and try to come up with reasons to explain the inexplicable.

I would like to see gold get back above the $840 level to feel a bit more comfortable about its near term future. For now, it has held its first test of support above the 40 day and the 100 day moving averages. The 10day and 20day have both stopped moving higher with the 10day now threatening a bearish crossover of the 20 day so the bulls will have to perform here and push the price back above yesterday’s high to shake the confidence of the shorts but as stated – they will first need to get back above $840 and then they can target $860 where they are buy stops lurking. Downside support below $810 is the even numbered psychological support near $800 which also happens to closely correspond with the 50day moving average. None of gold’s friends will want to see the 50 day moving average violated.

Those of you who might watch these things will note that the usual chart painting that regularly occurs at the Comex as the pit session draws to a close once again appeared for all to see. The obvious intention of the culprits at work here is to dishearten the bulls by erasing all of the gains made during the session since it is the pit close which gets reported to the technical data services for use in charting the Comex gold price. I am reaching the point with the gold market of relying more and more on the 12 hour charts simply because gold trading is too global now to focus so narrowly on the price action generated by 5 hours of shenanigans in New York.

Gold deliveries did not occur today as no contracts were assigned although January showed an increase in open interest so I am expecting to see more deliveries either tomorrow or the next day. Very soon we will be seeing just what kind of deliveries we can expect with the February contract. Those funds who intend to play the paper game against the bullion banks never seem to learn. Either that or they have something written into their charters that specifically states that no brains are to be used when it comes to their trading “strategies”. If these guys simply learned to buy in size on the price dips, the bullion banks would have NO ONE to buy from to effect their short cover. That, in addition to standing for delivery of the physical gold and taking it out of the warehouses, and the reign of the bullion banks over the paper sand box would immediately come to an inglorious end.

Click chart to enlarge today’s hourly action in Gold in PDF format with commentary from Trader Dan Norcini