Dear CIGAs,

Another week – another rotten day in the broad equity markets. Alas – you began so well last evening! What is it that ails thee? Wherefore doth thou persist in sinking lower and lower? Those might be the questions being asked by traders who saw the overnight trade in the equity futures moving sharply higher on the “good” news that the feds would only take over 40% of Citi instead of 51% or more. Sure – that was a great reason to buy. Traders began looking at the rise and saw another opportunity to get short from a better level and down it went.

I have to say that it is evident to me that the market has lost all confidence in the current administration’s point men on the economy and their “plan” to turn things around. You have to begin to fear that we could very well see an even sharper acceleration in the equity selloff based on the way the market is acting. This thing sticks its head up and the axmen come in and quickly lop it off. That kind of price action is terribly bearish. Confidence, that elusive, ethereal substance, once lost, cannot be recaptured until something occurs which gives solid evidence that it is sufficient to avert the crisis and quite frankly, many are looking for it and cannot find it.

Incidentally, the DOW is now back to levels last seen in October 2002. If it moves a bit lower from that level, it will be trading at levels last seen in October 1997! Another way of saying this is that all of the paper gains for the last 11 ½ years in the DOW are now smoke.

I heard what I consider a most intriguing idea put forth by a Republican Congressman out of my state Texas. He suggested that if the government feels compelled to try to do something to stem this crisis, why not simply declare a national tax holiday period of two or three months, perhaps even more, in which all withholding taxes are no longer taken out of American workers’ paychecks. In other words, let them keep the full amount of their wages. Couple that with a reduction in the corporate tax rate that levels the playing field between American business and our overseas competitors. His point made eminent sense to me. If the government is going to go into hawk, why not do so by letting the people keep the money that they have earned. Imagine what folks would think once they actually realized how much the government pilfers from them even week, or other week or month only to then spit it away on more useless pork? The problem with that idea is that it makes it almost impossible for the special interest block voters to be bribed by those who love to be the distributors of others money.

Meanwhile, the Euro, after rising sharply overnight (Yippee –let’s hear it for “risk” trades once again) got a case of heartburn or perhaps more aptly, sickness associated with being in high places, and promptly collapsed lower in the New York trading session as “risk” trades went back out. Seriously folks, it is a gigantic waste of time even attempting to come up with explanations for the price action we are having to witness in so many of these markets. It is called hedge fund madness. Plow back in buying with both fists only to abandon ship diving headlong into the water the next minute. When the dust settles most of the hedge funds will no longer be in existence. Good riddance is my attitude. Maybe some of their managers will find shoveling asphalt or screeding concrete on the new “shovel-ready” projects more fitting to their disposition to shove things around without any particular attention to patterns. Then again if word got out among the construction crew who they were, some of them might end up as road filler so perhaps they might want to avoid calling any attention to themselves.

Gold was taken quite a bit lower last evening as the thirst for risk came back meaning appetite for gold was out. It did manage to recapture most of its losses during the day session as it dawned on many traders that nothing the feds were going to do was going to effect any sort of quick recovery and that the time for risk is not perhaps as near as some might have been thinking.

Technically, the dip buyers are active in the gold pit which is a positive not to mention the price action in the gold shares as indicated by the HUI and XAU which both managed to withstand a great deal of selling pressure coming from the price drop in the broader equity markets.

Short term oriented traders used and are using the $1000 price level to book some profits since that was a target that some were looking for but longer term oriented players are using any weakness to get in or increase positions. This is actually good price action. As I mentioned Friday, this is one of the two possible scenarios I outlined. A panic rush into gold that would see it shoot up $55-$75 or more a day is in no ones interest. Those moves, while extremely sharp and massive, fizzle out in a collapse. We want to see a sustained, measured, steady move higher which consists of periods of consolidation in which the market adjusts to the new price level and has some time to acclimate itself to the new supply/demand equilibrium. A move such as this, has long-lasting staying power. While parabolic blow off runs can be fun for traders who catch the long side, they are extremely tricky because they collapse so quickly that very few can exit in time to keep most of their profits. Also and more importantly, holders of the physical metal are usually not of the nature that they are sitting there watching a parabolic blow off run with their car keys in their hands waiting to rush out of the door of their home to head down to the local coin shop to cash in. Such folks have bought and are holding the metal to protect themselves from what they see heading their way and they do not intend to part with the metal without a great deal of evidence to convince them that things have turned for the better.

Volume in last Friday’s Comex session was strong with an increase in the open interest of about 6600 contracts. The data suggests strong short covering was also met with fresh selling by the commercials once again alongside of the increase in the fund long position.

Goldman was the largest stopper once again in the February Comex Gold contract delivery process – most interesting to say the least.

Friday’s commitment of Traders data showed us the norm – funds buying with commercials selling but I should also note that a large number of the funds were adding fresh short positions, almost 5,000 to be exact through Tuesday of last week. Needless to say, those positions are history now as they are deeply underwater or were covered at a loss, which is the more likely scenario.

Bonds were down sharply overnight on the gain in the equity and the rush toward “risk” trades. They reversed course and are in the plus column now as I write this with the sell off in the equity markets continuing unabated.

Crude is back down after settling a bit above $40 on Friday trading near the $38.50 level. Nat gas recaptured the “4” handle. Platinum traded lower but managed to stay above the $1000 level. Palladium also was lower but is still above $200.

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