Dear CIGAs,

Economic news out of both Britain and Europe was so bad today that it sent both the Pound and the Euro (not to forget the Swissie) crashing and burning. That shoved the Dollar higher. Couple that with a sizeable selling bout that hit crude oil and gold had the stool kicked out from beneath it.

In Britain the news that economy experienced the greatest contraction since 1980 and that the country is officially in recession, rubbed salt in the wounds of the Pound which has been acting like a lead anchor has been hanging upon it the last few days. In Europe it was the largest drop in industrial orders ever recorded that sank the Euro along with less than confidence building talk coming from the German Finance Minister about the health of the Stability and Growth Pact. The Yen experienced a bit of short covering ahead of Japanese repatriation as it has been beaten with an ugly stick over the past week. The sum of all this is that it looks like the Dollar was the recipient of safe haven flows by default with bonds getting a mild boost as equities sold off early in the session. Gold however followed the Euro lower in spite of a reminder that all is not quite so well in economic la-la land.

As stated here many times, when crude oil gets whacked, it is a general rule that most every other commodity market is going to experience selling. That is because of computer algorithms that use the price of crude oil as one of numerous inputs to spit out directions for their fawning subjects at the offices of the hedge funds and index funds. There are of course exceptions to this rule but the fact is that when commodity markets move higher in tandem on what I call a “reflation trade”, they move in unison. When deflation fears arise once again, those same commodity markets see all of the fund positions come right back off again and down they go. There really is nothing other than this occurring. Just stick a crude oil chart up alongside of a chart of the S&P and you will see it. In effect, the entirety of all our commodity markets are doing nothing other than following the ups and downs of the US equity markets as sentiment shifts back and forth between an improving economy and a deteriorating one.

Gold is still stuck in a  large trading range with $960 on top and $900 and then $880 on the bottom. Within that is a narrower range between $940 and $920.  It cannot muster enough strength to breakout to the topside as growing sentiment that stocks and the economy have bottomed are undercutting safe haven flows while quantitative easing and its devastating inflationary aspect are keeping it underpinned. The latter has money moving back into commodities in general and that has a goodly number of players looking at the charts and calling a bottom in commodities as a whole. This is where gold’s support is coming from. We are back to having a classic duel between short-term oriented traders and longer-term oriented investors/traders who are buyers on breaks in price.

One thing about this range trade is that it has taken some of  the volatility premium out of the option market and that gives some of you folks who like to use options a chance to get them at a slight reduction in price.

So much for the nice weekly finish in the HUI and the XAU. Both were on track this week to put in very strong performances and leave the weekly charts looking quite friendly. Today’s price action undercut all of that nice work both indices had been putting in to paint a strong technical picture on the weekly chart by closing above the 50% Fibonacci retracement level as measured from the March 2008 high and the October 2008 low. Not only that, both indices had managed to better the 50 week moving average but bulls let their hard gotten technical gains slip from their fingers with the indices stalling out in these critical resistance zones. They have a shot at getting back in the driver’s seat next week but will need to act quickly to prevent another bout of selling from discouraged buyers and aggressive shorts from surfacing once again. The session is only half over yet so there is an outside shot that the bulls could find some grit and pull off a victory yet although admittedly, that has not been a defining characteristic of this crowd for a long time now.

I am keeping an eye on copper which has been slowly grinding higher based on China’s stimulus efforts and some thinking from the recent housing data that the US economy has seen the worst. Some of the technical indicators are near the overbought zone so we will have to see if it is just carving out a new trading range or is going to attempt a trending move to the upside. Copper still has a historic role as an overall economic condition indicator so its performance over the next few weeks will be telling. A “V” shape move in copper will portend a “V” shape recovery while an “L” shaped moved in copper will portend more of a leveling out of the economy with a sideways type of activity. I do not mind admitting that a “V” move would catch me by surprise as I do not expect to see such a thing develop, not with the current level of indebtedness among so many consumers and the severity of job losses.

Crude oil looks more and more like it has bottomed out and while it does not appear ready to embark on a solid uptrending move, I think it safe to say that the worst of the demand news has been pretty much baked into the cake at this point. There are a couple of things now working in crude’s favor – first is the quantitative easing policy of the Fed which is highly inflationary. We have seen investors buying crude in time past as a proxy for inflationary expectations. The second is that supply is dropping off and has been coming down to meet the existing level of demand. Any uptick in demand will be felt quickly in the crude oil market. I think OPEC is trying to come up with a supply number that pushes the crude price up to $75 where they would be happy. Their trick is to keep it from moving too much higher which would serve to encourage a start up in chatter about alternatives such as increased ethanol or other bio-fuel production, which they obviously do not want to see.

By the way, get ready for those new automobiles you drive to be made out of plastic and paper. The Obama administration just imposed directives on their new slaves (the automotive industry) to meet improved mileage standards. You do that by making the vehicle lighter and/or smaller meaning many Americans are going to pay with more serious injuries when involved in collisions. My own view is that if people want cars that get better gas mileage, let them simply buy them from the dealers – there are scores of them out there already. If enough folks do that, the automobile manufacturers will ramp up production to meet this new demand. Then again, this is what we can expect now that the feds are dictating what we may or may not do. I am waiting for them to mandate cameras in our bathrooms and electronic metering devices on our toilets to monitor whether we are flushing our toilets too frequently and using too much water. They could really juice things up if they hooked that stuff up to some sort of talking recording: “WARNING – you are exceeding the government determined level of water use for flushing – please desist immediately or your picture will be displayed on U-Tube along with the all the rest of the public enemies of the government – also, we know that you like guns too”.

The case could be made that the long bond chart is setting up a bullish flag formation but I would want to see them take out the 50% retracement level drawn off the January high and the late February swing low. That level closely corresponds with the spike high made on the day that the Fed first announced $300 billion worth of US Treasuries last week. Until then, they too seem range bound. A push above that level would indicate that chatter about an economic recovery is premature and fear is back in vogue.

Enjoy your weekend – throw some meat on the grill, invite a friend or two over,  and try to forget about these markets for a while.

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