Dear CIGAs,

Gold succumbed to selling pressure which was widespread across all of the metals in today’s session. Silver was hit particularly hard as the recent huge drawdown in Comex warehouse stocks came to an end (at least as of yesterday). Copper was derailed with the lower than expected Chinese GDP numbers undercutting recent bullish enthusiasm for the red metal while both platinum and palladium were weaker. With crude oil moving lower or at least unable to maintain its footing above the $50 level, gold simply ran out of friends today.

The technical picture for gold suffered a setback with its break under the 100 day moving average which has also taken it beneath the broken neckline of the head and shoulders topping pattern on the short term charts. Bulls have the onus upon them to hold prices near $880 and from setting back much further and threatening the $865 level. If they fail there, the bearish flag formation will be complete as well as bringing the head and shoulders pattern back into effect. That would give gold potential to move down to near $850. Failure there would target $816 – $820. About the best the bulls seem to be able to do right now is to keep it from falling further as they are unable to push it strongly enough to dislodge the sellers lurking overhead near the $910 level.

Gold just seems to be acting “tired” right now. Keep in mind that modern markets have now morphed into being all about momentum. Funds do not make money if prices do not move particularly to the upside. Once momentum stalls out, funds go and look for opportunities elsewhere. That is what we are seeing in gold for now. Generally when this sort of thing occurs and funds exit, the bullion banks have been the ones supplying the buying as they cover existing shorts into the fund selling. Physical market buying from India and other points to the mid and far East tend to reinforce the demand picture as buyers move in to take advantage of the lower prices. The key in determining whether gold will maintain its footing above its chart support levels is whether that buying is sufficiently large enough to offset investment side liquidation. One thing that clouds this picture somewhat is that the reported holdings of the big gold ETF, GLD, have remained unchanged at 1127 tons for the last three weeks. That is quite odd given the weakness in gold over this same period. One would expect to have seen those numbers drop off given the fact that open interest in Comex gold has fallen off nearly 40,000 contracts over that same period. Are the buyers of GLD, “sticky buyers”, who are long term holders and is the selling in gold a Comex phenomenon? I am simply not sure but it is difficult to envision gold falling much further if the GLD numbers do not drop off as they have generally done in years past during periods of gold price weakness. We’ll keep an eye on this for you.

I want to draw your attention to the entire commodity complex as a whole as indicated by the Continuous Commodity Index or the CCI. I am including a weekly chart to show a broader picture of what is taking place. If you notice, the CCI bottomed out in December of last year and has spent the last 4 months slowly grinding higher. Notice that there is no sharp, upward thrust but rather a steady, tortoise-like crawl higher. I monitor this chart to try to get some sort of visual gauge depicting the battle between the deflationists and the inflationists. Commodities are the arena in which this battle will play itself out so by keeping a watchful eye on this chart, we can see which side is gaining the upper hand. I would suggest that the deflationist forces have seen their best days and the mood is ever so painfully slowly shifting towards concerns related to inflation. The inflation numbers yesterday suggested the contrary but those are not forward looking. With quantitative easing in full force, commodity markets are already anticipating the return of inflation. This is another factor that will eventually works in gold’s favor  as an uptrending CCI is not conducive to falling gold prices. Odds favor a continuation of this pattern in the CCI with the chance of a sharp upward spike at this time quite remote. Only a break below that December low would give the deflation side argument any new life.

I might add this is why crude oil has been trading so contrary to its current negative fundamentals. Crude oil has become a proxy for inflation and trades more like a currency than an outright commodity. That is one of the main reasons crude oil traders are tearing their hair out trying to understand what is taking place in that market.

Chart patterns on the HUI and the XAU are decidedly bearish with both indices now moving downs toward the 100 day moving average. Both the 10 day and 20 day moving averages are now moving lower reinforcing the short term negative technical picture. The one saving grace that I can see on the daily charts of both indices is that some of the technical indicators are now down in the oversold zone from which prices have popped higher over the last 4 months.

We are not getting much if any help from the bond market as far as clues for what we might expect in the economy moving forward. They are trapped in directionless, sideways trade with the very short term pattern looking bearish but the pattern over the last few months typical of a broad range trade. Bonds have not been able to best the high made the day that the Fed first announced its debt monetization policy but neither have they gone back down to revisit the low made that very same day prior to the announcement that afternoon.

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