Dear CIGAs,

Increased selling pressure hit the gold market during today’s session as the broken neckline support level that had been serving to hold prices from moving lower finally gave way overnight. While the equity markets were not soaring higher, neither were they giving up much of their gains from yesterday. That too served to undercut safe haven flows in the yellow metal. The last straw was the ETF, GLD, finally showed some movement in its reported holdings yesterday – unfortunately that movement was a drop of 8 tons – the first such movement in nearly three weeks. Adding insult to injury, more Dollar strength left the bulls little to reinforce their side today.

Investment demand has been the driver of gold prices recently with the sharp climb in the ETF holdings serving to more than offset any slowdown in jewelry demand and increase of scrap sales. That investment demand, like it or not, is gauged by the industry by monitoring these reported gold holdings. Yesterday I mentioned whether or not the recent buyers of GLD were “sticky”; they had not been selling while gold at the Comex was moving lower in price. The drop in reported holdings is therefore worrisome although one day a trend does not make (I sound like Master Yoda speaking here).

Gold has now moved down the test the former swing low made in early April. Bulls must hold prices here to avoid a sharp drop down to $852 – $850. Watching the price action by the minute today, it is evident that the bears are working hard to breach that level and get to the sell stops sitting just under that level. Longs are valiantly attempting to prevent that from occurring  but they need help from some other outside source (much stronger crude, a change in the Euro-Yen cross, or sharply lower stocks) to bolster their line of defense. The problem is that judging from the open interest readings, not only are some longs running, but new sellers are now coming into the market with several funds taking sizeable short positions. That 100 day moving average is keenly watched by technically oriented trading funds and now that it has been breached, their algorithms have them selling. It will take some strong value based buying early next week to keep the technical picture from breaking down further. Bulls need to push prices back above $880 pronto like.

The HUI and the XAU look to be targeting the early March lows.

Safe haven flows into bonds are also seemingly coming to an abrupt halt with prices moving to a one month low. They still remain trapped within the confines of that huge price range made the day of the Fed’s announcement of quantitative easing but they are well off the spike high that occurred back then and less than two points away from that day’s low. A break of that level would have profound implications for the future course of interest rates. I find it telling that in spite of widely publicized and much heralded Federal Reserve buying of longer dated Treasuries, prices cannot move higher. It is obvious that a huge supply is lurking above the market with traders apparently deeply concerned how much of this mammoth amount of new debt can be sold.  What should be particularly troubling, is that we have just now scratched the surface of this new indebtedness, that has now effectively enslaved not only the current generation of Americans, but your children and their children.

The CCI is showing some strength today with the move higher in the energies supporting it while weakness in the metals is undercutting it.

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