Dear CIGAs,
Once again, risk was back in vogue as the Euro-Yen cross built on yesterday’s big upside day. With the equities continuing their bear market rally, the reflation trade was the game of the day as money poured back into the commodity complex for the second day in a row. Crude oil shot up to $60 at one point in the session while the grains, particularly soybeans, were all higher. None of this was lost on the Forex markets which ingloriously dumped Humpty Dumpty, aka the US Dollar, and bid up all of the major currencies against it. Even the Yen was higher against the Dollar today. The commodity currencies, the Canadian, Australian and New Zealand Dollars, were all beneficiaries of the money flows into the commodity sector.
The Dollar’s weekly chart is looking more and more like it has posted a major long term double top just above the 89 level. It is perched precariously on the 50 week moving average having found support at that level last week and thus far this week. Should this all important technical level give way, the Dollar will more than likely drop down towards the 100 week moving average near the 79.20 level. A close beneath that level would indeed confirm the double top on the weekly chart and would be quite ominous for the greenback moving forward. Such an event would catapult gold above the $1000 level. I have no doubt that the US monetary authorities are closely watching the price action of the Dollar, not to mention the US long bond which looks quite sickly.
Gold continues to meet with concerted selling near the $930 level (according to the latest Commitment of Traders report – that selling is coming from the bullion banks – no surprise here). This level has been tested once and held – should it be tested a second time and give way, the momentum to the upside will increase. Currently gold is seeing more of a grinding move higher rather than a strong uptrend. I am of the opinion that will change if $930 gives way on a closing basis.
The mining shares are displaying a stronger looking price chart than their yellow counterpart over at the Comex with the pattern more closely resembling that of a pause in a uptrend. The HUI needs to clear 360 on a settlement basis to kick the next leg higher while the XAU needs a convincing settlement above the 143 level to scuttle the potential double top near that region and send price charging higher.
The Continuous Commodity Index (CCI) looks like it took a brief pause in its three week uptrend but today is moving back up again. Were it not for the weight of the sagging natural gas market, chances are it would be just a few points below its recent peak. There is a bit of a conflict taking place in gold that involves this move higher in the commodity complex. The gold bears are harrumphing about a rising commodity complex signifying that the economy is slowly improving and therefore gold no longer needs to receive safe haven flows and is due for a fall. The problem with that argument is that their reason for the move higher in the entire commodity complex fails to take into account the link with the falling US Dollar. Money is flowing into commodities not to much due to the improving economy scenario (although I will cede that is part of the reason) but rather due to investor concerns over the long term health of the US Dollar and the inflationary repercussions of nearly unlimited creation of the same. Simply put, savvy investors can read the handwriting on the wall and know full well that the Greenback is heading for a sharp fall and are therefore attempting to secure their wealth from the ravages of the coming tidal wave of inflation. In such an environment, those making the argument that the price of gold will fall due to the lack of a need for a safe haven are seriously mistaken. Gold will shrug off any pressure tied to such thinking and will track higher along with the rest of the commodity complex as the Dollar drops below major support in the months ahead.
I wish for the sake of my children’s future I could say otherwise, but our monetary authorities and the plague of free-spending politicians have sealed the doom of the US Dollar. Its day of supremacy is slowly fading and with it goes our way of life. We are witnessing an historic transition occurring even if the vast majority is blithely unaware of it. The Dollar will go the way of Pound Sterling and all we can now do is to observe the tragic process knowing that it could have and should have been prevented if only we had true statesmen instead of short-sighted, self-serving politicians and bureaucrats. You sow the wind and you reap the whirlwind.
Click chart to enlarge today’s hourly action in Gold in PDF format with commentary from Trader Dan Norcini
