Dear CIGAs,

I suppose we can all rest much easier these days as retail sales numbers out this morning indicate that the economy is on the mend and it is going to be a Merry Christmas season for all the folks selling toys and RV’s. I keep reading a lot of, “better than expected” comments coming from the various analysts being interviewed by the wire service writers. As long as I have been at this, I am still always perplexed at where they all come up with these “expected numbers”.

Regardless, we are now watching another one of those shifts in market psychology that comes along fairly regularly. Previously, whenever we had seen numbers that were “better than expected”, the Dollar was sold off, carry trades were slammed on with a vengeance, commodities shot higher and gold moved up sharply as the “risk trades” were leveraged up on the “improving global economy” theme. Whenever we got “worse than expected” news, the opposite occurred – The Dollar moved higher, carry trades were reversed and bonds went up.

Now what we are seeing, and this seems to have only begun about a week or so ago following the last jobs report numbers, “good” or “better than expected” news is seeing the Dollar rallying with certain commodities selling off, crude oil in particular, and gold getting both fresh short selling and long liquidation. What to make of all this? Hard to say because from a fundamental standpoint one would assume that if the economy were improving, demand for many commodities, particularly crude and other energy related supplies, would be improving with price moving higher. That has not been the case – crude oil has been getting walloped lower and has now broken down below the psychological support level of $70.

There is also further chatter than the improving economic outlook is going to force the Fed to begin its attempt to sop up some of the excessive liquidity that it has been providing and that means a hike in short term interest rates. That is where the Dollar is drawing support from. Gold then sets back in price as the Dollar moves higher.

Still, it does not look like a large scale move in Dollar carry trade unwinding because there is not a blanket selling of nearly every commodity class across the board as is generally seen when the carry is lifted. For example, corn, beans and wheat are higher today, copper is higher, cattle are higher, as are sugar and cotton as I write this. That makes me lean more towards the idea that the sell down in gold is merely a retracement of its sharp gains since late October. There is buying coming in as I can see it from the price action on the intraday charts but Dollar strength is also precipitating a “sell the rally” mentality which can be seen on the short term charts. That is why the gains are cut in gold as it moves up from session lows. What further complicates the analysis is that many players are already squaring books ahead of the upcoming end of the year and are closing down trading until January. Their departure reduces liquidity and allows for much wider price swings, and if it is possible at this point, even more volatility.

Gold is now down into a region where I have expected to see very strong buying emerge, namely near the 1120 -1115 region. That closely corresponds to the 45-40 level on the RSI, which has held price setbacks since June of this year. So far it is holding but if it fails, it can easily head down towards $1100. That would put it very close to the uptrend line that has been in place since August-October which would definitely need to hold to prevent more serious short term chart damage.

The bond market has been selling off and is now down at levels where it has found buying support since August of this year. If they cannot hold the 117 level, a move down towards 115 is highly probable. Below that you go all the way down to 112 or so before any serious buying might be expected. Still, even with this week’s and last week’s move lower, the bonds have done nothing but merely move down to the bottom of a 4 month long trading range, so there is not yet a clear technical signal that a rise in long term interest rates is in store. We will need to watch these things closely for a sign of what the interest rate guys are anticipating as that will have an impact on the gold market.

The Dollar is looking much improved on the daily price charts with that close above 76.50. The weekly chart is still ugly however and until we see a change in trend or at least an indication of a change in the trend on that chart, the rallies are to be considered blips in a bear market.

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