Dear CIGAs,

A plunge in new home sales was enough to derail the equity markets this morning after they had earlier made a new yearly high. That then emboldened Dollar bears with the Euro shooting higher followed by the Yen which also rebounded following its sharp losses of the last few days. That brought about a reversal in the carry trade unwind with many commodities getting firm bids as crude oil shot more than $2.00 barrel higher (Quick honey – fill up the car). Gold of course liked that action and tacked on some nice gains lending some credence to the possibility that it has found a bottom in this particular price retracement.

By the way, let me make a note here that I am closely watching the price action in the Yen for signs that a Yen carry trade might be evolving once again. It is difficult to call it with certainty this early in the game but one fact is undeniable, the speculative hedge fund community having lit upon a cash cow in the form of these carry trades, is NOT GOING TO LAY THEM DOWN. One way or the other, they are going to find a funding currency for this money maker. If it is not the US Dollar, it will be the Yen or even another currency if they can find one. The key to the carry is to find a currency that offers extremely low interest rates and whose prospect is weak. That currency of late has been the US Dollar. However, if the market becomes convinced that the Fed is going to hike rates and therefore negate one of the necessary factors in choosing a carry currency (I will repeat that I do not subscribe to that view because the real estate market will not tolerate a higher interest rate environment – it is entirely too shaky to handle that), then it will seek out another currency with which to ply the deed. The Yen would qualify for the same reasons that the Dollar currently qualifies – the fundamentals of the Japanese economy stink and interest rates need to remain low so as to not upset what little signs of recovery might be emerging there. There is also an additional incentive in that the Japanese monetary authorities are not generally seen making asses out of themselves as are their counterparts here in the US by intoning such trite gobbly-gook as, “a strong Yen is the interests of our nation”. Quite the contrary, they LOOOOVVVVEEE a weak Yen.

I personally am not convinced that the Dollar carry trade is yet over but is rather waiting until the advent of the New Year for the hedgies to see what kind of numbers start appearing on the economy. If today’s new home sales numbers are any indication as to what awaits us then, the Dollar carry trade will be back with a vengeance. Time will tell.

The gold shares as evidenced by the HUI look like they have found support down here at current levels (416 -420). This index will need to climb back up and over the 460 level to generate a momentum-based buy signal. That is a former congestion band that is likely to attract sellers so that will be its first big test to see if can recover its bullish composure. Several of the technical indicators that I use are showing buy signals in that index which is probably forcing some shorts to cover and bringing in day traders on the long side. The close today and particularly tomorrow, will be critical in gauging the immediate direction of the shares. A weekly close above 455 would produce a bullish reversal formation on the weekly chart.

Bonds have broken down technically but have yet to take out a critical band of support near the 115 level. Should that fail, then major support just below 112^15 comes into play. That would signal a huge change in interest rate perceptions. Quite frankly, I do not see how the fragile US homebuilding industry or the real estate sector for that matter, could withstand such an occurrence.

There are a couple of things at work in this bond selloff – the first is that same thing pushing the Dollar higher – the perception that the US economic recovery will necessitate a rise in the short term interest rates by the Fed. The second is that the bond market is becoming more and more focused on the gargantuan supply of US Treasuries that are hitting the market. This factor more than the former is what is bringing selling into the long bond. Traders see falling demand in the face of rising supply and are working to lower prices. In other words, foreign Central Banks are not buying Treasuries in sufficient quantities to soak up the relentless supply that is coming to fund the current Administration’s orgy of spending.

At the risk of beating an already bruised and battered dead horse – one cannot print their way to prosperity for if that was possible, it would have been successfully attempted by previous generations. This insane stupor which has descended upon Washington has led the dipsticks there pushing this spending spree to somehow believe that the endless proliferation of US debt instruments can be conducted without the least bit of negative consequences. Do our illustrious lords and ladies think that the world has enough savings to soak up all these worthless scraps of IOU’s that are spawning like minnows? At some point reality collides with illusion and then the game is over. That is when the Dollar will fall apart at the seams. As far as I am concerned the US has already effectively defaulted on its debt obligations – the market just does not realize that yet. By the thievery of Quantitative Easing it has declared that it has no intention of ever making good on this mountain of indebtedness, at least not in terms of a currency that can maintain its value. I will borrow all the good apples that you are willing to loan me if I know I can pay you back with apples that are rotten to the core. You get your apples back but what good are they at that point.

That brings us back to gold and why it is necessary to look past all this short term noise; noise I might add that we have seen over and over and over again since gold made its first foray above the $300 level and especially when it cleared $400 in what now seems like ages ago. The long term trend higher in gold has been inexorable given the fact that gold is the only currency that cannot be adulterated by monetary officials because it cannot be created at their will. History has shown us that nearly without exception, political leaders and especially monetary leaders, will take the path of short term gain at the expense of long term stability and prosperity. That is what gold guards us against and why it is so hated and despised by much of the ruling class. If they had their way, they would sweep a magic wand and banish it from the face of the earth. I might add here that given the depth of sleaze, corruption and bribery associated with the purchase of Senators’ votes to ram this despised health care reform bill down the throats of an unsupportive citizenry, gold looks even more desirable to me. After all, where is all this money that was used to buy off hesitating Senators supposed to come from considering the fact that the US has none except that which it either prints or borrows from abroad.

Please see the gold chart for a quick look at the current technical posture of the market.

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