Dear CIGAs,

Gold was strong throughout overnight Asian trade but as it approached the opening of New York pit session trade, it ran into selling pressure (Gee – where have we seen this act before) which continued throughout the majority of the session. Even at that, it was holding relatively well until the Euro gave up the ghost, sinking more than a point and half against the Dollar. That allowed additional selling to emerge in gold but dip buyers were lurking in the wings and took it up off its worst levels and back into the plus column as the pit session entered its last 30 minutes of trade. Chart painters came in on the close to and attempted to push it back to unchanged.

It is interesting to note that gold’s recovery coincided with that of copper’s, which also experienced selling pressure as the Dollar gathered upside strength, but it too moved off its session lows as the morning wore on and eventually popped into positive territory.

Crude oil also experienced a similar bout of buying which lifted it into positive territory at one point. One can see the flow of managed money moving into and out of these markets as the algorithms do their thing. Any weakness in the Dollar immediately generates buying in the commodity sector even though prices may be down on the day. As the Dollar works higher, the buying dries up and the selling pressure dominates. Back and forth it goes as the struggle between the inflationists and the deflationists goes on.

You have to hand it to the Dollar bulls – they are trying to put up one helluva fight to defend those downside support levels on the technical price charts. They pushed price back off the 20 day moving average and above the 10 day completely erasing the losses from yesterday. Even at that however, the technical momentum indicators continue to flash bearish divergences. Only a closing push above the recent high in the Dollar near 80.85 is going to be able to negate those. Bulls will attempt to do just that while bears will first attempt to take price below yesterday’s low and then preferably 79.00 to kick off a wave of long liquidation.

Considering the fact that the Dollar erased all of yesterday’s losses, gold’s stubborn reluctance to break sharply lower, especially with the Euro surrendering as much ground as it did, is further confirmation that the metal is functioning more like the currency of choice for nervous investors.

Gold will need to see additional buying strength to generate an upside crossover of the 20 day moving average by the 10 day. Resistance is first at today’s high near $1,128 followed by $1,140 – $1,144.

Initial support for the metal lies at yesterday’s low which also coincides with the 20 day MA. Below that is support between $1,080 – $1,074.

The HUI is acting like it is unsure of what to do next. Its technical picture continues to improve but it will need to clear the 420 level to generate stronger buying enthusiasm and spark increased activity on the volume front of things. On the downside, a closing break below 390 will damage the fledging uptrend and perhaps allow for a retest of the strong support region near 370.

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