Dear CIGAs,

The Conference Board released its index on US Consumer Confidence this morning and that sent a shot across the bow of the equity bulls’ parade boat. The index plunged more than 10 points to 46.0. The expectation had been closer to 55.5. That was all that was needed to send the “risk aversion” trades into high gear with algorithm selling hitting the broad equity markets and the commodity sector. On the Forex front, that means the Euro gets sold, and the Dollar and the Japanese Yen get bought. Bonds then get a bid and move higher.

This is the “deflation” trade which whenever it occurs, serves to bring pressure on the gold market. Additional proof that the deflation trade was on today was the sell off that hit copper and then crude oil. About the only commodities that I could see that were higher today were the beans. In such an environment, it is difficult for the bulls to keep gold levitating.

As confidence is such an ephemeral substance, it is challenging trying to get a read on it, but it is not hard to understand that when jobs are relatively scarce and consumers are worried about bills, confidence is going to evaporate like the morning mist. Needless to say, folks who are worried about the future do not spend as freely as those who are not. This is also the reason that so much of today’s financial “news” is spun by the official sector and many of the talking heads on GET-TV– they cannot lay things out as they are lest they create more fear, concerns or worries on the part of the consumer. It is also the reason for the volatility in the markets – you are witnessing a clash between reality and spin in the pits.

The HUI was on the receiving end of more of those ratio spreads again. The fact that the HUI could not push through the 40 and 50 day moving averages generated technical selling. It was smashed lower violating both the 10 day and the 20 day moving averages which had been turning higher. The sell off gives the bears the short term advantage again. There is some chart support near the 390 level which is pretty much where the session low has been thus far. If that cannot entice some buyers to come back in, the miners could move back down towards the 375 region to test that strong buying region. We will have to wait and see how the chart shapes up in the next couple of sessions. A ranging trade would be a moral victory for the bulls but the HUI will need to bounce soon to set up that possibility.

The bond market obliterated the recent shorts as it soared up through the 40 and 50 day moving averages all the way to last week’s high. We will keep an eye on this market to see what bond traders are voting for next, lower or higher rates. It still appears to me like the bonds are worried about supply issues but also concerned about the moribund economy. Generally this sort of thing leads to a range trade with neither side gaining a clear cut advantage.

Back to gold for a bit – the $1,100 level is serving as buying support and is thus far attracting dip buyers. I would like to see it climb back above the $1,110 level to feel a bit more comfortable with a potential range trade rather than a move down towards $1,080.

Open interest was down yesterday. Fresh longs were obviously quite fickle and decided not to challenge the sellers up at yesterday’s highs. We will need to see the bulls continue to move into gold rather than liquidating to generate enough force to push price through the bullion banks’ line of defense near the $1,130 level.

As a side note, both Euro-gold continues to hold above the 800 level and British Pound-gold is not far off its all time high coming in at 716 at today’s PM Fix.

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