Dear CIGAs,

Watching the overnight action, particularly as trading moved into early European dealings, one would have thought that the wheels were coming off of the global economic bus. The Dollar was collapsing, the Euro was soaring, gold was hitting record highs above $1,388, silver was threatening to take out $25 and copper, platinum and palladium were all putting in huge upside moves. That is until later in the morning in Europe where the sleepyheads, arriving late to the party, were convinced that Chicken Little was wrong (someone tell that to the cotton market where it is again locked limit up and threatening to derail the entire textile mill industry). Gold slowly began coming off its highs and faded as it came into New York moving down more than $15 off its best overnight level at one point. Silver followed suit and faded considerably off its peak.

Apparently, there still remains plenty of willing and eager fresh short sellers judging by the continued rise in open interest in both futures markets. Open interest in gold surged nearly 11,000 contracts and in silver it increased by nearly 1,700. Clearly there are still more than a few short sellers around who are trying to pick tops in both these markets. As of yet, I have not seen any evidence of large scale short covering occurring although I expect that those weak-handed shorts who are exiting are getting replaced by the larger, strong-handed bullion banks and swap dealers. The key to both markets is the continued willingness of buyers to refrain from any sizeable liquidation as well as committing fresh funds to both. If they do not flinch and stand their ground, the shorts are going to suffer more pain.

The upside targets in silver of $25 and in gold, the $1390 level,  have been effectively reached and that more than likely spurred some short term oriented longs to book some profits prior to the weekend, especially as Bernanke is on slate to fill the air with more words tomorrow. Some guys may suspect that he will attempt to tamp down expectations of the SIZE of the next QE and thereby give shorts in the Dollar an excuse to cover. That might put some pressure on the metals for the day so the thinking is why not take some money off of the table and wait for another dip lower to come back in at a lower level. The market might oblige them; it might not. Dips in both markets have been shallow and fleeting of late.

The HUI went on earlier in the session to set another high but then it too faded as the metals came off their best levels. I like the fact that it is holding above 520 and looks poised to put in a very strong weekly close. Last week it managed a good close above 520, but just barely. Should it hold above 520 tomorrow, it would one up that performance and get a second consecutive close above that massive resistance level. Such a development would be strongly bullish on the charts and confirm more trouble ahead for the shorts. For today – it seems to be attracting buying near 530.

The Dollar appears to be seeing some short covering as the session wears on. It is trying to poke its head back above 77 after crashing through that level in overnight trading. I still suspect that we are seeing smoothing operations occurring in the greenback although it will never be admitted. The only way the US can keep from stirring up the hornet’s nest further is to not allow a total plunge in the Dollar.  A controlled descent, while still engendering ill will, would assuage some of the concerns of those nations whose currencies are bearing the brunt of this managed decline. It will be interesting to see if the Dollar can get back above 77 before the week is over.

Corn and wheat, both very strong overnight, are fading also as we move towards the close of the session. I am not sure whether some of this, as well as the move off the worst levels in the Dollar, is related to the move lower in the equities. The latter started off the day looking rather well but have begun to give up the ghost. That generally has resulted in “safe haven” Dollar buying (It is hard for me to even write those words in such close proximity to each other) but the lemmings cannot be expected to unlearn old habits without some pain. Regardless, it might be inducing a bit of money coming out of the commodity sector although only to a light degree. If the equities recover before the day’s end and we see these commodity markets that have come off their best levels, begin moving higher again, we will know what is occurring.

Bonds are lower today based on what best I can tell of nervousness over what Bernanke might say tomorrow. Now that everyone and his dog is fully expecting QE2, some are worried that it might not be a huge amount and that the market will be disappointed after factoring in a windfall of fresh liquidity. Some longs are slipping money off the table in that pit. If Bernanke sounds incredibly bearish tomorrow and stokes further fears of an economy sliding back into stagnation, it should not be long before the bond bulls re-emerge. We’ll see what the 21rst century version of the Oracle at Delphi pronounces.

Crude oil just cannot seem to stay above the $83 level for any length of time on a consecutive closing basis. It keeps flirting with it but runs out of steam whenever it nears $84 and then falls back. However, it has thus far not set back to any substantial degree which makes it look like the next trending move will be to the upside.

The CCI (Continuous Commodity Index) is very strong. Demand from the developing world remains quite robust and is keeping a solid floor beneath the complex even as the US economy flounders.

In some totally and completely unrelated news, the CME Group announced today that it would begin listing and trading RAINFALL futures on November 1 of this year. Yep – you heard it right – now you can bet on whether or not it will rain and maybe make money doing it! Poor Tom Skilling (Chicago’s premier meteorologist whose every word is hung upon by grain traders from about April onward through August). Now almost as soon as he utters his forecasts, the hedge fund algorithms will be slamming the rain futures market before he even gets to go to put up his maps.

Let’s see, they’ve already got futures contracts on temperature, snowfall, frost and hurricanes; now comes this. About the only thing missing is thunder and lightning. I have put in a request that they offer sunrise and sunset futures because as we all are so painfully aware, there is a risk element involved here as to whether or not the sun will rise in the East and set in the West. With Quantitative Easing coming from the Fed, there is a chance that it could cause the Earth to reverse the direction that it spins on its axis and heaven knows, we need to be hedged against such a development. And one wonders why America is in decline. What’s next – futures contracts on dead cow entrails?

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