Dear CIGAs,

News overnight that China’s Central Bank had raised interest rates (the first move in almost 3 years and a piddly .25% at that) in an attempt to curtail inflationary pressures developing in its economy (particularly property values) sent the foreign exchange and commodity markets into a tizzy.

Apparently China trumps the Fed’s QE. Maybe this is sort of like the childhood game, rock, paper, scissors. Let’s see – paper covers rock (that would be the Fed’s paper) but scissors ( that would be China’s attempt to contain inflation) cut paper.

I am still attempting to get it through my rather dense skull how this is supposed to cause investors to rush into the “safe haven” of the Dollar as “investors fear a slowdown in the global economy, especially in the emerging markets”, to quote the wire services. On the other hand, I give up – there is no connection. As I have stated on many occasions, the two phrases; “save haven” and “US Dollar” mentioned anywhere in close proximity to one another is like attempting to join the negative poles of two separate magnets together. Wishing it were so does not overcome the laws of physics. Any nation whose fiscal position is as atrocious as the US’s, can stake no claim to anything “safe” in regards to its currency, especially when that same currency is deliberately under attack from its own government.

I think it sufficient to say that any further slowdown in the global economy will serve to kick the Fed’s exotic Quantitative Easing machine into high gear wrecking more havoc on the Dollar. Not that the QE will do any good (it won’t) but that will not stop them from doing it anyway.

This appears more a case of a market price move begging for a reason to explain it. The simplest explanation is usually the best and it looks to me like a lot of guys were caught napping and a bit too complacent especially in the Forex markets where the European currencies, and the commodity currencies have developed a fairly good sized contingent of speculative longs. The newcomers to the party were unceremoniously flushed out. QE has been factored in and now that it is not coming forthwith, some of the larger traders apparently decided to ring the cash register which was enough to trip the short term technical indicators and the corresponding systems into action.

I want to see where this bump in the US dollar might carry it before it runs out of steam. One thing is for sure – the Japanese, the Brazilians and the Europeans are all happily whistling for the moment as their currencies sink lower. Saves some of them the expense of having to try to move the Dollar higher all by themselves.

That brings us to gold – it too got caught up some in the “excitement” generated by the Chinese move and took a bit of a breather from its strong climbing move of the past two months. It failed to hold at its initial support level near $1,350 – $1,345 and moved down to $1,330 before dip buyers stepped in and encouraged some short covering on the part of the bears. This level just so happens to be synonymous with the 20 day moving average and the median line on the pitchfork so from a technical perspective, the metal is finding support just at the point where the charts say it should. So far, so good. Let’s see if it can regain its footing here and work sideways a bit as it consolidates or wants to move a bit further down. Should it be the latter, it has some support surfacing near the $1,325 – $1,320 level.

Bulls will need to hold fast and not run to any extent in order to prevent the bears from getting a foothold. If they do this, shorts will have to cover once again and that should kick price back above $1,350. A push back above $1,355 that can hold into the close of the pit session will portend a consolidation pattern emerging.  I still think we are in a holding pattern in gold as we wait to see what comes this way in November when the FOMC will either have to put up or shut up.  I think that they have been trying to talk QE and get the same result without having to actually engage in it. Problem for them is that at some point, one’s bluff gets called and it is time to show the cards. The next two weeks or so will therefore more than likely be a bit choppy unless we get some definitive market moving data prior to that upcoming FOMC meeting in November. Lousy economic news will serve to reinforce expectations of further QE which will undermine the Dollar and support gold while news such as today’s that temporarily move QE off the market’s front page will serve to flush money out of the commodity sector and into the Dollar.

The HUI fell down below the psychological and technical support level of 500 but it is struggling to recover it as I write this, albeit, just barely. The session low was a mere few points above the 50 day moving average which needs to hold to prevent the computer algorithms from banging them even lower. The index took out three of its major moving averages today; the 10, 20 and 40 day. Bulls need to get it back above the 515 level to shake the weaker shorts back out. If they decide to run instead, the index could drop as low as 480 before stabilizing. The hedgies are obviously wasting no time whatsoever in going right back in with those ratio spread trades again.

I found it very interesting that the bond market could not move significantly higher today especially with the equities floundering and the rush into the Dollar commencing. That has to be a bit disturbing to bond bulls. Apparently that market has not gotten over its being jilted by its lovers at the Fed who refused to come out last Friday and tell it how much they loved it by offering it a gigantic bouquet of freshly minted QE dollars. It is not difficult to see the factors at work in the bonds – take the QE out of the picture and it is focused on the enormous supply and the lackluster demand. That argues for lower bond prices (higher yields) to move the paper IOU’s. Factor in the QE, and the market gets giddy because it knows the Fed will buy the damn useless things.

Incidentally for you silver fans out there, silver, priced in terms of the Euro, made an all time high in price at today’s London Fix.

Most of the commodity world is lower today as the automatic selling programs kick in on account of the Dollar moving higher. Copper is getting whacked pretty hard as traders fret over decreased Chinese demand. Natural gas in an exception to the selling trend but it has been beaten with the ugly stick to the point that it is seeing a bit of short covering. Sugar is higher today as is coffee. At least milk is unchanged so if you order cream, it won’t cost you any extra.

Let’s wait and see how today’s fall out from the China rate hike news plays out before making any extrapolations. I think it is more of a tempest in a tea pot but that assumes that discretionary traders still exist. The markets are run by algorithms so we will have to see where those lead us the next couple of days and go from there. Nothing has changed except China hiked rates ¼%. Big deal….

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

^[1]