Dear Friends,

The “Risk Off” trades returned once again today after disappearing yesterday. I am not sure what the actual event catalyst was but for whatever reason the US Dollar rallied very strongly today as the equity markets tanked and the commodities went down lower for the ride once again. Both gold and silver were derailed after putting in some decent performances yesterday.

The price action continues to reinforce the chart pattern that is forming – one of a range trade for both the metals. Gold is running into selling up near $1520 as a general area and seems to be encountering pretty good buying down near $1480.

Silver’s range seems to have narrowed a bit from $39 – $33 to a bit tighter $36.50 – $34. That market is so schizophrenic however that it is too early to say definitively how this new range is going to work. I suspect it will get wider.

We are seeing very wild swings in price in almost all of the commodity markets out there as so much of the price movement depends on the whims of the hedge fund community. They are manics, of that there is no doubt. One day all is well with the world and its full speed ahead; the next day the entire world is ending and “sell, sell, sell” is the order of business.

All I can tell you is that we have had severe chart damage inflicted upon a host of the commodity markets with all this risk off related selling and that is going to take some time to repair. The reason is very simple – you just do not see a wholesale shift in sentiment back towards a particular asset class overnight once the investment psyche has taken such a terrible hit. The CCI chart is still showing a formidable double top formation on it so the idea that the precious metals are going to now immediately return to their previous peaks within the next week is simply not going to happen unless we see that CCI index turn around rapidly and charge substantially higher. I look for more of this choppy, range-trade for the immediate future with the markets attempting to consolidate to see where they want to go next.

There is a real fear out there of what happens when the end of June comes and the Fed’s QE2 program is supposed to end. The sharp drops in the equity markets are ample evidence that traders/investors are fearful of the results of the liquidity spigot being turned off. Already the Dollar is moving higher as a result of this “quasi-tightening” by the Fed. That brings further pressure on the commodity and stock markets which have been fueled by the endless Dollar printing. This is what is moving the markets for the time being.

Longer term, the fiscal woes of the US are not going away. There is no serious effort to deal with the runaway spending plaguing the nation and any attempts to jack up taxes to narrow the budget deficit will have the effect of just exacerbating the problem as it will put further pressure on the economy, pressure which I might add it is in no position to handle.

This thing seems to have started in earnest back when Trichet failed to raise interest rates in the Euro zone or at the very least sounded hawkish on future rate hikes. Once the markets disgested his comments they began to believe that the “global growth” scenario which has been fueling equity and commodity gains, was turning into more of a “global slowdown” scenario. That in turn fed into the idea that demand for commodities was going to fall. Enter the “Risk off” trades and that is where we are right now.

At this point I am basically watching to see how things begin to fare as we approach the end of June. I find it difficult to believe that if the stock markets begin to fall apart and break down technically, the Fed’s doves on the FOMC are not going to begin advocating further “accommodation”. Should that occur, the “Risk – On” trades will be back on.

Here’s the situation as I see it – Bernanke and the Fed wanted to initially stave off the threat of deflation, something all Central Bankers hate. They were more than happy to accommodate the hedge fund industry and have it do their bidding by jamming the price of nearly everything that was not nailed down higher. That was a simple matter of QE1 and when that expired, QE2. “Deflation – what deflation – we don’t see no stinking deflation”. Carry trades – have it at guys – put on as much as your little leveraged souls desire.

However, once the hedge funds dared to start pushing gasoline prices higher and consumers began complaining, with the usual demagogues blaming Big Oil, Big Speculators, whatever, the Fed decided that enough was enough. Besides, soaring gasoline prices are not good for the current administration and since the Chairman of the Fed serves at its pleasure, something had to be done. (Of course, they could actually drill for the damn stuff but that would be too easy). Out comes the talk of the end of QE2, Trichet fails to hike and down goes gasoline and everything else. Problem solved. In other words, the hedge funds, having dutifully done the bidding of their masters at the Fed, got carried away in the minds of the powers that be and had to be brought back under control. No wonder Bernanke could spout off his continual talking points about inflationary pressures, specifically food and energy, being temporary, transitory, etc. They knew full well at the Fed that they could pull the rug out from under the ninnies that run the hedge funds at any time.

We will see just how far this latest ruse carries things however since, as stated above, the problems afflicting the US are deep-seated, entrenched and unyielding to mere talk and posturing. Job growth is abysmal and while prices may be dropping for some foods and energies on the commodity exchanges, it takes time for that to filter through to the retail side of things.

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