Hourly Action In Gold From Trader Dan

Posted at 2:49 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

Today’s action in nearly every single market that trades can best be described by one phrase – “It’s all about the Fed”. Their decision to basically print as much money as needed to liquefy the financial system is a signal that the Dollar be damned as far as they are concerned. They will create as many of those little green things as they feel is necessary to free up the logjam in the credit markets. The Forex markets wasted no time whatsoever in administering a sound “arse whooping” to the greenback as it has utterly collapsed. We have been saying at this site for years now that the Fed would burn the dollar to the ground rather than allowing the stock market and the general economy to slump into a depression. That prediction has been vindicated I think it is safe to say. It really did not take a rocket scientist to figure this out; one merely had to read Chairman Bernanke’s own writings where the strategy is laid bare for anyone who wanted to see it. The only question in my mind at this point is exactly how fast the monetary authorities are prepared to let the dollar fall since it is no longer a matter of “IF” it will fall – they want it down. No one is going to want the dollar to drop off the face of the earth – what they ideally want is a “controlled descent” if such a thing is possible now that any fundamental support beneath the dollar has been eliminated.

When you throw in the fact that the incoming administration has made it clear that their intent is to create a government works project modeled after the New Deal of the 1930’s, the whole thing has an eerie, surreal feeling as if we have been here before. Budget deficits into the future as far as the eye can see coupled with free money being thrown into the system is a recipe for the demise of the Dollar. All this translates to much higher gold prices especially with the absolutely pathetic yields that investors can now hope to obtain on US Treasuries.

The mining shares are higher today building on yesterday’s impressive late session power move higher. The 100 day moving average is below the HUI’s session low with the last barrier up near the 200 day moving average around the 350 level. That same moving average comes in near the 148 level for the XAU. It too is trading above the 100 day moving average with the 10, 20, 40 and 50 day all now moving up. The charts are clearly in a bullish technical posture. On the weekly HUI chart, prices have moved above the 38.2% Fibonacci retracement level off the early 2008 peak and the October low. A key test will be the 50% level near 334. A close above that and the shorts are cooked. I am interested in seeing where support emerges on any dips in price. The fact that this move is coming so late in the month and year is noteworthy as generally this is a period in which liquidity tends to dry up and most investors do not commit to anything of size as far as positions go. They are generally reducing positions and getting ready to take off until the new year. That alone tells me that this is not an ordinary move; rather a great deal of distress is taking place and emotions are very strong.

Back at the paper gold market known as the Comex – open interest is indeed rising – a bullish technical signal but the rather small extent of that rise is a sign that a great deal of short covering has been occurring. The jump in open interest in the very distant months is a sign that the spreaders are also at work. With open interest still at very low levels and all of the technicals now generating bullish signals and upside momentum, the room for a very large build in speculative long positions is quite ample.

Bonds are moving vertically, a sure sign that a market is in a parabolic blow off run. That market is a giant bubble but only the very brave or very, very quick will be able to get in front of it. When it pops, and it will, great will be its fall. In the meantime, the trend is higher as the many traders are simply buying the long end with flattening trades and could care less how high they push it.

Back to gold – deliveries for December gold have been continuing with 500 contracts still left open in the December. Those of you who have been taking delivery  – nice work – those of you who are financially able and wish to secure more physical gold – how about joining the effort to level the playing field against the bullion banks. Do not leave the gold in the warehouses if you stand for delivery. Physically remove it.

Technically gold has run all the way to the technically significant level near $880. If it can clear this level and shrug off the selling that we saw come in today near there, it will be at $900 the next day. With the huge move in the dollar the last few days, it would not be unexpected to see a bit of a pause in the Forex arena which might stir some short term longs to book a few profits in the gold. Then again, one can just look over at the bond market and see a market which really is not pausing a helluva lot. The psychological damage that was inflicted on Dollar bulls by the Fed’s decision yesterday was simply enormous. The nearest I can come to describing the experience that the Dollar bulls went through would be to defenders inside a castle learning that their reserves intended for reinforcement had just thrown open the huge gates from the inside and laid down a red carpet with the words, “Welcome” inscribed on it.

Those of you who are interested can take a look at the CCI index. If it can get back above the 370 level on two consecutive closes, the commodity complex might have bottomed as a whole.

Click chart to enlarge today’s action in Gold as of 12:30pm CDT with commentary from Trader Dan Norcini