Hourly Action In Gold From Trader Dan

Posted at 3:58 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

“The battle for Helms-Deep is over; the battle for Middle Earth has begun”!

So says Gandolph the Wizard in the second of Lord of the Rings trilogy, “The Two Towers”.

Gold has beaten back the Orcs and Uruk-Hai to regain the critical $880 level and must now deal with the Ringwraiths (the bullion banks) and Sauron (the monetary lords) as they attempt to defend Mordor (the unbacked paper money system – the root of all economic woes in the global universe). If Frodo can just make it to the fires of Mt. Doom and throw the golden ring of power into the volcanic flow (reintroduce gold into the monetary system), the system will topple freeing the masses from the tyranny of the money masters!

Okay – so it’s a bit melodramatic but gold has smashed through the level which all of the technical studies point to as being the lynchpin of the monetary authorities’ defense – the $880 level. That level marks the upper boundary of the bullish wedge formation I mentioned in yesterday’s commentary as well as the horizontal resistance level which has held it in check since the middle of last December. Bulls were able to take it through this barrage of bullion bank selling who not unexpectedly were attempting to absorb all of the bids and force it back down. The battle could be seen on the 5 minute charts where for a while they were successful at defending their position but a strong wave of buying stormed into the market and effectively routed them out. They were then forced back to $900 where they are regrouping.

Once again gold has defied the action in the Dollar keying off the banking crisis now occurring in Britain as the British Pound disappears into a black hole while the Euro continues to swoon as confidence in the economic fortunes of Euroland disappears like the morning mist. Gold is seeing strong safe haven flows from Europe, which as all the regular readers of this site have known for some time, has generally been the scene of bear raids on gold commencing around the 2:00 AM CST hour. Not so any longer – there is real fear gripping Britain and Europe. Gold has again made yet another all time record high in terms of Sterling at the PM Fix coming in at 641.012 while Euro price gold did indeed set a brand new all time high at the Fix, coming in at €682.420. Euro gold looks like it might be making a run towards €700. At the risk of being repetitive – it certainly appears that a loss of confidence in the European currencies is occurring with the resulting rush into gold being led by European investors. New York is keying off of that as momentum players now move in on the long side.

Overhead resistance now becomes $900 which is near today’s session high followed by more stiff resistance near the $935 – $940 level. Support initially emerges back near $880 and then near the downsloping trendline at the top of the wedge formation which comes in near the $870 level. Oftentimes markets will break up and out of such a formation and then come back down to the broken trendline where they should find buying support and bounce back higher if the breakout is a bona-fide one.

The HUI and the XAU look like they have finalized a divorce from the broader equity markets after their trial separation period which began early this week. The HUI is closing in on former double top resistance near the 310 – 312 level which if it can best that should put it on path to target the general region near 350. The XAU appears to be the stronger looking of the two indices as it closes in on 127, again, a double top that has been in place for the last 5 weeks. A breach of that level and it has a good shot at making a run towards 138 – 140.

I should point out that the major gold ETF, GLD, reported a surge in gold investment demand driving reported tonnage to a new record high of 819 tons. You all know how I feel about that particular entity but nonetheless it still remains a good barometer for gold investment demand.

Keep in mind that this drive higher in gold has been occurring against a backdrop of relatively very low open interest. After making a peak above $1000 last year, open interest in gold reached to almost the 600,000 mark, topping out at 593,953 nearly a year ago to this exact date. Yesterday’s open interest number was a paltry 342,088 or 57.5% of the peak. This comes with gold around $110 or so away from reaching the $1000 level again. Clearly, there is a great deal of room in the paper gold market should momentum players begin returning in size. I would still suggest to some of these managers that they consider standing and taking delivery of some of the gold contracts that they are buying and help pull down the Comex warehouse stocks further. Even so, I wonder what the price might be should another 100,000 new longs move into this market…

Bonds continue to sink as excessive supply fears overwhelm any flight to safety buying that might be occurring. I am certain the Fed does not like seeing interest rates going in this direction especially since they were hoping to push longer dated yields lower by announcing potential plans to buy along the long end of the curve in an attempt to stimulate the housing sector.

Stocks have moved into positive territory as I finish this commentary. That is only helping put additional strength into the HUI and the XAU.

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