Hourly Action In Gold From Trader Dan

Posted at 3:51 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

Gold hit the magical number of “$1,000” in today’s trading session in the front month April contract at the Comex and immediately registered newswire flashes across the various services. This is something guaranteed to garner the attention of that section of the public who  are still somehow oblivious about the metal not realizing its role as a safe haven and the ease with which it may be bought or sold. Perhaps they have been too busy lining up waiting for the government handouts that are proliferating faster than the flu virus in winter. Either way, those who have been attempting to hold back the metal, got what they did not want – headlines and interest!

Keep in mind that this is only the second time in its history that gold has shot up above the $1,000 level. Generally short-term oriented traders like to book profits when such things occur so it will not be unexpected to see a bit of a pullback from here.

I know this does not sound like the words of an inspired market genius but one of two things will happen here. We will get the scenario that I just outlined or the market will shoot sharply higher. If it is the latter, it will be quite telling as it will reveal just how determined, eager or downright terrified people are becoming. Market action of that kind of nature speaks thusly: “get me in at any price – I simply don’t care – I want in”.  Or in the case of trapped shorts: “Get me out at any price – I am terrified of getting wiped out”. In other words, the latter scenario will give us a measure of market intensity. The former will show that there is not yet any panic buying occurring in the gold market even though overall demand is very strong.

If the market does set back, I do not expect any subsequent price retracement to very deep this time around – things have changed since last March 2008 ( a year ago), the last time gold was over $1,000. The price rise this time has been measured, it has been steady, and most importantly, it has not been driven by a rush of hot fund money into the market. The open interest is 60% of what it was the last time the price of gold peaked – while there is a sizeable long position in the Comex gold market, it is well off the levels it reached at that last peak. Also, the reported holdings in the gold ETF, GLD, show that investment money is steadily flowing into this sector. The last time gold was over $1,000 back in March, the reported gold holdings were only 663 tons. As of yesterday, holdings were reported at 1029 tons. Obviously a much larger share of the public is moving into gold. I am hard-pressed to see a reason why all this money would suddenly decide to abandon gold unless of course an economic miracle recovery were to immediately commence. Perhaps the Obama administration will discover a new method of creating money that sees it miraculously fall out of the heavens so deep around us that we do not even have to bend over to pick it up. First time something like this occurred, it was quail. At least you could eat that. Paper does not sound particularly appetizing to me.

I should note here that gold priced in British Pound terms and in Euro terms has set brand new all-time highs the last four days in a row. BP gold is closing in on the 700 level and was fixed at 690.353 while Euro-gold is steadily heading towards the €800 level as it was fixed at €782.437 today. Both charts are absolutely stunning to behold. Europe has reached the point where you might say that confidence in paper money has been lost.  Eastern Europe is still a major overhang and fears about a regional default are probably not out of line.

Also, we are not yet through the month of February, but gold is on track to put in its highest monthly CLOSE ever. Coincidentally, that occurred back in February 2008 when the front month closed at $975. Next Friday’s close is going to be interesting to say the least. One more thing – gold in inflation adjusted terms is still well off its all time high which on an inflation adjusted basis is over $2,000. The case could me made that even at current levels, gold is not particularly expensive.

Last night Japan’s TOPIX set the lowest close in that index in 25 years. The “buy Japan” when it comes to the Forex markets took a direct hit for while the Yen did indeed move higher in the usual knee-jerk risk aversion trades, the news out of the land of the rising Sun was so gloomy, that even yen buyers were put off and the currency faded well off of its session highs. The reason I mention the yen is because this flight into the Yen has made it one of the few major currencies in which gold when priced in those terms has not set a brand new all-time high, in contrast to what the yellow metal has been doing when priced in just about every other major out there. Japanese investors are probably still rushing into what they perceive to be the safety of their bonds but one has to wonder how much longer that will be the case. You have to look at the Japanese stock market to realize just how bad things could deteriorate over here. Their broad stock market has never recovered from the bursting of its bubble back nearly 2 decades ago. Imagine – almost 20 years later, the stock market there, the Nikkei, has not even managed to stay recapture half of its losses!

Around mid-morning, something quite remarkable occurred in those same Forex markets, something which could quite possibly portend a major sea change in sentiment towards the Dollar. I cannot explain why but the Euro and then the other major currencies suddenly reversed course and shot sharply higher of their lows after being down sharply overnight and early in today’s morning sessions. Could it be that the Dollar is beginning to finally anticipate what the spending orgy that this nation is embarking upon is going to do to it? Remember how long it took for the bonds to realize that you cannot create gazillions of the things and then expect supply not to overwhelm demand. We had to sit through a bubble in that market where knee-jerk safe haven buying originating out of stock market fears gave way to supply side fears. This tug of war can still be seen in the bonds as they once again shot up sharply today but look how far off their bubble peak they are now sitting. I think we will eventually see something similar with the dollar, although I do not know the timing. It is interesting however that today’s move in the Euro and in the Dollar came on no news that I can see whatsoever. Those kinds of moves are always, always, the most significant ones. Right now, it sure as heck looks to me that the Dollar might have finally topped out. A weekly close below the 86.60 level will give us the technical signal that a short term top is indeed in. It is still too early to say a longer term top is in however.

The only commodities that I could see that were up today were gold, silver and platinum, with platinum having gone back to trading as a precious metal. Some guys are looking at it being priced very close to the price of gold and are wanting to own it. Every other commodity was down, and down hard. Grains got whalloped with beans leading the way lower. Crude oil gave up its gains from yesterday failing at the $40 level and now heading back down to near that magical $33-$34 level once again. Natural gas is getting the snot beat out of it as the glut of the stuff in supply continues to weigh down the market. It now has a “3” handle in front of it. Talk about cheap…. I only wish I had lots of spare salt domes to store the stuff so I could resell later after the inflation tidal wave that is coming arrives.

The mining shares are proving to be go to investments in the equity world as those who bought them are finally seeing them respond to the higher gold price. They are still well off the highs they made the last time gold prices were above $1000 however. To give you some perspective – The HUI was over 500 in March 2008. Currently it is near 325. The 50% retracement level on the weekly chart comes in near 335 so the HUI is definitely within gunshot of that. Large institutional investors will be monitoring that level with interest. If the HUI can mount a convincing climb above that level, they will move in. I should also note that the 50 week moving average also comes in near 341. To say that the HUI is at a critical level is an understatement to say the least. It is time for the bulls to perform if they want to break the back of the mining equity perma shorts. To a certain extent, some of the miners might be seeing selling pressure from guys just blowing completely out of stocks and selling everything. Other than that, I cannot see much other reason to sell them. When you get violations of major lows in the broad stock markets, that sets off a sort of random computer generated selling process and a lot of good stuff gets tossed out until the dust settles and guys who actually think before they pull a “buy” or “sell” level move in.

You will notice on the daily chart below that I have now made the switch back to the daily or in today’s case, the weekly chart. Gold is now at levels that we cannot see resistance levels on the short term charts until we get some more consolidation type price action. Until we do, I will not be using the 12 hour charts.

One last thing – on the delivery front – JP Morgan has gone to becoming a seller the last three days after taking 1,498 contracts out of the total 4,611. Goldman however took the lion’s share of deliveries once again stopping 611 out of 680 contracts. They have taken 2,162 February’s out of 4,611 or nearly 47% of all the gold. That has definitely caught my attention. Obviously someone for whom Goldman is acting was well informed about the gold market.

Enjoy your weekend and what is left of our once glorious country now that the Feds have decided to raid the productive class in the name of “fairness”.

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