Hourly Action In Gold From Trader Dan

Posted at 3:53 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

The setback from $1,000 continues with gold attempting to uncover some buying support to establish a floor from which it may consolidate. It appeared as if the $930-$920 region might hold it but a push from sellers, either from liquidating longs or fresh shorts (it is unclear at this time), took it into a series of sell stops just below that level and knocked it sharply lower on the day. Silver in particular was rocked as it has proved to have lived up  to  its nickname, “the playground of the funds”.

Let me reiterate once again, those of you who have not yet secured any of the physical metal but continue to plow all of your cash into the ETF’s, use price weakness such as these periods to acquire the physical metal. Do not buy it when all of the hedge funds are chasing it higher rather buy it from them as they unload. Be smarter than that group and take advantage of their ineptness as traders – that is exactly what the bullion banks do and why they are so easily able to clean their clocks time after time in the Comex paper markets. If you want to make money in the metals, you cannot imitate the actions of the funds or follow the advice of so many of the newsletter writers who also chase prices higher. Rather, institute a scale down buying program in which you can increase the size of your buys as price moves lower. In that way, you lower the overall cost of acquiring the metals even if you do not catch the exact bottom, something which I might add is pretty much a waste of time attempting to do in our brave, new world ruled by hedge funds and their “World of Warcraft” approach to trading. I want to emphasize that this approach is only for those buying the actual metal – traders must be very careful to buy in at technically significant levels or else you can end up as a statistic with no money left in your commodity account. Practice good trading discipline if you are a trader. That means cut your losses.

The mining shares are holding very well considering the selling barrage hitting the metals today. It could well be that the ratio of the shares to the metal had gotten too far out of whack again and that is being corrected. Either way it is nice to see them holding so well.

Today’s chatter surrounding gold is that record inflows into the gold ETF, GLD, have slowed down or halted. There has not been a reported outflow but neither has there been any increase in reported holdings and that has short term traders moving out waiting for those to resume. Also, there is a bit of thinking that the economic news has been so rotten that deflationary pressures are more likely than inflationary expectations which were beginning to build in the mind of many who are eying the massive liquidity infusions into the system. Short term deflationary-oriented thinking is leading to selling therefore. Lastly, India as a large buyer has been largely absent from gold since it moved to $1,000. They are usually fairly price sensitive over there but I suspect that they are welcoming this price level. We need India to offset any let off in investment demand.

Gold is moving down into very solid support near the $900 level with the region between $890 – $880 (our old friend) particularly looking to attract quality buying. Resistance is now $930 on the upside. I am still looking for a solid, consolidation pattern in gold to emerge. So far it is still probing for a low to a potential trading range. Once we get that, and we might just have done that this morning, then this thing can simmer down a bit and that will bring back the jewelry demand that has been absent and will also bring in the longer-term oriented investment buyers. Right now it is too volatile for many players to get involved. Also, a range trade will be the best thing for this market moving forward since it allows for end users to get accustomed to a newer, higher price level. Sticker shock sets in when markets run too high. I still feel very confident that the kind of buying that has driven gold from $680 to $1,000 was NOT primarily from hot money and the majority of the gold buying will therefore “STICK” pretty well. What you are seeing currently in gold is the exit of that portion of “hot money” that got involved in the recent leg up. They may very well be done for now.

Copper defied the selling trend today and shot sharply higher as stockpiles were drawn down out of the LME warehouses. Some are reading that as a sign that economic activity might have slowed as much as it is going to but others are saying that the drawdown is due to Chinese buying who like the wise traders that they are, are moving the metal into their stockpiles while prices are cheap. You have to hand it to the Chinese; there are no better long term oriented traders in the world. Those guys play chess while the West plays with a checkers’ mindset. China can diversify out of their Dollar holdings and acquire a valuable commodity at bargain prices killing two birds with one stone. Hats off to them for their savvy.

Friends, this madness in the markets is going to be with us a while, I am saddened to say. Your best way to deal with it is to attempt to tune out the day to day gyrations in price and keep a longer term perspective. I know that sounds trite by now but if you allow the hedge fund machinations to shape your fundamentally informed view, you will end up changing your convictions with nearly every tick in price. You cannot beat those guys with their expensive algorithms and computer-generated buying and selling unless you are willing to sit at a screen and trade one minute bar charts and scalp for a living. That might pass for fun among some, but I assure you, try doing that for a few months and see what it does to your family and your health for that matter. For most folks who work for a living and cannot sit in front of a screen all day, they must take a different approach. That means you formulate a long term view and then buy when prices set back and sell a portion of those holdings when momentum chasers run it up. Do it over and over again and you will make money. All you need to do is to take some money out of the middle of the move. Forget trying to nail exact tops and bottoms – that is for braggarts and liars. Let the ever decreasing number of hedge funds cut each other to shreds. Pretty soon only a few will be left.

Bonds are back to tracking equities in the inverse moving higher today on equity weakness and moving lower as equities would move up from their lows. Ditto for the Dollar – it is following the well being or lack thereof  of the broad equity markets actually moving lower as stocks move higher and moving higher when equities plunge.

Crude oil is back above $40 although not by much this AM. I am thinking that some guys are putting on long oil/short gold spreads right now in an attempt to catch what they think is a gold/crude ratio that is too far out of whack. That would explain some of the price action I am seeing in gold vis-à-vis crude oil. Nat gas is back above the $4.00 level which is a positive. Falling energy prices are not helpful to gold since it feeds into that deflationary mindset. Down here in oil country, layoffs are occurring in the oil patch with several projects begin shuttered due to the low prices. That too will eventually feed into reduced supply. Crude oil is setting up for one helluva upside run when this thing finally shifts gears and moves back into an inflationary mindset.

I continue to marvel at the resiliency of platinum which, although weaker today, still remains above the $1,000 level.

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