Hourly Action In Gold From Trader Dan

Posted at 1:47 PM (CST) by & filed under Trader Dan Norcini.

Dear Friends,

Gold is performing admirably given the extreme volatility in the currency markets. After yesterday’s drop lower in the Euro coming on the heels of Trichet’s comments about IMF involvement with Greece, gold held very steady as more and more it seems as if it has taken on a solid role as an alternative currency in the minds of Europeans. That cannot but help to steady it and provide a solid base of support beneath the market. As the Euro staged a sharp rally this morning, gold then shot higher recapturing the $1,100 level as startled bears ran for cover.

In terms of the Pound and the Euro, it is still holding above 700 and 800 respectively.

The Euro rally coming on a Friday after it has been lower all week and especially after breaking through a critical support level just under the 13500 level, is a bit difficult to read. It could be pre-weekend short covering as traders who were short book substantial profits or it could be the start of something more. Markets oftentimes tend to bottom when the bearish news seems to be the worst. We will need to see what occurs next week to get some additional insight.

I want to continue emphasizing that the rally in the Dollar has NOTHING to do with any set of bullish fundamental factors. Rather the greenback has been trading more as the "anti-Euro" or should I say a bit more accurately, "the anti-Europe" currency. The Dollar’s fundamentals remain abysmal with no end in sight to fiscal budget deficits of a magnitude that are terrifying in their implications. Bernanke’s testimony yesterday was more or less a regurtitation of low interest rates for some time which is what put the fire under the equity markets in the earlier part of the day. All the stock market knows is that it has a low interest rate environment and that is enough for the bulls to become giddy especially with the financials making all that money.

Here’s the problem – once it appears as if interest rates are headed higher, the equity markets are going to get much more concerned about such things as job growth and profits but not just profits that have come from cutting expenses but rather profits coming from increases in sales. That is going to be a tall order for expectations to be exceeded especially as richly as some of these stocks have become valued. Record home foreclosures, mortgage delinquencies, states’ budgetary woes, continued job losses and high levels of underemployment remain strong headwinds to any sustainable economic improvement especially if monetary accomodation were to abate.

Back to gold – the market has refused to break down even with the Dollar moving up through a tough resistance level signifying that the buying down near $1,088 – $1,090 has been substantial.

The push back above the $1,100 level and back into the former trading range between $1,130 on the top and $1,100 on the bottom is friendly as it indicates that bears were either unable or unwilling to press the market down much lower after it moved into the $1088 region. No doubt strong physical market buying thwarted their intentions. We will now have to watch to see if the bulls can keep price above this $1,100 level. As I write this and the Euro fades somewhat off its highs, gold is moving lower alongside of it surrendering its best levels of the session.

I still believe that the Central Banks of both China and India are interested in acquiring more physical gold for their reserve diversifcation process and will be active if they feel price is at an attractive level. Consider their plight – they were moving from Dollar denominated paper to increasing holdings in Euro denominated debt – what did that gain them with the collapse in the Euro? Move to British Pound denominated debt? Sure – why not if you are a glutton for punishment. Gold just keeps looking more and more attractive in this environment.

The HUI needs to get back above 405 and maintain that level to make me feel more comfortable. Support has emerged just above 390 near the 392 level indicating that the mining stocks are also attracting buying near current levels but there is not yet enough momentum to the upside to take the index baack above 420 which is where it needs to move to force out some shorts and attract additional allies to the bullish cause.

Those of you who have been watching or viewing the CFTC meetings on the metals markets will understand when I give a public heart-felt thank you to my friend Bill Murphy and his sidekick Chris Powell for all the hard work and dedication that they have provided to the cause. They and GATA have been ridiculed and pooh-poohed by many "analysts" in the metals markets and derogatorically dimissed as "tin-foiled hat" conspiracy theory advocates, and yet they have persisted and now, come what may, they have had a chance to make their case heard openly at the highest levels of enforcement within our futures markets. The CFTC does not invite ninnies to testify. Hats off to you both guys! Your critics owe you a deep apology but somehow I doubt you will see that based on the character of some of those who have condescendingly ridiculed you. Your facts and evidence were never disputed by these bomb-throwers – their entire case consisted of ad hominum attacks.

As I have said many times, I have traded the markets for a long, long time and have never seen any other markets trade as strangely, counterintuitively and even perversely as the metals. Traders are not particularly unbiased folks since we all must have a "view" in order to make money but even the most disinterested observer of long experience has to notice the odd behavior of the gold market especially on major report days. When one sits here day after day after day observing every single tick all day long, before long you get a "feel" for things and instinctively realize when something is out of whack.

A brief word on the long bond- if they take out this week’s low on strong volume, Katie bar the door especially if the yield on the 10 year rises into the 4.25% range. You can then kiss any recovery in the real estate market goodbye.

One last thing – the torpedoing of a South Korean Naval ship apparently by North Korea needs to be watched for signs of reprisals or an increasing of tensions in the region. Even the equity bulls could not ignore any escalations of conflict that might occur.

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