Hourly Action In Gold From Trader Dan

Posted at 2:11 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

If the FED wanted to give the Dollar the kiss of death with yesterday’s FOMC release, they certainly managed to accomplish their task. It continued its descent which began as soon as the statement hit the wires yesterday and has not looked back since. As it has done so, it has resulted in once again another huge inflow of funny money into the commodity sector in an exact replay of what was occurring in early 2008. There were very few individual commodities that were lower today as billions more were jammed into hard assets in an attempt to shield wealth from the depredations of a currency that has broken through support levels in a manner that is frightening for its intensity. Cotton in particular is on an awesome tear into the stratosphere. Get ready to see the price of your cotton clothing moving higher at the retail stores soon.

One more reference to the Dollar – it is clawing its way back above critical support near the 80 level on the USDX chart. Dollar bulls know that a weak close below that level spells a lot more pain to their trading accounts and therefore they will attempt to hold the greenback near this level if possible. If they can do that, we will probably see a short bounce here although without any change in the fundamentals, it is difficult to make a case for anything more than a dead cat bounce.

The metals benefited immediately from the influx of fresh buying related to the Dollar’s drop with both gold and silver leaping higher. Gold set another record just shy of $1300 while silver took out $21 with relative ease. Should silver be able to mount a sustained charge above $21.50 it could very easily be at $23 in a flash.  So far it has peaked out at $21.20.

Open interest in gold came in near 597,000 contracts, amazingly still below the record high even as gold has soared into a new all time high price in nominal terms. The very strong volume in yesterday’s trade coupled with what I consider a rather tame increase in open interest suggests a tremendous amount of short covering occurred right after the FOMC report hit the wires. Weak-handed shorts were annihilated in yesterday’s upside reversal.

The price level of $1295 – $1300 has been a target for gold once it broke out above $1285. Indeed we are seeing some longs booking profits after a nice run higher so it would not surprise me to see price set back and attempt to rest a bit. If any setback in price holds above $1285 it will be strongly suggestive that a very quick run through $1300 is in order. A deeper setback towards $1260 that holds that level suggests a bit more sideways trade before an attempt to kick off another leg upward. A breach of $1260 would send the metal back towards $1245 where I would look for strong buying to surface.

Also aiding the charge higher in the metals is the action in the HUI which has built on its breakout above the critical resistance level near 500 and has a shot at making a run towards 520. That is the last level that really needs to be cleared to see an acceleration upward in the mining shares. It is also the level at which a great deal of the persistent short sellers in this sector are going to be experiencing tremendous pain. The manner in which it has set back from its high near 514 today suggests that the share bears are fighting to hold the line and prevent a breach of 520. Let’s keep an eye on the price action of the HUI and the XAU for any potential clues as to the next move in bullion. It would be a great solace to the bullish cause to see the HUI maintain its footing above that pesky 500 level.

I still look for the hedge funds trapped in that ratio trade involving a long bullion/short shares position to eventually move to a long mining shares/short broader equities trade. Once that occurs, we will see the mining shares play catch up on the gold/HUI ratio not to mention outperforming the broader market as a whole.

I suspect that an eventual break of the 520 level in the HUI which is maintained will more than likely see gold enter into another phase in its decade long bull market, one marked by increasing awareness on the part of the average citizen about the metals markets. For all of their impressive performance over the last 10 years, gold and silver are just now, just now beginning to come on the radar screen of many small investors and citizens. One can see this sort of shift in the phases in a bull market by noting the slope of the upward lines on a long term chart. The initial increase is a very shallow rise with a low angle slope. The next phase sees the upward sloping line increase its angle of ascent while the final phase sees sometimes nearly vertical rises with incredibly steep slopes. Gold has obviously not yet entered the final phase.

As our wise friend Monty Guild has written in his recent commentary, the rise of the yellow metal is not going to be without its enemies notice. The problem for the West and its perennial gold price rigging scheme is that the Central Banks of other emerging economic powers around the globe have plans to increase their official gold holdings as part of their reserves and are now emerging as buyers of the yellow metal. While the West may attempt to fight the rise in price, the East is going to be there to buy it up on the dips that such machinations create. I have long maintained that the battle over gold is really a battle for economic supremacy.

The long bond speculators are doing exactly what their masters at the Fed expect them to do after receiving their marching orders from yesterday’s FOMC release. They are back bidding up the price taking the bond market up over a full point as I write this. Even with their buying the gold/bond ratio is currently moving in favor of gold.

Crude oil is again the weak sister in the commodity complex as it cannot seem to break out of its range trade and participate in the broader commodity sector price rise. It is being weighed down by ample supplies during a time of the year also when heating demand is still relatively tame and driving season for the summer is now long gone. While food and clothing prices will be soaring in the weeks and months ahead, at least we can deal a bit easier with decent energy costs. How long that will last is anyone’s guess however. Personally at some point next year I expect that to end.

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