Hourly Action In Gold From Trader Dan

Posted at 2:04 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

So much for the anxiously anticipated payrolls report – it turned out to be an absolute dud with the economy shedding yet more jobs (try to think of this in human terms). Another 95,000 jobs disappeared. While private sector hiring did show a mild increase, government jobs (state, local and federal – census workers) showed another drop.

Further distressing news was that July and August numbers were revised DOWNWARD. If that were not depressing enough, preliminary estimates for the yearly benchmark revisions reveal that the government underestimated the overall number of job losses for the year and may erase another 366,000 off its books. Keep in mind that these are all “official” government numbers. The reality is even worse. By the way, the underemployment number is closer to 17.1%.  Nearly 1 out of 5 are either out of work or working part time being unable to secure full time employment.

Obviously this is not what the stock market was hoping for (it is also the last report before the upcoming November election) but it is what bond traders were hoping for as this sets the stage for another round of Fed Quantitative Easing. Bonds moved higher in anticipation of more purchases next month or certainly in December.

The rest of the markets were somewhat torn by the news. Commodities in general were moving higher on the reflation play (QE2) but some of the individual markets such as crude oil were caught in a tug of war between the rotten jobs number, the subsequent continued slow growth and slow demand, and the notion that more funny money will punish the Dollar. Crude was higher but its gains were subdued as it is thus far unable to stay above $83. Should it be able to better than market as of today’s close, it will be poised for a run towards $87.

It was not so in the grains where a stunningly bullish corn number from USDA caught that market by surprise. That market has been on a real roller coaster of late. It was just a week ago when a USDA report caught everyone by surprise but on the opposite side. Then the numbers show corn stocks larger than most were expecting and the market went limit down. At the time there was a great deal of suspicion regarding USDA’s numbers. Those fears were confirmed today and the doubters vindicated as the release showed a substantial drop in the overall corn yield with the result – the market went limit up and will probably do so again when it reopens Sunday evening. Can anyone say, “whiplash?” Wheat and soybeans were both pulled higher by corn with both markets locking limit up on the open of pit session trading; however, wheat has faded a bit but still remains sharply higher moving back occasionally hitting the limit again.

The Dollar moved lower but weakness in the Euro keep it from falling sharply. I am not certain why the Euro was relatively weak considering the payrolls number. A European official was attempting to jawbone the Euro lower saying that it was overvalued based in current fundamentals but his words do not really carry all that much weight. Still, some looked at it as revealing that the Europeans are very uncomfortable with the Euro near 1.40. There are also increased grumblings from various quarters of the world about what is being viewed as a deliberate devaluation of the Dollar by the US. The BRIC nations are becoming rather vocal and who can blame them? One wonders if perhaps there are some smoothing operations taking place to slow the Dollar’s descent and quiet some of the critics. Whatever the reason it kept the greenback from falling below the 77 level.

The hesitancy of the Dollar to break 77 is probably what kept gold from taking out its record high from yesterday’s overnight session. Looking at the charts however a close above $1,350 would be strongly bullish heading into next week. This goes back to what we have been repeatedly saying – as long as the market remains convinced that the Fed is going to engage in yet another round of Quantitative Easing, gold is going to move higher. You cannot create trillions in paper confetti Dollars and not have the ultimate currency respond accordingly. Even the most obtuse has to realize at some point that this will break the “back” of the greenback.

Historians will point to three factors when they analyze the events leading to the downfall of the Dollar from its global reserve status. First – an out of control Federal government spending binge which plunged the nation into an unsustainable debt abyss. Second – a binge of massive Quantitative Easing which resulted in an excess supply of the currency in a period of weakening demand. Third – the modernization and industrialization of the economies of Asian and Latin America.

But enough of that for now…

After seeing a bit of chart weakness surface in yesterday’s price action, gold bulls failed to run en masse forcing fresh short positions that were established yesterday to be covered. That took price higher before new selling originated near $1,350. For gold to continue moving higher it will need to take out $1365 to set up a push towards the next target level near $1,380. The key to $1365 appears to be the 77 level on the USDX. If it goes, so too goes $1,365. Initial chart support on the downside has been established near $1,325 with better support down near $1,315 – $1,312. The weekly close in Gold is yet another all time best.

Silver’s ability to recapture 23 is most impressive and should it manage to maintain its footing above this level early next week, it looks set for a run to $25.

The HUI managed to clear that 520 level once again. It is early in the day as I write this but IF the HUI can put in a weekly close above 520, it will be its best close ever and portends higher prices ahead. This 520 level is being fiercely contested with mining share short sellers pressing hard to avoid the level being violated. Why these boneheads continue to fight the trend escapes me but it is obvious that they are attempting to impose their will on the sector. It would be so much more profitable to just buy the mining shares and short the broader equity markets but combine huge paper losses and big egos and you get a combination that generally ends poorly. Regardless, 520 is the key that technicians are watching. If the HUI closes below 520 for the week but above 500, it will still look quite strong on the charts but will more than likely set the market up for some range trading for a period of time.

The Yen has now gone nearly straight up vertically for the last three weeks after dropping sharply on that round of BOJ intervention.  Amazing stuff. They either intervene on Sunday evening or Monday after this weekend’s big meeting or the Yen is going to accelerate higher. Everyone is sitting around wondering if they are going to be able to convince their counterparts that they are only wanting to engage in smoothing operations to prevent a “disorderly” rise in the Yen and thus get broad acceptance for an intervention or are instead attempting to engage in a currency devaluation at the expense of others. This continued rise in the Yen is killing Japanese GDP but apparently there is nothing that they can do any more to prevent it.  The stronger the Yen, the more downward pressure on the Dollar and the more upward pressure on commodities priced in Dollar terms. One has to wonder if the BOJ might make that argument to their counterparts to justify another round of intervention. “We are just trying to avoid a bubble in commodity prices so please let us bomb the speculative long yen crowd”.

The dollar is hanging by a thread above 77 on the USDX. Should it fail early next week, it will immediately head down towards 76.20 or so. A lot depends on what the BOJ might do coming out of the weekend. If they do nothing it will break the 77 level.

Platinum is over $1700 and palladium continues knocking on the door of $600. Copper totally negated yesterday’s bearish chart pattern and went on to make a 26 month high. It is within striking distance of psychologically important $4.00. As said several times here within the past two weeks, all that is lacking in seeing commodity prices managing to reach the former 2008 peaks based on the CCI (Continuous Commodity Index) is for the energy sector to spring to life. With today’s abysmal jobs number reminding us how many Americans are in terrible financial straits, any price rises in energy costs, particularly as we head into the winter months, is the WORST possible development at the WORST possible time for many of these families who are barely hanging on.

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