Hourly Action In Gold From Trader Dan

Posted at 2:33 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

Weakness in gold and silver were blamed on several factors as trade moved into New York this morning.

Overnight Brazil hiked its core interest rate by 50 basis points and there was additional chatter of further interest rate hikes in China to combat surging inflation pressures on the heels of some data out of that quarter suggesting previous hikes in both interest rates and reserve ratio requirements are not having much effect on taming price rises. That led to a general reduction of the “risk trades” and selling in commodities as a whole. Witness the case of the two markets I like to track in the sector, copper and crude, which were both sharply lower, crude oil failing to hold support at $90 and copper getting spanked for more than 10 cents. Even corn, which has a strongly bullish set of fundamentals did not escape the selling barrage when it opened for trading in the pit this morning although it did finally absorb the algorithm selling before moving higher again. At least fundamentals are still ruling in a few of our markets. Ditto for wheat which is now trading above the $8.00 level as I prepare these comments. Food prices continue to rise – period.

There was also an unemployment number which came in lower than some were expecting leading some to talk up the prospects of the US economy which brought some strength into the US Dollar. The Dollar also was the recipient of a sharp selloff in the Yen and the commodity based currencies which moved lower as the risk trades were dumped. (Bonds were also sold down).

There was also the rather strange report out of the CME Group that the mini gold contract was to be delisted. This is the 33 ounce contract not the micro gold contract. This abrupt announcement, without any explanation, (there was a blurb on their website) had many traders wondering what was going on and why. Some sold first and waited for an explanation later. I am still going to try to see if I can find out what the reason behind that sudden announcement was.

All of the above combined with a rather big onslaught of selling in gold and especially in silver which took out a critical support level on its daily chart.

Gold dropped as low as $1342 on its chart, a level which it must now hold to prevent a deeper correction down towards the $1320 level. The daily chart pattern has taken on a decidedly negative aspect with today’s sharp move lower. Perhaps a bit of saving grace for the metal is that the funds have been liquidating longs for some time now and have greatly reduced long side exposure back to levels last seen when gold was trading closer to $920 or so. That will help some but if for some reason the price level were to break down through $1320, a very substantial long side selling rout would take place that would damage investor sentiment towards gold in the immediate term. We’ll have to see where and when this selling barrage finds a respite. Bears were attempting to force it down through $1340 throughout the session but after the initial drop down towards that level, were unable to do so. Volume was very heavy today suggesting a great deal of emotional based selling. It is going to take some time to therefore repair the damage to the bullish psyche. Even with today’s sell off in gold, it is only down about 6% off its recent peak. Considering the fact that it has moved up 24% since July of last year, that is really insignificant.

Euro gold dipped under the 1,000 Euro mark for the first time since November of last year at today’s PM Fix. It would need to hold above €950 to prevent a wave of deeper selling on that side of the globe as that would do some damage to the gold chart when viewed in terms of the Euro.

On the weekly chart, gold is forming what can be viewed as a potential rounded top formation with support evident near the $1320 level. That is why this level is important for the metal to hold to prevent a deeper setback towards $1285 – $1280. It will take a closing push past $1370 to now turn the tide in favor of the bulls with $1380 to uncover buy stops from fresh shorts.

Silver’s breach of $28, a critical chart support level, casts a negative pall over that market. It had been uncovering some decent buying support near the 50 day moving average but that simply evaporated in the general rout among the metals today. Tightness in the physical market is apparently no match for the paper market. Used to be that in the childhood game of rock, paper, scissors, that paper covered rock so I suppose the same applies with the Comex paper market. It now needs to hold $27 or it will drop to $26.40 or so with the potential for $25 in the cards should it fail to stabilize near that level.

The HUI gapped lower today and now looks like it might want to head down towards the 490 level. It is extremely oversold on the daily technical charts and looks to be approaching levels that should put a halt to the severe selling. The region near 480, the 50 week moving average, should stabilize the sector, as it has proved to be a good level since July 2009 at containing all downward thrusts in price. Bottom pickers will probably begin nibbling soon.

Bonds were absolutely crushed today falling nearly two full points again in yet again a repeat of the pattern that we have now been spectator to for the last month. They are unloaded whenever it appears that the global economy is entering a period of rising interest rates only to be artificially manipulated higher by the Fed’s QE purchases which then cause an almost immediate rebound from off the lows as bond traders anticipate the next entry by the Fed into the bond market. As said many times over the last month, the market is a joke with everyone on the planet being able to see the game being played by the Fed. Specs came in and sell them lower only to then have a certain crowd jump in and bid them right back up in front of the Fed with more specs then waiting to unload their freshly purchased bonds into the hands of the Fed and then repeat. Lather, rinse, repeat. I am going to watch and see if the bonds immediately move higher on the reopen of trading early this evening. That has been the pattern and will reveal that the crowd is once again expecting them to come in and put another floor under the market.

It will continue to work until it doesn’t.  Heaven help us all if 118^20 gives way on big volume. Then again, with a total commitment of $600 billion in freshly created “money” to be thrown at the market, it is difficult to imagine that. For now we play the game with the rest of the crowd and do the bidding of our monetary masters. This is what particularly galls me whenever I read comments from public US officials who have the temerity to lecture the Chinese on the level of the yuan.

The Dollar was resuscitated right on schedule today as it is attempting to recapture important chart support near the 79 level on its daily price chart. Technicals are pointing lower however. What is amazing is that one can lay a chart of gold over the chart of the Dollar and the two markets have had nearly identical chart patterns since November of last year. I am not sure what to make of this just yet. One would expect a breach of support in the Dollar to garner buying interest in gold but that has not been the case for the last two months.

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