Hourly Action In Gold From Trader Dan

Posted at 5:49 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

Gold was strong upon its opening overnight in Asian trading but could not hold onto its gains as longs used the rally to lighten up further and reduce their exposure. While that is not unexpected considering the technical posture of the market, it is also disappointing that with the CCI index making yet another all time high today as commodities across the board were soaring, the yellow metal simply went nowhere.

It appears that the “growth trades” are now the new norm for the time being with gold being jettisoned in favor of equities. You’ll note that this is the reason that gold is down in unison with the Dollar as I explained in last week’s comments. The “risk trades” were still being implemented but gold was not a part of them, at least for today. There was also the usual, “buy the rumor, sell the fact” trade associated with Egypt in the sense that it did not fall apart completely over the weekend, although that is a matter of perspective. Traders were fearing a region-wide proliferation of the unrest on Friday and by today they were practically bored by it all.

We’ll have to see how the metal handles any potential retest of last week’s lows. I would actually prefer to see it move lower and then bounce away as that would more clearly denote those lows at the end of the recent price retracement but rest assured that the perma bears are attempting a push down through those levels. Whether or not it holds will depend on the willingness of longs to stop liquidating. As has been the case with this market since its decade long bull market began – the key to any upward progress is the willingness of managed money and other speculative interest to buy into it. If the specs continue dropping off of the long side, the market will move lower. Granted, they are selling into strong hands but that is little consolation for those who might be long the futures market or the ETF.

When the exchange released the Open Interest figures from Friday’s sharp price recovery and there was a sizeable reduction, I knew we were in trouble. Still, the metal has not given back all of its gains from Friday and that still gives the bulls the opportunity to hold it here if they will simply stop running.

Demand for the metal is incredibly strong on the physical side of things and if the specs would stop disgorging their longs, the market could base here. We do know however that the bullion banks are buying like crazy as price descends.

With the managed money side of things down to long side levels last seen when gold was trading at $920, there is not sufficient fresh selling to break the market down below $1300. That requires a spec rout and liquidation selling. We will have to see if those left in the market on the long side have the financial wherewithal to stand pat.

The Dollar chart looks beyond awful right now with failure to hold today’s low setting the market up for a move down towards 77.20. Dollar bulls need to at the very least take out today’s high to stick a short term bottom in near 77.80.

Bonds have broken back down once again (no surprise) giving up all of Friday’s Egyptian turmoil-based gains plus some. They continue to tread water with Fed buying under the market preventing a deeper sell off. Watch for them to immediately pop higher on the reopen of electronic trade early this evening.

As mentioned earlier, the CCI went on to set another all time record high in today’s session as Bernanke’s “the only thing we really need to fear about inflation is the unreasonable fear of inflation”, took yet another round house kick upside the head. Crude oil shot up to a fresh yearly high just shy of $93 as that market is attempting to forge a solid close above $92 on the charts. If it does, it is going to move towards $95. Brent crude, which is arguably a better representative of crude prices globally shot up to $101.67 and as I write this is trading above the $100 bbl mark. But I am not the least bit concerned about these rising food and energy prices because Ben Kenobi has told me that the Force is strong with him and he can sweep it all away by merely waving his hand. Gold is probably the Darth Vader of the Federal Reserve universe so this time I am rooting for the dark side. A rising commodity index that is firing on all three cylinders, base metals, energy and food, is not conducive to continued selling pressure on the precious metals side of the sector. I suspect that the Jedi at the Federal Reserve are tremendously disconcerted over getting zapped by some lightning coming out of gold.

The HUI was caught between a rising equities market and falling gold prices today but managed to hang in there fairly well. Obviously, it would have been beneficial to the cause of the precious metals for the thing to have gained on the day but it is still holding above 500 at this point. We need to see it get a close above 517 ( a strong close) to turn things solidly around. I should point out that its reluctance to stay below 500 is resulting in the 10 day moving average beginning to flatten out although it is still moving lower. We will be keeping close tabs on this index.

Click charts to enlarge in PDF format with commentary from Trader Dan Norcini