Hourly Action In Gold From Trader Dan

Posted at 3:19 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

It looks as if the Dollar’s implosion was just too much for the gold market to ignore today. Earlier in the session, it came under selling pressure as the growth trades were jammed on and gold was once again jettisoned in favor of an now almost panic type of buying occurring in the equity markets. However, with the HUI refusing to break down and moving up alongside the rest of the equity world, once the Dollar began increasing its downward speed, buying began to surface in gold that took it through $1336 where it then gained further upside traction moving up towards $1345 and yesterday’s session high.

The metal continues to have trouble clearing the downtrending 10 day moving average, which is the bare minimum required before the bulls can feel a bit more confident that the bottom in this latest reaction has been forged, but the longer it can stabilize in this general region, the faster it will be able to manage this simply because of the manner in which that average is calculated. Shortly after the close of pit session trading, the usual attack on the metal occurred which took it down below $1340.

I am watching Euro gold as the last few days have seen it stabilizing near the €962 level. Yen priced gold has also been stabilizing near the 1090 level the last few days. Yen priced gold has me interested because of last week’s downgrade of Japanese debt by the rating agency S&P.

I should note here that the fund long side liquidation continues apparently unabated as we witnessed another big drop in the total number of contracts outstanding in gold during yesterday’s price retreat. The total open interest remaining in gold is now down to 463,700 contracts. To put things into a bit of perspective, the peak in open interest was 650,764 back in November of last year. Interest is down nearly 190,000 contracts in the last 9 weeks! That gold has only fallen some 6% in the face of this huge exodus of speculative money is remarkable. It tells me that the short side of the market (the bullion banks and the swap dealers) has been aggressively covering shorts at a rapid rate. As said yesterday and at the risk of beating a dead horse – the speculative long side must stop liquidating longs before this market can begin moving higher in earnest. As long as they view rallies as selling opportunities, the open interest will bleed down further.

That brings me to the non-stop party that has been occurring in the US equity markets. The S&P put in a top near 1574 at the height of the stock market bubble back in March of 2000. It then collapsed nearly 50% before recovering in late 2002 when it embarked on another run to above 1500 before it peaked near 1586 in October 2007.

From that point it then forged a double top on the long term charts as it fell through chart support centered near 1255 as the credit crisis erupted in full force upon the implosion of Lehman Brothers in the summer of 2008. Price continued falling down towards the 750 level which forced a panic in the ranks of the Federal Reserve which then announced its first QE program back in March 2009. From that point on, the index has now gone up 19 months out of the last 24 months to the point where it is now trading ABOVE the level it was last at all the way back in June 2008, just prior to its collapse due to the advent of the credit crisis.

I am not sure exactly what supposedly got “fixed” with all this money printing to so improve the economy as to justify a move in the stock market to a level higher than it was at before the inception of the credit crisis, especially with the woes remaining the housing sector and on the employment front. Another way to look at this, based just on the level of the S&P 500, is that the entire credit crisis fallout has been solved and it now has never happened! This madness just goes to prove the old adage:” You cannot fight the Fed”, especially when its primary dealers are in there using free money jamming the stock indices higher with the passing of each day.

At some point, once the panic among the more prudent money managers and the general public which has been sitting the rally out and watching from the sidelines, begins to take hold and they begin rushing into equities at full speed, Goldman and Morgan will then begin unloading all those longs that they shoved on into the hands of these latecomers to the party. That will keep the champagne corks popping and the toasts flowing as they once again pass out huge bonuses to their “skilled traders” who are only skilled because they got their hands on billions of dollars in free money courtesy of the US taxpayers, their children, and their children’s children. Isn’t America great!

In what is becoming more the norm rather than the unusual occurrence, the CCI (Continuous Commodity Index) made yet another record all time high today as the relentless rise in commodities continues. The Australian Dollar, a key commodity currency, soared back above the par level with the US Dollar today and looks like it wants to take another shot at the peak it put in at the end of last year near the 102 level. Should this currency take out its record high, it would portend further rises in the commodity sector especially in the base metals. Along that line copper finally took out that stubborn overhead resistance near the upper $4.40’s and has now gone on to make an all time record high. The cost of plumbing and electrical wire continues to soar. Say Ben, are you seeing this?

In a rather ominous development, the Dollar crashed through a strong floor of chart support near the 78 level on the USDX in today’s session plunging all the way down towards 77 before it encountered some buying. There is some support on the chart near the 76.50 level which if it cannot hold should see it move down to challenge a major chart inflection point near the 75 level. Ben and company have gotten their wish – they have succeeded in jamming the Dow and the rest of the equities markets higher but they have destroyed our birthright in the process. What makes this so dastardly is that this has been their plan all along – knock the Dollar lower but try to do in a manner that is more of a controlled descent rather than an utter collapse.

Paper asset inflation is now moving at full speed ahead and that has the less informed “analysts” praising the Fed’s actions but the fact is that if one compares the current equity market ratio to the price of gold, the market has not gone anywhere in real terms when measured against some sort of objective standard of value. Translation – the rally in the equity markets is nothing else but paper asset inflation courtesy of the Federal Reserve.

Bonds did pop higher overnight upon their initial reopening of trade but then moved lower as the equities moved higher. Once again, at the very moment of their worst levels of the trading session, even with the CCI moving higher into record territory and the equities partying like the good times are ready to roll, the bonds magically levitated off their worst levels turning what was a full point plus move lower into a modest loss for the day. The Fed’s dealers are alive and well.

What makes this such a mockery of any semblance of a free market is that at the same time the sharks are front running any Fed action on the next QE bond buy, the talking heads are telling us how wonderful the US economic improvement is becoming. The whole thing is a massive display of senselessness. If the economy was as good as the stock rally is telling us it is, then there would be NO NEED OF ANY FURTHER QE and the bond market would promptly collapse. I am afraid that those who cannot see the utter illogic of it all, are beyond hope.

Such things are lost on the trading world however as the only thing that matters in the short term is the technicals and the need to follow the momentum wherever it leads. It will stop when it just stops and until it does, the trading systems will do their thing. Still, I wonder what it must feel like to be able to turn the entire investment world into a group of lemmings or to play the part of the Pied Piper of Hamelin.

The HUI is trying to muster a close over the 517 level but thus far has not quite been able to pull it off. The majority of technical indicators are now issuing buy signals from down deeply in oversold territory. That plus the fact that the index has now managed to put in a close above the 10 day moving average which continues to flatten out should begin to attract further buying into the sector. It will now take a solid push down through the 500 level to put the recent low in danger. Good traders will have some money management levels to now work with.

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