Several noteworthy events occurred today which impacted gold trading in the US. First and most importantly were developments along the currency front. The British Pound was utterly mauled as news came out that the Royal Bank of Scotland had incurred the largest loss in British corporate history. If that was not bad enough, shares of Lloyds Banking Group fell by nearly 50% at one point in today’s trading as the market greeted the Bank of England’s rescue plan for the banks and the economy with a resounding THUD. The fear is that interest rates are falling to near zero and that the British economy is in horrific shape. Investors are also looking at the details of the rescue plan and are voicing concerns as to how this massive increase in debt is ever going to be repaid. Sound familiar?
News of continued downgrades in sovereign nation debt in and around the Eurozone sent the Euro into the toilet as it dropped to its lowest level since early December last year.
Now those of us who have been accustomed to watching the action of gold on a daily basis would have generally expected gold to drop alongside of the Euro especially as the Dollar went on another of its rip-roaring short squeezes amid panic buying. However, something happened related to this currency movement that caused a complete reversal of the norm. Gold in Sterling terms shot to a brand new all time high at the London PM Fix coming in at 612.307 while Gold priced in Euro terms came in at 661.383 coming in just shy of its all time high PM Fix of 663.352 made back in October of last year. Gold traders in New York looked over at that and decided that they needed to get out if they were short or get in if they were out! In other words, what looks to be a genuine flight to the safety of gold has begun in Europe. And why not? With US Treasuries paying next to nothing and several European nation government bonds being downgraded, where else can those who are fearful of what is occurring go with their life’s savings? If I were a bond holder and looked ahead at the plethora of new debt being issued, supply of such magnitude that the numbers send the mind reeling, I would seriously doubt that demand would be able to keep up with it.
What we are seeing is gold trading as a currency – something that has repeatedly been echoed at this site now for years especially in the face of repeated deflationist claims that gold would sink alongside of the rest of the commodity world. Keep this important fact in mind. Gold is a currency; it is only a commodity when there is general trust in paper money. Any fears or concerns about the stability or trustworthiness of any fiat currency will send money scurrying into gold. It is now evident that is occurring in Europe. It WILL OCCUR here in the US at some point in the not too distant future.
The second noteworthy item affecting gold was the price action in the expiring February crude oil contract. After dropping to a new yearly low, it rebounded sharply taking out the previous day’s highs as shorts began covering and bottom pickers began moving in. One day does not a trend make but I am keeping a very close eye on this market as crude oil, whether we like it or not, has become a sort of barometer for the rest of the commodity complex as a whole. Higher crude prices would only serve to bring in additional buying support into the gold market.
Technically gold blasted through two overhead resistance areas with seemingly little to no opposition. The first one at $840 was gone without gold breaking a sweat; the latter zone near $860 also was breached as buy stop momentum carried prices through it sending the shorts reeling before bullion bank selling came in and managed to suck up all the bids and drop it back below this level. The inability of gold to close strongly above the $860 level reinforces it as a significant barrier with $880 still lurking above that as the opposition to a move to the $1000 level. Support lies now at $840 and then below that near the $820 level.
The mining shares, as indicated by the HUI and the XAU, showed a very strong disconnect from the broader US equity markets which went one way (down) while they went the other (up). Both indices have recaptured the 10 and 20 day moving averages after a perfect bounce off of the 50 day moving average last week. This is quite bullish action with the next barrier to both indices their former double tops make back in late December and early January of this year. Expect to see shorts try to hold the line there for if they fail, a trending action will be highly likely.
It is difficult for me to see where the buying came from that pushed the Dollar higher seeing that Treasuries were hit hard while equities were also taken down sharply. If anyone was busy running into the US Dollar as a safe haven play, I sure did not see it.
Bonds are weaker today after getting hit hard overnight but seem to be holding above the session low with continuing weakness in equities supportive.
Click chart to enlarge today’s hourly action in Gold in PDF format with commentary from Trader Dan Norcini