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Hourly Action In Gold From Trader Dan

Posted: Dec 15 2010     By: Dan Norcini      Post Edited: December 15, 2010 at 2:40 pm
Filed under: Trader Dan Norcini

Dear CIGAs,
Price action in both gold and silver is indicative of the beginnings of holiday trade as players begin squaring books ahead of the year’s end and move to the sidelines in anticipation of taking some time off. Potential exists for some rather strange moves in price. Try not to read too much into it as both longs and shorts exit the market only to return at the start of the New Year’s first full trading week. Pit locals LOVE this time of year as it gives them a chance at picking the pockets of both longs and shorts as they can use the thin trading conditions to go after both upside and downside stops. A lot of them put their kids through college based on the money they secure during holiday trading conditions. Stops are easy money for them although occasionally one or two fund traders will hang around long enough to mess with their plans.
Technically, gold needs two consecutive closes above $1400 to kick it up towards $1420. Downside support exists near the $1375 level with bears hoping to break it down below there and push it towards $1355 or so. Look for dip buyers to be active should that occur.
Silver needs to secure at least one PIT SESSION CLOSE over $30 to give it a shot at taking out the recent peak near $30.75. As stated in previous posts and in my recent radio interviews, silver is not acting like a massive short squeeze is occurring. We will know it from the price action when that occurs. Right now, it is not. The current state of the silver market is one of resting below a critical resistance level.  There is good buying showing up on dips towards $28.50. Silver shorts would dearly love to take out $28 but so far the quality of the buying that has been occurring is thwarting them from so doing.
The HUI is stuck in the same situation as both metals. The recent top near 600 is strong resistance with sellers digging in their heels up there but buyers appear active on forays towards the 560 level. The end result is a sort of range trade or consolidation period.
The big story, bigger than the action in both the metal’s pits, is what continues to occur in the long bond market. It simply cannot seem to get any traction to the upside whatsoever. A market that acts like this is telling us that sellers are eager to unload bonds for whatever reason. More and more the focus of the bond market is the supply of these things versus the waning demand. When you get a day in which the equity markets fade lower and the bonds cannot hold their gains even with that sort of supportive backdrop, it is quite telling. It is saying that bond owners believe that the risk/reward for holding bonds is moving against them.
There can be several reasons for this psyche. First – fears of inflation which erodes the value of bonds. Second – fears of repayment of the principal. That may not be as much of a problem when it comes to US Treasuries in particular (they can always conjure more into existence to pay off existing ones!), but there are more than a few municipals that are looking increasingly dubious. Throw in a good dose of debt woes from sovereign nations over in Euroland and many bond holders are getting nervous about these IOU’s in general, particularly when they see riots tied to austerity measures that might work to bring some of these spendthrift nations back towards some semblance of fiscal health. Some might be thinking to let’s just get out of them completely and look for somewhere else to park our money given the strong potential for monetary and political leaders to take the path of easier resistance of just issuing more debt rather than face down a crowd of angry rioters. Thirdly – growing suspicions that China is unloading Treasuries and looking to use its massive reserves to secure sources of raw materials and precious metals. “Why be the last man holding the bag” if the big buyer is stealthily selling them. Fourthly – the Bernanke-led Fed announced that they continue with their QE program because the unemployment numbers remained too high and inflation was too tame. Any bond holder hearing that would be nuts to hold those paper promises in his or her’s hand.  Lastly – some are looking at the agreement coming out of the lame duck session of Congress and see another bloated spending bill resulting in a further worsening of the US fiscal condition. Whatever the reasons, and there might be others, ( I Have a suspicions that the big banks did not like the profit potential from the narrow yield curve), bonds are a technical train wreck on the charts that looks to have more carnage inflicted upon it judging from the eagerness of sellers.
See yesterday’s bond chart for support levels. Should 119 give way, there does not appear to be much in the way of preventing a fall towards 115.
That brings us to the Dollar – it is going to be moving higher or lower based on the day to day focus of the Forex markets. On days in which Europe’s woes gain ascendancy, the Dollar will move higher. On days in which the focus turns to the US’s own set of economic or monetary woes, the Euro will move higher and the Dollar will sink. Neither of these two currencies are worth the rag paper that they are printed on so it has really become a lesser of two evils situation. “Would you prefer arsenic or strychnine with that sir?” Until yields rise high enough to compensate holders of debt denominated in either currency for the risk associated with holding them, gold and silver, and copper, platinum and palladium for that matter, will stay strong in price. All of these metals are currently serving as stores of value or stores of wealth and until something changes along those lines, it is difficult to see why those looking for such havens would shun them.
Click chart to enlarge today’s hourly action in Gold in PDF format with commentary from Trader Dan Norcini