Dear CIGAs,

It is difficult to get an accurate read on today’s price action because it was dominated by front running of index fund rebalancing to conform to changes being made in some of the major commodity indices. Copper was up 7% at one time today based solely on a heavier weighting of the metal in two of the indices. There was no fundamental news that I was aware of but that does not matter for these players – they have to take on positions in accordance to the percentage weightings that they are given in the index. If the composition of the index is raised to 6% from 4% in copper for example, then the funds have to take an additional 2% of their monies and stick it in a long copper position, regardless of what the fundamentals might or might not be. If the composition of gold is lowered from 8% to 6%, then they have no choice but to sell enough gold long positions to bring their holdings back down to a 6% weighting in the yellow metal. Obviously, the makeup of these indices determines a great deal of the price action across the various commodity markets.

Frankly I find the idea of reducing the weighting of gold in the indices for 2009 to be very odd. Gold was one of the very few items that showed a gain for 2008 – yet its weighting is lowered?  What we see in the US equity indices is the exact opposite. Poor performing stocks are gotten rid of out of the index as quickly as possible while the best performing stocks are added to the index. That way the bureaucrats can attempt to keep the index levitating. Yet here we have a case where the index managers made a deliberate decision to lower the weighting of the best performing commodity for all of 2008. Let’s see someone come up with a rational explanation for this – don’t hold your breath because there is none.

Needless to say, with all this as a backdrop, gold was promptly clocked at the opening of pit session trading at the Comex as yesterday’s weakness coupled with Dollar strength brought in more selling overnight which continued into today’s session. The metal traded down into the 20 day moving average before rebounding sharply as dip buyers surfaced in a large way especially late in the morning. The spike well off the session low has to be encouraging for the friends of gold for that occurred even with frontrunning of upcoming forced selling in gold by way of index fund rebalancing. The recovery in the Euro from its worst levels did not hurt matters any for gold bulls.

To build on today’s nice spike we need to see a higher close tomorrow. That will inspire confidence among the gold bulls that the reaction is finished and unnerve some of the weaker-handed shorts whose covering can be expected to push prices back closer to $880 once again. I am still a bit leery about the upcoming index fund rebalancing as that will commence in a couple of days time so we need to be alert to actions coming off of that front.

Technically gold will need to maintain its footing above the $825- $830 area to keep the technical chart picture from deteriorating. That should prove to be a strong area of support if this uptrend is going to continue into the new year. The fact that it managed to close back above psychological round number support at $850 is very friendly. Resistance still lies over head at the $880level which is clearly being defended by our “friends”, the bullion banks who work for their monetary masters in a mutually symbiotic relationship (don’t you love the free markets we have here in the USA). The 10 day moving average is still moving upwards which is a positive  and  gold’s ability to recapture that level in today’s spike action no doubt unnerved many of the shorts whose covering near the close could easily be observed from the near vertical rise in the last 5 minutes of pit session trading.

Again, those who are sick and tired of playing in the private sand box of the bullion banks and having their castles kicked over need to learn new tactics. You cannot expect different results if you are going to employ the same worn out strategy again and again. Take the physical metal OUT OF THE COMEX WAREHOUSES if you want to put an end to this. Standing for delivery is a good thing but if you merely take the warehouse receipt in lieu of the actual metal you have not done anything to short-circuit the bullion banks. You MUST REMOVE THE METAL. Fund managers that insist on continuing your brain-dead strategy of chasing momentum higher and higher could turn the tables on your enemies at the Comex and simply begin systematically acquiring the metal from Comex inventory. You are not trading soybeans here – this is gold and if you want to profit from this market then get rid of your algorithms and use your minds.

I might as well mention here that like most other things associated with the Comex, I am now having questions with the warehouse stocks number that they are releasing. In spite of very heavy deliveries occurring in the month of December (nearly 50% of the entire registered category), we saw an almost imperceptible change in the numbers being reported for the warehouse stocks. I find that quite difficult to believe. If nothing else we should have seen some changes occurring between the registered and eligible category. Once again when it comes to the paper gold market, we get nothing but more murkiness. Personally I miss the old full sized gold contract that was up and running when the CBOT managed it; at least we  had some openness and transparency in the contract with that exchange. If the Comex gold contract ever does become extinct, they will have no one to blame but themselves. We live in an age of increasing sophistication among traders and investors who demand transparent markets and level playing fields. The inability or unwillingess of the Comex authorities to provide either leaves no one but themselves to blame should traders vote with their feet and take their business elsewhere.

I mentioned yesterday the fact that the commodity currencies, (the Australian, New Zealand and Canadian Dollars), were all trading higher against the US dollar and that we needed to keep an eye on that as it might signify a bottoming of the commodity markets. Those three currencies are all trading above their respective 50 day moving averages. They are still below the 100 day however so we do not have an all clear sign as far as a trending move goes. Of the three, the Canadian Dollar is showing the most strength today as of the time I am writing this. That probably is the result of the action in the TSX which is seeing energy stocks and natural resource stocks all performing quite nicely. There are obviously strong money flows into Canada right now.

I also mentioned that the fundamentals for the platinum group of metals (platinum and palladium) were extremely weak and if they began showing signs of bottoming action it would also have a positive effect on the entire complex. Today palladium took off to the upside completely negating yesterday’s weak showing. Should it break through the $200 level and maintain its footing above that level, that alongside of further upward action in the Aussie, Kiwi and Loonie, would have to be respected as a sign that the complex has put in a bottom. The problem in attempting to decipher all this mess is that the fundamentals are murky at best but the index funds are throwing money into the markets willy-nilly irrespective of such things so you get a situation where you are unclear as to what is really taking place – are these markets actually bottoming in the midst of a global slowdown or are the technicals now saying that prices have gotten too cheap and are now screaming buys. We do have some markets where the fundamentals argue that prices are definite buys – others are not there yet but they are still going up as index fund money flows into them anyway. Anyone who claims to have all of this figured out is far wiser than I am and I will be the first one to come and sit at their feet and learn. For now, short term scalping might be a better bet for traders because these damn index funds can spin out on a dime and exit as fast as they came crashing in. Their giddiness of one day can be replaced by depression and despair the next. Today however it is all bells and whistles as they are busy slinging money at anything that looks, talks, walks or smells like a commodity. Ah yes, such finesse in trading is a thing of beauty to behold. I am sure it must have taken those who manage these institutions every bit of 15 minutes of life experience to learn how to trade in such a skillful fashion.

Yesterday I remarked about crude oil saying that it would take a strong close above $50 to convince me that a new uptrend is beginning. Today it briefly flirted with that level before sellers showed up in force and promptly beat it back down. Still, this market has to be respected because any further eruptions on the geopolitical scene and traders will be focusing solely on that as they rush in to buy. For right now it does appear that crude is encountering selling pressure near  the $50 level which also happens to closely correspond to the 50 day moving average – a major technical resistance area. Tomorrow’s session should clear things up a bit in regards to this market.

Bonds continued to wilt dropping almost a full point today before managing a bounce. They are perilously close to the 40 day moving average which if it cannot hold, will send the fund longs fleeing for cover. Given the steepness of the decline, I would expect to see some short covering coming into this market if for no other reason than they are short term oversold after being overbought for so long. Has the bubble in the bonds finally popped? Again, I am not sure but one thing is certain, the level near 141^27 – 141^30 is formidable resistance. If bonds punch through that level it will mean the Fed is losing their battle against deflation.

The mining shares rebounded today following the action in the metal itself as both the HUI and the XAU are higher and are trading above their respective 10 day moving averages. The bearish divergence on both charts is a reason for concern so this sector will have to quickly push through last week’s highs to provide the bulls with fresh recruits to their side. That level is 127 on the XAU and 309-311 on the HUI. If they hesitate there shorts will be emboldened and short term oriented longs will bail out. The onus is now on the bulls to provide sufficient firepower to assuage any concerns. All in all a nice showing in all things golden today. Let’s see if that can continue tomorrow.

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