Dear CIGAs,

Gold has now switched gears once again and instead of following the Dollar up and down, after of course having moved mostly inversely to it for the larger part of the entire bull market in gold, seems to be  trading inversely to  the US equity markets. In other words, stocks go up, gold goes down. Stocks go down, gold goes up. Gold is keying off of what is perceived to be any bad economic news and moving higher. When the news seems to be somewhat positive, it sells off. Yesterday of course it was all about Bernanke’s fairy tale about the US coming out of recession late in 2009 or early 2010 once the “stimulus” package kicked in. That and his talk pooh-poohing bank nationalization was enough to give the financials in particular a big lift and that drove the equities higher and gold lower. Today, buyers of financials are apparently having a case of buyers’s remorse and back down they are going. Gold is drawing support off of that action but even at that, it seems to be running into steady selling pressure which forces it back down when it manages to put up some gains on the day. It is well off its overnight lows however where it tracked down near to $950.

You will also note that gold is moving higher or holding relatively steady while the dollar is moving higher. That means that gold is moving higher in other major currency terms at a faster clip. I have been noting that in terms of various major currencies, the yellow metal has been notching a series of all time record highs. The only major left out in this parade has been gold priced in yen. That is slowly changing however. While it is still a bit off its all time high priced in yen terms, gold has been moving steadily higher as the yen is rapidly falling out of favor.

I think what is happening with the yen is that the carry trade unwinding which is what has been supporting the yen, has just about run its course and forex traders are now turning their attention to the abysmal numbers coming out of that country. Quite simply – they stink! Couple that with such low yields on Japanese government bonds,  and there is a consensus forming that there is really no reason to buy the currency. As it moves lower while gold now holds relatively steady or tracks higher, that is going to push Yen-Gold higher. It will be interesting to see if the Japanese citizens begin moving into gold in a larger way now that their own currency is finally apparently succumbing to reality. Up until now, they have been largely absent from the gold market favoring their bonds but that could change and change rapidly as economic conditions over there begin deteriorating even more rapidly. The yen has been overpriced in my opinion and until it drops lower, their export market is going to struggle. Japan has been dependent on that sector of its economy to a much greater extent than their domestic front.

In the cheery news category – January existing home sales dropped to a 12 year low

In another interesting development, bonds and equities are also moving in tandem. Just like they were doing yesterday, bonds were following equities around. Normally we see the inverse. I have a theory on today’s weakness in the bonds; however, it is just that, a theory. I saw a note on the wire feed this AM that the cost of credit default insurance on some US Treasuries was rising to the point that more than half of the yield would have to be paid by the buyer of the Treasury to insure it against default. That is stunning! Try to wrap your mind around this – the supposed safest, most liquid paper vehicle on the planet was just in effect downgraded on the credit default insurance market. Forget the official ratings agencies – That is really the only rating that is important. You have to wonder if US Treasuries are going to lose their safe haven reputation? If they do, how will the Dollar continuing defying gravity? Something to consider….

Crude oil got a strong shot in the arm this AM when data was released showing a sharp drawdown in gasoline supplies. Energy bulls seized on that to shove the shorts out, pushing crude above $40 in the process. It is trading near the $42 level as I write this.

The mining shares, affected getting brutally mauled yesterday, are trading higher today. Not much to say about them right now. Maybe some guys who blew out yesterday are having second thoughts? Who knows… Long term thinking continues to clash with short term day traders and momentum players in this sector.

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