Dear CIGAs,

Sometimes it is a worthy exercise to try to stand back a bit from the closeness of the one minute bar chart and reflect a bit and ponders the action of markets, which is of course another way of saying the thought patterns of investors whose actions then result in movements in price. When doing so, I am struck by how silly this must appear to a completely, unbiased, impartial, non-involved spectator (of which there may be none in this land). It can actually be a bit humorous.

Look at it this way – millions of investors all across the land are watching one of the most severe, if not the most severe financial crisis unfolding in their lifetime. They have seen age-old companies collapse literally overnight; other name-brand institutions swallowed up and merged into their former competitors, massive job layoffs, automaker executives bowing their knee to their kings in Washington begging for money, entire countries going bankrupt with others teetering on the brink; massive amounts of debt, the likes of which we have never ever before witnessed being piled up like leaves on an autumn day, major US states as well as many urban cities running out of cash with which to meet their obligations, foreclosures which show no sign of abating not to mention the increasing number of delinquencies, etc,. The list could go on and on, you all have seen and read enough about it to fill in the blanks if I left anything out.

Then we get the Chairman of the Federal Reserve sitting on a chair in front of the Congress boldly proclaiming that he sees an end to the recession late this year or early in 2010, PROVIDED that the stimulus package is effective, and SUDDENLY, INSTANTLY, WITHOUT HESITATION, investors all across the fruited plain,  realize how utterly and completely wrong their assessment of things has become. With that they rush wildly back into the stock market on the assurances of the same man who told us back in August of last year, that the fallout was contained and that the institution which he represents had all the tools that it needed to deal with such exigencies at their disposal. Have you ever seriously considered just how incredibly stupid this must look to an outside observer? There was no warning from this man or his fellow compatriots back in July of last year that we were on the verge of such an event – no keen insight into the tenuous nature of things – no trumpet sounded that might alerted investors to the huge imbalances that had formed and were about to come crashing down on the heads of the citizens. And yet, millions of otherwise rational human beings are ready to expect that the worst is behind us and that recovery lies just a few steps ahead of us merely because one man said it POTENTIALLY could be IF something cobbled together by the same group of people who helped create this mess in the first place works?

Excuse me, but I for one would love to see the empirical evidence that these gamblers could present to prove their case. After all, we are not talking about men whose track record at predicting has been exactly accurate. Perhaps if the so-called stimulus package contained anything that had been proven in times past to actually induce economic activity of a lasting nature, I would be inclined to come around and embrace it and join the merry band of those who are happily gobbling up all the paper equities that they can and jettisoning gold but there is nothing in this bill except an increase in the size and scope of government and a lurch into socialistic policies, which have never worked at any time in history. That and a proliferation of debt which is looking more and more like something more closely related to a Biblical plague are what keep me fearful for the future of our nation and make me quite content to be holding the yellow metal as insurance against what these destroyers of wealth are doing.

The simple truth is what was stated by one of the few brave voices in the panel before which Ben Bernanke sat, Ron Paul, who informed the hapless Fed chairman that capital cannot be created out of thin air by means of an electronic printing press and that he was setting the stage for the ruin of the Dollar and runaway inflation. Not to worry however Congressman Paul, Mr. Bernanke assures us that this same Fed which has presided so brilliantly over our current economic debacle, stands ready and willing to deal with the inflation problem when it will arise. With that I can see the gears spinning and the thought processes taking over, “I must SELL GOLD; I MUST SELL GOLD; I MUST SELL GOLD.”

To sum up my lengthy rant, investors listened to the testimony of Bernanke and the speech of the Obama, and decided that at least the US was “doing something” about the crisis and would therefore be the first one to emerge from it. And based on that new thought process, they have decided that the US equity market is the place to be and that gold is once again moving back to its archaic, barbaric relic stage.  Since the stock market is supposedly forward looking, investors are looking forward to an improving economy and are buying in the hope of catching a major low in the equity markets while they sell gold hoping to catch a major top in the yellow metal. Risk in back in! To those of you who get your jollies by writing me and peevishly castigating me for being too long-winded, take that!

Now let’s get on to more serious stuff – gold has dropped down off the $1,000 region and moved into a region of strong chart support. It will need to find enough buying here to offset fresh short selling and long liquidation by the shorter-term oriented trading crowd. Failure near the  session’s low will allow gold to drop down to the next strong level of support which comes in near the $906 level followed by $900.  Below that is our old friend at $880 once again. Given the severity of the economic crisis, I would think that gold should hold here but trying to account for the thinking of the general investing community in this day and age is a hopeless waste of effort. They will do what they will do.  Everything depends on the affinity or lack thereof for “RISK”. I would prefer to see some consolidation activity and some base building to give players some time to get accustomed to the higher price but until then, volatility is the norm. Keep in mind that commercial end users and producers for that matter do not like volatility as it makes it difficult for them to assess risk exposure.

Once again, as it did yesterday, gold was following the movement in the equities in an inverse fashion. As stocks faded off their best levels, gold moved off its worst levels as did the miners which also moved higher as the broader stock market moved down off its highs. It does not take much observation to realize that what we are seeing is the market’s assessment of risk. When risk is in, equities get bought and gold gets sold. When risk is out, equities get sold and gold gets bought. Right now this is the prevailing theme in the mind of players. To a certain extent, gold and the bonds are moving somewhat in tandem as well. Gold moved off its lows and it did so did the bonds recovered  half their losses and then some as gold moved higher. That fits with the usual idea of safe haven buying occurring in both gold and the bonds.  I am not going to be so bold as to attempt to explain what is making players change sentiment as often as they change their socks but it is evident that a good many conflicting opinions are at work and confusion and uncertainty are driving market prices now.

One more comment about the bonds, after the $22 billion auction on the new 7 year notes, Treasuries moved back down. Not sure what to make of that just yet but apparently bond traders were not impressed with the auction results. The dip was short lived however as the fading equities brought out buying in the bonds that took them right back up again. Safe haven buying is definitely having a war with supply-fear selling.

I do like the fact that the mining shares did not utterly fall apart today even when gold was down quite sharply – perhaps that is a sign that any selling in the gold arena is being viewed as a buying opportunity rather than a reason to abandon ship. We’ll see…I wish I could say the same for silver. It was obliterated today which is very odd considering the fact that copper was up. If you are going to trash silver because of the “weak industrial demand” theory, then try explaining why the industrial metal copper, the supposed bellwether for economic activity was up.

On the daily price chart, gold violated the 20 day moving average but is tenuously clinging to support right at that level. Gold could drop all the way down to $890 – $880 and be sitting near the 50 day moving average and still maintain a technically bullish posture for the intermediate term. That is the region that held it back in January when it experienced a brief correction. There is already the usual chatter occurring of a long term double top occurring in gold near $1,000. Gold would have to close below $700 however to confirm such rashly premature conjecturing. It will now take a pit session close back above the $980 level to re-energize the bulls. That would set up the next run back to $1000.

On a personal note – sitting here writing day after day and attempting to explain what is becoming more and more inexplicable with the passing of each day is quite tedious and tends to takes it toll so I will beg your understanding if on certain days I limit my comments to a few chart observations unless something of definitive note occurs. The madness that passes for the price discovery mechanism today more often than not defies rational analysis. I think most of our readers understand by now that chasing price movement is now the norm for investing and that sort of activity is independent of reasoned analysis or logic. It is pure emotion and who can ever get a gauge on understanding the fickleness of such things. Keep your eye on the big picture at such times and try not to let the day to day gyrations rattle your composure. I have found that the best time for serious analysis of the markets and the macro-economic picture is after the markets are closed in the quiet of the evening when the noise from day trading scalpers and geeky hedge funds has quieted down. That is the only way to survive in these casinos. You cannot allow hedge fund idiocy to shake you from your firmed, settled, and reasoned convictions. Remember, most of them are losing money and many have folded and are gone.

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