Dear CIGAs,

News that the Feds were converting their preferred shares of Citi into common shares was enough to knock the snot out of that stock and that served to drag the financials down lower. Citi was whacked for 28% as I pen this. If you want to see a genuine horror story, pull up a 3 year price chart of Citi… the stock has gone from trading over $50 to less than $2.00. BOA was taken down 8%. There are increasing fears of bank nationalization by the feds and the continuous dribble and drabble of conflicting news coming out of this administration’s point men on this issue has unnerved would-be buyers of the banks.

Also, the GDP news was the worst since 1982! The economy shrank at an annualized rate of 6.2% in the 4th quarter of 2008. And remember folks, we are using government figures here – just use their figure as the high side and go down from there and you will get an accurate reading.

All that served to push equities lower which then pushed gold higher in the same pattern that we have been seeing for some time now. If you stick a 5 minute bar chart of gold alongside that of a 5 minute bar chart of the emini S&P, you will see the linkage between the two. I want to emphasize here particular to those who keep writing me telling me I am wrong about this, that I am not saying there is a tic by tick relationship between the two. I am saying that gold is generally moving inversely to the S&P. When it moves off its lows, selling is coming into gold. When it sinks down towards it lows, buying comes back into gold. Once again, RISK is what is being measured here or I should rather say, the willingness or unwillingness of investors to take it on.

Earlier in the session, the S&P broke down below its major support level at the November 2008 low but then popped briefly back above that level. It still managed to trade down to levels last seen in April 2007! It sure seems to me that the equity bulls are putting up one helluva valiant effort to defend that technical level. They know full well that if they fail to hold here, the stock market is going to move sharply lower as that is a sort of last-line-in-the-sand defense point from a technical perspective. Equity bulls are buying for two reasons – they are trying to force a TECHNICAL BOTTOM in the market and they are claiming that all of the bad news is already in the market. If only gold bulls had the same strength of conviction that the equity bulls display. Instead our side seems intent on delivering over their headquarters to the enemy wrapped with red bows and ribbons and “WELCOME” signs written all over it. Face it, these are the last guys you would want in a foxhole beside you in the event of a major battle. They would run up the white flag before you ever got your magazine loaded…I am not speaking of the smaller public – I am referring to the fund managers who still have it within their power to break the rein of the bullion banks over the Comex gold market but are too dense to do so. They insist on playing the paper game with these sharks.

Deliveries finished up for the expired February gold contract yesterday and moved into the thinly traded March. Total for February ended up as 5,920 or 592,000 ounces. Not all that impressive to be honest considering that in December deliveries totaled 1,357,900 ounces of gold. We will have to wait until the April contract goes into its delivery period at the end of March to see what kind of numbers can be put up. The thin March will be along the line of that which we saw in the January contract.

The big action today as far as yours truly was concerned was the action in the long bond. They cracked support moving sharply lower even as equities fell apart. I have mentioned on several occasions that it was out of the norm to see the bonds and equities moving in tandem since as a general rule they have been going in the opposite direction during this economic meltdown. Of late however, there have been days in which the bonds have fallen right alongside of the general equity market. It is almost as if the very notion of US Treasuries as a safe haven is being called into serious question by many bond traders. That fits with the manner in which the credit default insurance market is pricing coverage for some Treasuries. There still continues to be safe haven flows moving into bonds but those are being met with selling by those who are mortified by the gargantuan wall of supply that they see coming, thanks to a run amok, out of control spending spree by our illustrious political leaders. After all, if you were contemplating buying Treasuries, would you be happy with a yield of 3% for ten years when you knew that the world would be swimming in the things in a few short months and into the foreseeable future? It may be redundant but watching bonds falling apart is one of the most serious things I see occurring in these markets. The long term monthly chart looks more and more like a major top has been posted. It makes me wonder where the demand is going to be coming from to buy the huge supply coming especially seeing that many of the overseas Central Banks do not need as many of them since their exports to the US have been dropping steadily meaning that they need to sterilize a lot less money.

Crude oil was weaker today with natural gas hitting a new yearly low before rebounding. It would certainly not hurt the cause for gold to see the energy markets bottom out.

I will put up a monthly chart for gold later on today. Before this week began, gold was on target to have put in the highest monthly CLOSE ever, before the gold bulls managed to surrender.

Enjoy your weekend.

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