Dear CIGAs,

Mining equity bulls are finally showing some mettle in today’s session and seem to be attempting to dig in their heels after yesterday’s poor performance in the HUI and the XAU. Both indices are currently trading near session highs although the broader equity indices are also higher today in contrast to yesterday’s selloff. Trying to get a firm read on the mining shares has become problematic at times because it is difficult to say whether they are just moving in sync with the overall equity markets or are a leading indicator for the bullion price. If paper is moving higher and the mining shares higher it does not tell us much. If paper was moving lower with the mining shares moving higher, then we would have some insight into the nature of the buying. Right now we are left guessing as to what it all means because day traders and scalpers (which is what the hedge funds are forcing all of us to become) are simply going with the order flow on any given day. No one really bothers to ask questions – they simply react.

The price action we are seeing dovetails with what Monty has written about volatility. Long term position trading is becoming extremely difficult not because there are price retracements in bull markets and such. There have always been price retracements. What has changed is the extent and the ferocity of the price retracements. Having witnessed more than a few trending markets over my trading career, the general pattern (in a bull market for example) is to see strong upside moves, followed by minor price retracements during which volume tends to fall off with volume increasing on the upside days. The hedge funds have pretty much ruined all of that.

Now we see days in which prices shoot sharply to the upside only to be followed by a price retracement the following day which can completely erase the entirety of the previous day’s gains and does so on huge volume. The result is that trend following trading systems and traders for that matter, are left confused, uncertain and nervous. This leads to a loss of conviction in which traders eagerly grasp at small profits and are wary of leaving large positions on for any length of time. The end result is extreme choppiness with many whipsawed back and forth not knowing whether to go long, sell short or jump off the window ledge. Many traders simply opt to sit on the sidelines or attempt to find calmer waters in some other market and hope to ply their trade there. Case in point – just look at a chart of the Japanese Yen since the beginning of this month. The price has swung wildly up and down with huge moves up and huge moves down only to basically end up exactly where it started at the end of February! Talk about a useless waste of time for a position trader! The more frequently this occurs, the worse the volatility is going to become because the stabilizing influence of the longer-term oriented position and value traders is absent to a great extent as the entire trading contingent morphs into some frenetic version of the pit scalper from days past.

Back to gold – it had a tight range but within that range it was quite active in today’s session. Up for a while, then down, then back up, etc. One of the factors that led to selling coming into the gold pit was the move down in crude oil which had been stronger overnight and early in the session only to then succumb to another bout of selling. That brought selling back into the gold pit and silver as well. Then crude bounced back off the worst levels and gold moved higher. Strength in the grains, notably the soybean market moving off a friendly Prospective Plantings report, brought a general bout of buying into assorted commodities but the weakness in crude also generated selling in some of the very same commodity complexes. The Dollar moving lower however reinforced commodity buying but as the Euro moved off its best levels and the Dollar moved off of its worst levels, the sellers appeared once again in the commodities markets. Then you have the copper market moving solidly higher reinforcing a friendly chart pattern and giving further credence to its predictive role as a leading economic indicator (Dr. Copper) and the picture becomes even more muddled.

The point in all this is that there are now so many factors feeding into commodity market price action that attempting to sort them all out is becoming quite the task. I think it safe to say that overall, the commodity markets have bottomed out but the thing creating volatility is traders/investors trying to gauge just how quickly they might move or what kind of bottom they have forged. Copper’s chart for instance is a nice, well rounded gradual bottom and not a “V” bottom which are always a bit more problematic to decipher. That creates a bit of a quandary for gold buyers – is copper signaling the worst of the economic slowdown is behind us and therefore the safe haven needs for gold has abated or is copper signaling that inflation fears are slowly coming to the forefront of investors’ minds and that gold needs to be bought as a hedge to protect the value of one’s holdings? Is the Dollar weakness a sign that the Fed’s dollar debauchment-inducing policies are coming to the forefront of traders’ mind or is it just a mild setback in the intermediate bullish trend? Have the US equity markets bottomed out? Has the bond market also topped out or are long term rates going to head lower reinforced by the Fed’s concerted efforts to shove them down by its announced purchased program? Questions abound and thus so does volatility. Longer term those who have read this site for years know where all of this is headed but it is the “short term” gyrations which can lead one to question their own sanity at times. My advice – drinks lots of cold beer and do so quite heavily! Seriously – the die is cast for the Dollar long term and gold long term but if you are having trouble weathering the huge price swings consider either becoming a bit more active in managing your portfolio or find a good quality money management firm to do that for you (let me put in a plug for Monty and his fine staff at Guild Investment).

Technically nothing has changed concerning gold – it is still range bound and managed to recapture the floor of the very tight $940 – $920 range after losing that support for a brief period yesterday. It its broader range, $960 still lurks on the topside as resistance and $900 as support on the bottom. Open interest barely moved yesterday and is sitting near the 370,000 level.

April gold experienced some very heavy deliveries and stoppers in its first delivery day today. AS a point of interest, back when there was a great deal of excitement surrounding the delivery process in December of last year, the first day of deliveries totaled an unusually large 8,600 contracts. Well guess what? April in its first day saw an even greater number of deliveries taken at 8,867 contracts stopped or a total of 886,700 ounces of gold. That is no small matter and is quite encouraging. We would need to see another 7,000 contracts or so taken over the rest of the delivery period to really rock the perma shorts’ world. Whether that will occur is anyone’s guess but it would certainly level the playing field at the Comex were the shorts to be served such notice that the longs intend to force the issue. 15,050 contracts remain open in April as of yesterday – if half of them were to stand for delivery things would indeed heat up. According to the Comex stats, there are 2.94 million ounces of registered gold in their approved warehouses.

Incidentally, the big seller was Deutsche Bank while Morgan and Bank of Nova Scotia were the two largest stoppers. Morgan has been stopping a lot of gold lately.

Today was both the end of the month and the end of the quarter so it is not wise to read too much into today’s price action as a large number of funds are closing out some of their positions to book profits in preparation for sending statements to clients. They always want to show a profit for the month and/or quarter when they can. Tomorrow’s price action will carry more weight from an analysis standpoint. If we get the funds moving in the same direction as many of the markets did today, that will reinforce either trend changes in some or new trends or more of the same. If the markets give back a lot of the gains or losses they put on today, that will be a sign that the funds have moved right back in again and are re-establishing many of the positions that they just lifted at quarter’s end.

By the way, last night on “24”, Jack Bauer was exposed and contaminated by a biological agent and the FBI and a Navy Seal Team walked right into a trap set up by the bad guys. No wonder the Dollar is selling off today!  Things are not looking good for Jack to return next season!

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