Dear CIGAs,

The dollar was up today and that translates to everything commodity being down. Selling pressure was evident in nearly every single commodity futures market with only a bare few escaping the move out of those markets. Computer algorithms are what they are and have become a fact of market life.  Right now, those algorithms are keying on the level of the Dollar and  the level of the S&P. When the S&P moves lower, the Dollar moves higher and the computers then have orders flowing into the pits to sell commodities as “risk aversion” increases. When risk aversion drops off, as stocks move higher, the dollar then moves lower and commodity markets experience broad based buying. That old friend of ours, the Euro-Yen cross, continues to be a good harbinger of which way investor sentiment is leaning. Today it was lower which is another way of saying the investors were trying to avoid risk. In our brave new world, that means the “risky” asset known as gold (?) is a definite sell.

Down it went and into the sell stops and that was that.

I mentioned last week that support at $880 in gold must hold or gold will move sharply down to test the $860 – $850 level. That is where we are headed as we came all the way down to $865 before a bit of a session bounce occurred. The bounce was not enough to take it back up above $885 so the bears are now in control of the paper gold market. Technicians will point to a short term topping formation which was confirmed by the loss of support at $880. If bulls do not immediately (and that means tomorrow) push prices back above $880, then the move down to $860-$850 will gather momentum as additional long side liquidation will take over.

You have support at that level centered around $852 (see the chart) and then below that near the $816 – $820 level. Seasonally, this is not a particularly strong time of the year for gold so we have that workingagainst it in addition to the bearish technicals. Gold would have to recapture the $930 level to convince the “sell the rally” trade to abandon their logic and flip around to buying dips.

Gold deliveries were ZERO today which means that the longs are no where near threatening any Comex default as we are constantly being told by various internet essays.  The paper gold shorts are quite confident as they have little in the way of determined opposition that would threaten their complacency. Hedge funds who are determined to play the paper gold game against the bullion banks and employ momentum based strategies for the buy side will continue to lose money. It is really that simple.

To show you how effective the bullion bank short selling has been – open interest in gold, after bottoming out near 261,000 in December of last year, had been on a steady increase as gold prices moved off their lows and had reached to near the 390,000 level. It has now dropped nearly 40,000 contracts alone in the last 7 trading sessions and no doubt a substantial bit more than that after today’s debacle. The funds are getting flushed out once again with open interest now back at levels last seen in early February of this year. Another way of saying this – most of the buyers that had come into this market in the last two months were flushed out in 7 days with the bullion banks banking their paper profits thanks to the hapless longs.

I have given up on telling the hedge funds what they need to do to turn this loser’s game around (buy into the weakness and hold the contracts into delivery) but they will not change tactics so that is that. Gold will need India to rescue it.

Silver is even more peculiar than gold since it too is getting whalloped even in the face of three successive days of 2 million ounce out-movements from the Comex warehouses.

I am particularly confused by today’s price action across the gamut of markets because there was NO SAFE HAVEN that I could point to based on the price action. Equities got hit pretty hard today but bonds also went down. Crude oil was down and most of the grains were down. Copper was down after touching the magical $2.00 mark on Friday. If money was flowing into some sector for safety today, I sure as heck could not see which one. That is why the move higher in the Dollar is so opaque. Maybe people were buying US corporate debt; I am just not sure what they were doing other than sticking cash under their mattresses.

The HUI and the XAU, after only last week setting up bullish chart formations, have now completely broken down once again. Both look to be headed back down towards their March lows. Perhaps they can set up a sideways trade after moving down towards that level and uncovering some buying.

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