Dear CIGAs,

I have time for only a few brief comments today so I want to focus on a market that I think bears close watch, namely the US long bond. Yesterday I remarked that bonds had broken down technically and failed to maintain support at a critical level generated on the day in which the Fed first announced its quantitative easing program and its intent to make sizeable purchases of longer dated US debt. They continued sliding further today as selling momentum increased dropping just shy of a full point at one time during the session. The day is still not over and these bonds have made a fool out of me more than once over the last few years, but as of right now, they look very vulnerable to further declines. Obviously a swift sell off in the equity markets can be expected to bring in buying in the bonds but whether or not they can recapture broken support levels on the chart remains unclear even if that were to occur. Rest assured that the US monetary authorities are more than displeased to see what is occurring in the long bond and have doubt taken notice. It would not surprise me to see them make some sort of concerted foray into the market to attempt to impose their wills on it.

I do not think it can be emphasized sufficiently enough that the technical breakdown in the long bond carries profound consequences for the future of the US economy moving forward but it is particularly significant because it indicates to me that the bond vigilantes have indeed awakened from their prolonged period of hibernation. It is evident that the bond market has now shifted its focus firmly to the looming massive supply of debt coming its way and that the fear is that current levels of demand (the Fed’s planned purchases notwithstanding) will not be able to keep up with this expected huge increase supply. Economics 101 tells us that oversupply in the face of steady or falling demand means lower prices and the bonds are responding to this inexorable fact.

That this technical breakdown is occurring alongside a strong move higher in copper, a move higher in the grains, sugar and various other commodities is not without significance. I have been remarking that gold has been caught in a sort of no man’s land of recent weeks as the market psychology has been wavering back and forth between deflationary fears and expectations of future inflationary pressures. When safe haven flows dry up, gold has been struggling to sustain its gains as insufficient buying tied to its role as an inflation hedge has been present to offset the waning safe haven buying. Once the market however becomes firmly convinced that the inevitable and inescapable product of this reckless spending and nearly unlimited amounts of new debt creation by Washington and other nations will begin to produce its noxious offspring, then gold will find solid, sustained and strong buying in the face of any setbacks in price. We are not quite there yet, but with the bonds breaking down and the CCI slowly grinding higher, it seems to me that many large scale market participants are voting with their wallets and are buying commodities to position themselves for an inflation play that will makes them billions in profits in the months and years ahead.

I want to emphasize that my analysis is based solely on the price action of some key commodity markets that I monitor and that all important CCI index. Were it not for the fact that the natural gas market has been so weak due to its current supply glut, I am convinced that we would have already seen a CCI (Continuous Commodity Index) moving up a bit more strongly rather than its current grind higher. Either way it does more and more appear that we are slowly but surely seeing a shift away from the deflationary scenario to an inflationary one. The transition will be much like the shift from winter to spring so expect periodic episodes in which the former will not go quietly into the night. Let’s just watch this unfold and attempt to understand what the market price action is telling us.

Gold once again found buying support near the $880 level as the bulls were able to drive prices well off session lows once again. It was helpful to see both the HUI and the XAU moving higher today. Nothing has changed in the near term technical picture for gold yet. Bulls are attempting to fend off a concerted effort to take it lower but cannot yet break the downsloping trendline that dominates the daily chart. The triangle pattern is still intact for now.

Copper has run right back up into a region where if it is going to fail technically, this is the spot. If it can push higher into next week, and particularly if it could somehow take out the $2.20 level, it should bode well for the entire commodity complex. We will just have to wait and see.

The Dollar was relatively flat today.

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