Dear CIGAs,

The rather surprising existing homes sales number combined with “not as bad as feared” earnings from some major firms, was enough to send risk appetite into the stratosphere this morning as the Japanese Yen had the stuffing beaten out of it. That set up hot money flows back into equities and particularly crude oil which served to bring in new buying and short covering in gold. That buying was enough to beat back the usual early morning gold rape complements of the bullion banks as trading came into New York this morning. Not to be undone however, the bb’s dug in above $957 and hit every single bid from the funds.

By the way, the idea that this selling is related to a mining company hedging production is without basis. I have been around these markets for more than 20 years and have seen more than my fair share of scale up selling by commercials. Selling of the nature that we continually see in the Comex gold arena as we did this morning, which attempts to force price downward rather than allowing it to rise and and obtain the HIGHEST possible price, is NOT producer hedging. Commercial hedgers DO NOT FIGHT upward moving markets. If buyers want to bid up the price of the commercial’s product, why fight them? Let the specs bid it up and obtain the greaest sale price for your hedge. The problem that we have with all the chatter that passes for market analysis these days, is that it is based on a speculator’s view of things which does not see markets in the same manner that commercials do nor does it understand scale up selling and scale down buying. That is because most of the guys around today are all momentum chasers and have no earthly idea what scale up or scale down even means anymore.

We also had the rather unusual press release from the USDA stating that they were going to resurvey farmers on the amount of acreage planted to corn. A few weeks ago, USDA stunned us all with a gargantuan acreage number that basically kicked the props completely out from beneath the corn market and sent it careening sharply to the downside. USDA’s mea culpa was the catalyst in today’s session for wholesale short covering and end user hedge coverage implementation which set the entire grain complex on fire. With crude and the products moving higher, along with the grain complex, the perma gold shorts at the Comex were very active in absorbing the tremendous amount of buying that flooded into gold.

In watching the price action of the HUI and the XAU, I was struck by the disconnect between their action and that of Comex gold. Mining shares were following strength in the broad US equity markets and at this hour are threatening  a clear technical breakout on the charts. The HUI is doing battle with the stubborn 360 level while the XAU is engaged in a conflict with the 150 level. Strong convincing closes above both levels by the respective indices will presage a test of this year’s highs made in late May. Yet, in spite of this, the bullion banks have continued to sell with reckless abandon at the Comex.

The other thing of interest this morning was the weakness in the bonds. If bonds appear to be trading in a schizophrenic fashion, it is because they are. After rallying sharply higher the first two days of this week on Bernanke’s Congressional testimony, suddenly they became anxiety ridden on supply issues as more US debt auctions hit the calendar. Traders continue to worry that with the massive supply that need to be sold to fund US profligacy, buyers are going to insist on higher yields before ponying on up to the bar.

Bonds look to me to be in a range trade with 121 on the top side bringing in selling while 112 on the downside is attracting buyers who seem to feel that yields at that level are a decent value considering the state of the economy. We will be watching carefully to see if anything changes in this regards as it has profound implications for the war between the deflationists and the inflationists. I might add, the deflationists seem to be losing the argument.

A breakdown of the 112 level in the bonds coupled with a move higher in the energies and metals, will mean that the market has voted in favor of the inflationists.

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