Dear CIGAs,

I am not quite sure whether it was the rally in the equity markets or the announcement by the current US Administration that the yearly budget deficit would reach a mind-numbing total of $1.6 TRILLION, but whatever the reason, gold shot through resistance near $1,090 around mid-morning and promptly tacked on another $10 in a matter of 10 minutes as overhead buy stops were hit forcing out a fair number of fresh shorts who ended up selling into a hole last week. Volume was quite strong on the move.

I had to do a double take myself and verify that the budget number was indeed correct because it is the largest one since WWII in terms of percentage of GDP. Just last week, the Congressional Budget Office estimated that the fiscal year budget deficit would come in at a mere $1.35 Trillion. Maybe they were just confused and were working on fiscal year 2011 instead of 2010 because the same Administration that has given us this nightmare on Elm Street also projected a $1.3 TRILLION deficit for that year. IN other words, taken together, the next two fiscal years, the Administration that has given “drunken sailors” a redemptive pass (spending like a drunken sailor), will dig a hole of nearly $3 TRILLION for generations as far as the eye can see into the future to deal with. I don’t know whether to puke or to cry but what I do know is that there is no way under heaven that the US Dollar is going to embark on a bull market run. All rallies are just blips in a long term bear market as sums of money this size guarantee a nearly unlimited supply of Dollars in the immediate years ahead. Who in their right mind is going to view the greenback as any sort of safe haven given these facts? To me, this just makes a Dollar devaluation all the more probable.

Imagine the interest payments alone on this debt. It will take a growth rate that is almost unprecedented to provide the tax revenue for the government to draw upon to meet its financial obligations. The frightening thing is that we are just talking about the federal government here and have not taken into account further complications that might arise due to the severe financial duress of many of the individual States of the Union. What happens in the event of the need for a federal bailout of a bankrupt state government? Think it cannot happen? Just consider California which is already clamoring for just that!

Mr. Soros can continue his misguided trash talk of gold but I think history is going to prove him to have been completely senseless. Besides, he has always been enamored of Obama and any other leftist so he has a personal stake in seeing the left succeed in its attempt to remake the American republic into a European statist model. A run higher in gold would be the signal that the global investment community has turned a thumb’s down to such policies which is not what Soros wants to see – thus his trashing of gold. I believe it was Adam Smith in his “The Wealth of Nations” who stated that “ a nation has a great deal of ruin in it”. That statement by Mr. Smith is going to be put to the test, when it comes to the US.

Back to gold –today’s pop higher ran right to the downtrending 10 day moving average before sellers showed up to try to keep a lid on any further gains. Bears were initially able to prevent the longs from conquering that moving average. However, a later session push higher developed which routed the push back and forced them to cover, this time taking price above $1100 with another push higher coming within the last 30 minutes of pit session trading. Tomorrow’s session will be critical therefore to the immediate direction of the market. If bulls can muster enough strength to hold price above $1105 they will force additional short covering and generate some further momentum based buying. Any additional strength also runs a good chance of turning the downtrending 10 day moving higher up which would put the market in a more friendly technical posture. For now, support remains at last week’s low near and just under the $1080 level where our big buyer/buyers of size have been busy. Further overhead resistance surfaces between $1114 – $1118.

The gold shares as indicated by the HUI finally, finally, showed some strength but so far they have not been able to take out last Friday’s session high (as I write this they are close to so doing). The ten day moving average does not appear on the charts until the 401 level and currently the HUI is near 390. Clearly, work remains here for the bulls with the price action the remainder of the session setting the near term tone. A strong finish for today will signal that the shorts met with too much buying to overcome and had no choice but to cover. Technical indicators remain deeply oversold in the shares so without some sort of fundamental input, bears are risking a large portion of their recent profits if they get too greedy. With the surge higher in bullion today, prudence would dictate the booking of some profits before they disappear.

Today’s low, coming in near last Friday’s low which also happens to correspond to the low make back in October of 2009, serves to reinforce the 370- 377 level as very important chart support. If the shares are going to hold, they will hold at this level. I will feel much more confident about their immediate prospects if price can climb above 405 but you have to like the price action thus far.

The Dollar chart still looks friendly from a short term technical perspective and will remain as such until bears can take prices down below 78.20 and hold them there. For now, the bulls still have the wind at their back although the 80 level might give them a good run for their money. We’ll see. Whenever you see a move higher in gold with the Dollar showing rather insignificant weakness, it is a sign that gold is moving higher in terms of a majority of other foreign currencies.

The bonds continue struggling with overhead resistance centered from 118^25 – 119^04 but have yet to breakdown or confirm the strength in the equity markets. Bond traders continue to remain skeptical about a strong economic recovery. We will keep a very close eye on that market to attempt to get a decent read on the thinking of the interest rate community. Eventually supply issues will work against the bond market although at what point that will occur I am unclear.

Incidentally, the ISM number today was viewed as friendly to the US markets.

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