Dear CIGAs,

The big mover in gold today was news that the Fed will increase the number of counterparties that they can do these so-called, “reverse repos” with. That was interpreted by some traders as a hint that tightening is on its way. That led to chatter that some would opt towards holding Treasuries and other interest rate products. Maybe that explains why bonds moved higher today with all those folks rushing in to buy them and sell gold. Whoops, bonds fell today. So much for plan A.

As long as I have been at this game I am still amazed at how easily some traders are led around by their noses by the monetary officials. Serve up the claptrap, ring the dinner bell, and Pavlov’s dogs salivate and begin barking. The only thing keeping this economy from flatlining right now is low interest rates and copious amounts of liquidity with which the banks can goose the US equity markets higher. The “good news” that another 36,000 jobs evaporated last month is certainly reason for the Fed to start attempting to suck that liquidity out of the economy isn’t it? These same carnival barkers are ever quick to remind us how inflation is under control and was it just a week or two ago that Bernanke himself admitted that interest rates are going to need to stay low for an extended period of time? How soon we forget.

There was also some mixed sentiment in regards to Greece’s economic woes which brought in a bit of short covering in the Euro and the Swissie. Sterling still could not manage a bounce even with the rest of Europe a bit higher. To say that the Pound stinks would be an insult to birds. They cannot smell but even the pigeons appear to be pooping on it. That is pretty bad.

I would have preferred to see gold maintain its footing above what was former resistance near the $1,130 level but it did not. Still, the bulls have the short term advantage and will maintain that as long as they can hold price above $1,110. A push through that level that cannot regain it before the pit session closes will make some of the weaker longs nervous and give the bears a bit of an advantage. Only if price drops below $1,080 -$1,074 will bears be able to growl.

The HUI held up better than gold bullion did today in a further sign that more of those hedge fund spreads are continuing to be unwound. That is a very fluid situation so I will continue to monitor developments along that front. For now, the HUI is holding well above the major moving averages with the shorter ones moving higher. I would like to see that index hold above 406 on any setback in price.

The Dollar has still not managed to get a close above the 81.00 level on the USDX. The market appears to be in a truce between both bulls and bears right now. The bears will need to take it down below 79.60 to rout their foes while the bulls need to punch through and hold it above 81.20 to force more short covering.

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