Dear CIGAs,

Gold put in an impressive performance today from where I sit battling back from a barrage of selling linked to the ridiculous story circulating around the market today that China was not interested in buying gold. That initially emboldened the raiders at the Comex and sent the lemmings packing and heading for the hills before saner minds prevailed who began buying into the weakness. The result was a strong bounce from important technical support near the $1,110 level (see the chart for a view and read the comments there).

Let’s state the obvious here – the Chinese NEVER announce their intentions beforehand. Do the investors/traders in this nation believe that they are stupid? Anyone who follows the soybean market can attest to this. As we mentioned last time a story appeared announcing China’s intention to buy the remainder of the IMF gold sale; such a thing would be very uncharacteristic for them. After all, we are not dealing with a Gordon Brown here (the Prime Minister of England who at the time he headed the Treasury there announced beforehand his intention to sell England’s horde of gold thereby guaranteeing that the citizens of his nation would receive the lowest possible price). Rest assured that China has no intention of saying the least thing positive about gold purchases knowing full well that they will create a stampede of buying into the market which would guarantee them the worst possible purchase price.

You might recall that after copper collapsed from over $4.00 all the way down to $1.25 that it was not until it had recovered quite nicely off the bottom that word leaked out that China had been accumulating the red metal for its strategic stockpiles. Did China come in and announce beforehand that they were going to buy gobs of copper? Of course not –it was only after the market began moving higher and kept moving higher and traders were speculating as to what was going on that the truth came out. I remember full well the comments from the analysts at the time who were dumbfounded by the fact that the metal kept moving higher in the face of a collapse in the US housing market and an abrupt shutdown of the US economy. They were all sitting around scratching their heads trying to come up with reasons why the market was going up and not down.

It will be exactly the same for gold. China will buy it and you will not know it UNTIL AFTER THE FACT. The price chart will tell us when the buying is occurring but it will not tell us who is buying. I repeat, the East does not announce their intentions until after the fact. They will accumulate the metal on price weakness whenever Western-based hedge funds are in the process of selling it. If I had to bet on these funds against China, my money would be on the Chinese.

One last comment about this matter – China is still reeling from the fact the India beat them to the market on their gold buys late last year. And do not forget that India is going to be adding more gold to their official reserve holdings at an appropriate price level.

Even if you leave the Chinese out of the gold market – gold has not been making all time record highs in terms of the Euro and the British Pound and 30 year highs in terms of the Swiss Franc because China might or might not buy the metal. It has been doing so because it is functioning as a currency without any obligations attached to it. In other words, China’s actions in the gold market have nothing to do with gold’s string of all time highs in these major currencies. It is fear, uncertainty and a desire for a safe haven that have fueled the metal’s rise. China is just an added bonus which will serve to keep a floor under the metal on price retracements.

The US Dollar continues to struggle with the 81 level on the USDX. It is difficult to make a short term call on this right now. While the bearish divergences continue to flash warning sign after warning sign, the market simply will not break down. One could make a case for the Dollar consolidating here and preparing for another leg higher or getting ready for a fall through major support. The technical case is simply unclear right now as neither the bull camp nor the bear camp has a definite advantage. Bulls need to take it above 81.40 and hold it there while bears need to take it below 79.60 and keep a lid on it there. As stated often – the Dollar is benefiting not because its fundamentals are strong (they stink) but rather because the fundamentals behind Europe are even worse.

The HUI moved higher today following a similar pattern in gold at the Comex as it recovered from its worst levels. It is maintaining its footing above most of the major moving averages with the 100 day serving to hold it on the upside. A push through that level (432) will give it the impetus it needs to move on up towards 450. Support lies first at 415, followed by 410 and then 390.

The S&P 500 continues its merry rise oblivious to any reality as it trades in its own little world of sloshing liquidity. It has managed a move to recapture 50% of the losses since it peaked back in 2007. A strong close today and tomorrow would give the bulls further momentum and give it a shot at moving up towards the 1225 level. If it breaks through there, we might all just as well get out the party hats because according to this screwed up, useless indicator of the US economy, the good times will be here again. You have to shake your head in wonder at how these managed operations can pull stunts like this off. Then again, a few $billion here and a few $billion there, and the next thing you know, you have a bull market in equities. In this day and age of technical analysis, fundamentals are irrelevant. The only thing that matters is momentum.

Bonds are still stuck in their broad trading range of the last 2 months. Bears will gain an advantage if they can close price under the 115^15 level but they will not have gained control over this market unless they can take price down below 114^20. Bulls need to push price back up towards 118^24 to gain the advantage and over 120 to take control. For now, we seem to be at an impasse.

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