The chart below depicts the balance at the Federal Reserve of its Custodial Accounts, which for some of our new readers, is basically the US debt holdings of Foreign Central Banks around the world. As such, it is a good way to gauge the relative indebtedness of the US.

I have been constructing this chart every week now for many years and each week I look at it and post the new data, I have to sigh in despair at what is portends for my children. Our nation is hopelessly bankrupt for all practical purposes as there is no way under heaven that a debt of this magnitude will ever be repaid in its entirety unless of course the currency in which the debt is denominated is deliberately debauched and drops precipitously in value. This is precisely what China is angry about, and I might add, rightfully so.

For the Chinese to go out of their way to formally rebuke the US ruling elites and monetary officials about the commodity bubble that is occurring courtesy of the collapsing US Dollar, is quite remarkable given their penchant for etiquette and tact. One can easily discern just how irritated not only China, but all of Asia is with the US. At some point, this tension is going to erupt in a much larger way. Heaven help us all when it does because it will be marked by a period of soaring interest rates as a buyer’s strike occurs in the US Treasury market.

The middle class will be the victims in all of this as the find themselves unable to keep up with the rapid increases in the cost of living.

Click chart to enlarge in PDF format

Gold continues on its steady path higher breaking into one new record high after another with the passing of each day. In nominal terms, we are left with nothing on the charts to indicate resistance areas other than projections from various technical methods. The fact is that the Dollar is so weak technically, and inflation expectations are rapidly increasing at such an alarming rate, that buying momentum in gold shows no sign of stalling, even after its strong gains of the last couple of weeks.

From a trading perspective, ascertaining where a new resistance area may surface can be a bit challenging when a commodity is in uncharted territory. Ever since gold broke out above the old chart high near $1,070, we have had little to base price projections upon. A method that we can use that will provide us a certain degree of reliability is analyzing the inflation adjusted gold price. For that reason, I am detailing that chart along with some markings that can give us a bit of a road map as we witness history in the making.

You will note that gold has already bettered the 50% price retracement level on an inflation-adjusted price basis. In addition it has now taken out the last line of horizontal chart resistance based on a swing high. The region centered near the $1200 level corresponds to a 61.8% retracement of the entire bear market decline coming nearly 30 years ago. In technical analysis, should a Fibonacci level fail to hold a rally or stem a decline, there is a strong tendency for markets to move to the next level of resistance or support, which in the majority of cases, is to retrace the entire move, either up or down. That would allow gold to actually target a move to near $1770 – $1750 in nominal terms, which is the highest monthly CLOSING price on an inflation adjusted basis.

Also, please note the Yen priced gold chart for some further confirmation of market psychology shifting decidedly to inflation and further away from deflation. When the dam broke in the financial derivatives world back last year in July, the yen carry trade began a violent unwinding as deflationary fears erupted. That took gold down in price while the Yen rallied as traders rushed to buy back short Yen positions. The result was that gold dropped very sharply when priced in terms of the Yen. Note the remarkable difference a year can make as you look over the price chart. The fact that gold is moving higher even in yen terms tells me that the inflation psychology is now globalized and is not contained to any one particular nation. See what fury the Central Banks of the world have unleashed upon us all.

Click charts to enlarge in PDF format with commentary from Trader Dan Norcini

The fallout from the G20 summit over the weekend was sharp and predictable – in the absence of any comments about the level of the US Dollar, currency traders began to beat it with an ugly stick within mere moments of the opening of the Forex markets. In the process traders drove it to a new yearly low and set it up for a sharp drop down to the 74 level on the USDX. There is a band of congestion on the weekly chart that appears between 72 – 74; we are in serious trouble if 72 falls as a currency crisis will be unfolding. That massive double top formation on the weekly chart projects an eventual move to as low as 54 should things get out of hand and the Dollar come under further concerted attack by the hedge fund community.

This is the reason why crude oil is acting in such a counterintuitive fashion, rallying near $3.00/barrel concerned over the indifference being displayed by the US monetary authorities towards the Dollar’s plight. Combine that disregard with the potential for another $trillion dollar health care “reform” boondoggle, and the endless string of debt production by the US governing rulers, and quantitative easing is going to go on indefinitely. One has to wonder if at some point the only buyer of US debt is going to be the Fed itself. Heaven deliver us from this madness.

The fade from session highs in gold towards the close is a minor cautionary note for short term oriented traders but the trend in gold remains solidly higher. After all, it is difficult to become too bearish on the gold market when the Dollar is a near free fall and the reset of the commodity world is screaming higher. Please refer to the 12 hour chart for some technical support and resistance levels.

One quick comment about the HUI – its rally has taken it within a few points of retracing the entire loss from July 2008 when the fallout from the derivative crisis began in earnest. The mining shares were tossed out along with the rest of the world of paper as the deleveraging process gathered steam but they have been steadily working higher. While still not moving in the fashion that many are looking for in the gold community, the mining sector has definitely been outperforming the S&P 500 as a whole.

Equities are rallying on easy money – that is all there is to it – nothing else. The very term, “jobless recovery” is an oxymoron that was created to describe the fallout from the creation of nearly unlimited $billions of dollars which have found their way to the trading desks of Wall Street. Maybe Goldman considers “God’s work” as making $billions from proprietary trading while only $millions from their core banking business but I suspect the Almighty is not particularly impressed.

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

By now the government’s data release of this morning’s unemployment number is already baked into the market cake. The crummy news served to reinforce the notion, that helicopter Ben and company will continue their mission of protecting us all from global warming by filling the air with so many scraps of paper (aka – dollars) that they will serve to blot out the sun and keep us much cooler. No wonder it is so dad gum cold this year. In plain speak – Quantitative easing is alive and well and shows no signs whatsoever of being endangered any time soon.

The news sent gold careening upward breaking through the $1,100 barrier and making yet another all time high in nominal terms. Pre-weekend selling emerged as profit takers met up with gold perma bears to back gold off the session high but dip buyers continued to come in and push it back off the lows. Again, this is occurring with the Dollar actually gaining against the Euro and selling emerging in crude oil, the grains, natural gas and sugar and livestock. I mention this point because the hedge fund algorithms that have taken over the commodity markets would generally be selling gold under such circumstances. Yet gold is higher in spite of these factors. That is most remarkable. Not only that, this time the mining shares are actually higher even with the stock market struggling to hold on to its meager gains today.

As a point of interest, many of you follow John William’s wonderful work over at Shadowstats which cuts through the BS that the ministry of propaganda publishes on a regular basis and serves up to the generally gullible sheep. You have thus long known that the official statistics regarding the unemployment rate are not at all credible. I do find it interesting however that even at the government’s own official web site (http://www.bls.gov/news.release/empsit.t12.htm), the more realistic U6 numbers are actually horrendous (Seasonally adjusted at 17.5% compared to the headline number of 10.2%). If even these numbers are fudged, and we know that they are, one can only imagine how bad the true rate of unemployment is in this nation.

That is why chatter about the Fed withdrawing liquidity from the system is so imbecilic. The only reason some Fed governors even broached that subject a while back was a quixotic attempt to prevent a complete rout in the US Dollar by carry traders. Today’s data makes their public ponderings seem even more futile than ever notwithstanding all the publicity and hoopla surrounding their little ol’ dry run attempt to fine tune their actual mechanism with which to do so.

Technically gold is very strong on the weekly charts with all of the major moving averages trending solidly higher. It is a bit overbought on the daily chart and is showing some signs of selling but that is not to be unexpected after its performance this past week. The news from India this week brought about an entire new dynamic in the market and has many now looking for further Central Bank purchases to provide a strong floor of support on any bouts of price weakness.

We will more than likely see a repeat of last week’s data in this week’s Commitment of Traders data with swap dealers and commercials adding to shorts while managed money and CTA’s added to longs. The specs are in the driver’s seat right now and have not shown any signs yet that they are tiring.

Gold in terms of both the Euro and British Pound continues to perform exceptionally well. Yen priced gold is holding up fairly well but has been somewhat held back by the run into the Yen during periods of equity weakness and risk aversion.

Click chart to enlarge in PDF format

News overnight that India was going to stand for half of the proposed IMF gold sale sent shock waves through the gold bear camp resulting in a near panic among trapped shorts. Their buying sent prices ripping through overhead resistance just above the $1,070 level setting off a cascade of pre-placed buy stops that propelled gold above $1,080, a mere $20 from psychologically significant $1,100.

By the way, let me take a minute here to give a Hat Tip to Jim who has been saying for YEARS (and received a fair amount of trash talk for so doing), that any gold sold under an IMF arrangement would never see the light of day as Central Banks would gobble it all up. That is precisely what India did and I am convinced that China is also looking to do. As a matter of fact, India probably got the jump on China because they knew that they were lurking in the background looking to buy.

How many times over the last few years did we hear talk about IMF gold sales just about the time gold was threatening to put in a technical break out on the price charts. The news would cause a near panic among ignorant analysts and talking heads who would promptly advise their clients to dump their long positions playing right into the hands of those who originally trotted out the story. Let’s hope that after today, gold longs are no longer the least bit troubled by any further chatter concerning IMF gold sales. Do not forget, that the Central Banks of the rising powerhouse economies of the East are looking to diversify their foreign reserves and need large block sales of gold at a preset price in order to facilitate an order of the magnitude that they are placing. Try obtaining 200 tons of gold on the open market! That is why they welcome such large sized gold sales.

What makes the surge higher in gold even more impressive is that it came in the face of a weaker Euro, a stronger Dollar, and most particularly, a dropping equity market. The net result of such occurrences is that gold moves higher in terms of nearly all of the major foreign currencies. Gold priced in terms of Euros is at its best level since March of this year with British Pound priced gold back near the 650 level.

Based on today’s price action, one would have to say that the price of gold has consolidated long enough above $1,000 that the market has now come to terms with a permanently higher gold price of 4 figures. Without wanting to be premature, gold under $1,000 would undoubtedly be viewed now as a bargain. That is why markets that move higher, consolidate, move higher, consolidate, etc, are sustainable bull runs. The run and pause effect gives the industry TIME to become acclimated to the new, higher price level whereas markets that launch into parabolic type blow offs, while spectacular, are generally unsustainable and short lived in the broader scheme of things. They come crashing back to earth as quickly, if not faster, than they went up.

The mining shares, while still lagging far behind the price of bullion, are sharply higher today as the market now has to reprice those shares to allow for the changing dynamics of the gold market. A fair number of our readers keep asking me about the shares and why they are performing so poorly compared to the metal itself. My view is that the Gold ETF’s have sucked a large amount of investment capital that would normally be flowing into the shares into those particular investment vehicles. The big funds can leverage those up and obtain the same effect that they used the mining share purchases for, namely as a way to obtain leveraged exposure to the gold price.

Jim has written a masterpiece about the gold shares that is a must read for anyone who has exposure to this sector that deals specifically with what to expect in these moving forward. I urge the readers to refer to that often. Those miners with exposure to non-recourse loans and the inherent short-of-gold derivative are now seeing what Jim warned them about years ago.

The Dow Jones/Gold ratio is currently trading exactly at “9” as I write this. You might recall that chart I put up not all that long ago where I noted that the ratio near “9” has been a floor of support. If this level gives way, it will indicate that savvy investors who can read the tea leaves of the US economy have seen the handwriting on the wall and understand that the lake of inflation is relentlessly rising behind the dam of illusionary wealth soon to break forth with a fury. As said so many times on this site by Jim, Monty and myself, you cannot print your way to prosperity. If that were the case, it would have been successfully attempted long, long ago by nations throughout the course of history. Sadly, our current monetary officials and political leaders are oblivious to this truth and refuse to back away from their reckless policies and short-sighted courses of action. The Dollar, while moving higher today, is a catastrophe waiting to occur. The collapsing Dow/Gold ratio says it all.

Bonds are moving lower in tandem with stocks today which is unusual. I have not been able to clearly read the bond market ( then again I know of no one else who can for that matter these days) but perhaps the surge in the gold price caught bond traders’ attention and they are a bit more worried about inflation than they are the lower equities. Bonds are probably going to have to get below the 117 level and stay there to flip the inflation/deflation battle over to the inflationist camp. All I can say is that you could not pay me to hold a US debt obligation. They are nothing but confetti paper in my opinion as the world is literally awash in them.

Back to gold for a brief moment – volume in the gold pit is very strong today and most impressive. This move is coming with a lot of emotion particularly fear among the gold shorts. The weaker ones were blown out – the only selling left is the bullion banks but it should be noted that they have not been able to cap the price below the early morning price peak. Buying is quite persistent and is eating through the overhead selling allowing the market to move higher and put in a new peak as it moves further into the session. That is not the norm that we have grown accustomed to seeing in this market.

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

Click here to view this month’s action in Continuous, Euro, Japanese Yen, British Pound, Australian and Canadian Dollar Gold with commentary from Trader Dan Norcini