DAN NORCINI COMMENTS

Hourly Action In Gold From Trader Dan
Posted: Oct 08 2009 By: Dan Norcini Post Edited: October 8, 2009 at 2:06 pm

Filed under: Trader Dan Norcini

Dear CIGAs,

It would appear that the decision by the Reserve Bank of Australia to raise interest rates has set a fire under the Aussie and added further to the bullish tone in regards to the entire Asian currency block. It soared to just shy of the 90 level early last evening when news of an unexpectedly vigorous employment report from down under hit the wire. The surging Australian Dollar pulled the entire Asian block of currencies higher sending the US Dollar swooning in the process as even the Euro got in on the action. Traders want to own Asia as they see it recovering from the global economic slump much more quickly than the heavily indebted West.

So strong are the Asian currencies against the US Dollar that THREE Asian Central Banks were all actively intervening in the Forex markets in an attempt to stem the Dollar’s decline against their currencies.

South Korea, Taiwan, and the Philippines were all three buying Dollars last evening as they struggle vainly to keep some sort of export competitiveness by weakening their currencies. The problem they face is that no one wants to own the greenback and any rallies that these banks create by their bid on the Dollar are being met by speculators eager to sell the Dollar down from a higher level.

We have been saying for many years now at this site that the Dollar was headed for a Humpty Dumpty like fall but I am astounded at how rapidly sentiment has turned against it. The foolish lemming-like panic into it as a “safe haven” that dominated the Forex markets for much of the last year has abruptly shut off to be replaced by a sort of disdain and contempt reserved for the currencies of banana republics. The current US Administration seems to have turned a blinded eye to the Dollar’s woes but then again, they are mainly the cause of its demise what with their insane spending binge and reckless concern for fiscal budget deficits. The Fed cannot help either because they are locked into low interest rates for fear of squashing any nascent economic improvement.

This is why the rally in gold is so impressive – the Forex markets are setting the tone and because of their immense size, the gold price managers at the Comex are being overwhelmed.

Gold is taking out overhead resistance levels as the sentiment against the Dollar is so strong, that traders are bidding it up even before the Dollar cracked key technical support near the 76 level. If the Dollar fails to close back above that level, and it is looking increasingly likely that it will fail spectacularly there, gold could easily shoot to $1,100 in the blink of an eye.

The rise in Euro priced gold through the 700 level has been rapid as expected once that formidable barrier gave way. British Pound gold looks like it wants to move on towards the 700 level and go on and make another all time new high in the process. Things are happening very quickly now exactly as Jim has been saying for the last few months. There might be some Central Bank intervention on occasion to attempt to prevent a plunge in the Dollar but any blips produced by such actions will be short-lived as the Dollar carry trade will be merciless without any sort of higher interest rate support for the Greenback. Witness just how ineffective was ECB President Trichet’s attempt at jawboning the Euro lower. Traders slapped him in the face and told him to go back home and playh with his marbles. If traders feel that Asia has the strongest probability of raising rates in that corner of the globe compared to the West, they will continue capturing interest rate differentials producing a relentless stream of pressure against the US Dollar, all comments from Central Bankers notwithstanding.

Technically gold is performing with remarkable resiliency as intraday dips are seized by would-be buyers forcing short term oriented bears to cover repeatedly. There are plenty of analysts advising clients to wait for a pull back towards $1,020 before buying but the market thus far has not accommodated them. It is entirely possible that the longer gold refuses to see any decent sized price retracement, these sideline sitters are going to fear missing the move and will come in and force an acceleration sharply higher. We will just have to see whether or not gold will dip down far enough to let them get in near that level. With so many looking for such a move, the odds are high that they are not going to get it.

It will take some sort of stronger bounce in the Dollar to unnerve the gold bulls. It is so deeply oversold that it is due for a blip up but short sellers are eager to sell it on any move upward.

Last night Alcoa reported a decent profit and that had the equity world ablaze with happy thoughts which led to more risk trades and further US Dollar carry trade increases. The tone has thus far continued in the equity world in today’s trading session but interesting enough, the gains in gold are outpacing those of the DOW with the DOW/GOLD ratio currently running in the vicinity of 9.3. If you recall that chart I sent up earlier this week, the level near 9.0 has been a decent support level for this ratio. If the ratio breaks down near there, the implications are foreboding indeed as the inflation genie will not only have gotten out of the bottle, but will be climbing up and down the walls and breaking dishes on the floors!

The HUI today cracked that stubborn resistance level centered near the 440 level and in the process ran to make a new yearly high. I want to see how it can close both today and tomorrow for the week for if it sustains its level above 450, then next week has it primed for a run to 480 which is the last defense line between it and its all time high. It has been lagging bullion instead of leading it but one of the things that I believe which explains this is that we now have the ETF’s around. Money flows into the gold mining stocks tended to lead the metal in the past but that was because institutional investors and some funds were not allowed to buy futures because of their charters. If they wanted exposure to gold, they were forced with the default option of buying the mining shares. That is no longer the case – they can plow into the ETF instead, which by the way now claims to hold over 1100 tons of gold. While I have more than a few doubts about the ETF’s, tracking it is a much better way of analyzing the gold market from a technical perspective than are the shares as indicated by the both the HUI and the XAU. They remain very valuable as confirmation tools but I am of the opinion that more weight is being placed upon the ETF’s when managers are looking for technical clues.

Gold faded a bit going into the close of the pit session but still retained the bulks of its gains from overnight and early in the session. That bodes well for tomorrow which will be a good test of how strong the conviction of the bulls is as the opportunity to book some profits from this week’s enormous move higher will be tempting.