Dear CIGAs,

It was a very volatile day in the markets today with the gold, Forex, and bond markets making big swings. The Bond market in particular utterly collapsed during the session as looming supply fears rattled bond bulls even as equities dissolved. As the bonds dropped through support, the Dollar was smashed lower and gold catapulted higher forcing a wave of short covering and attracting more new buying. That momentum took it easily through yesterday’s session high with price also besting round number psychological resistance at $950. The move is most impressive and the charts are showing an acceleration higher which is coming out of a period of grinding consolidation. I have noted that the RSI is also confirming the upward move with that indicator finally bettering horizontal resistance drawn off the last swing high.

Volume in yesterday’s breach of resistance at $930 was very high and accompanied by a strong surge in open interest. Both are technically bullish, especially the volume reading. Today’s session is showing good volume as well which is serving to confirm the upward thrust. Traders are slowly beginning to roll out of June and into the August contract ahead of the delivery period.

The weekly charts of the HUI and the XAU both look very strong technically. The HUI has finally bested the difficult 50% retracement level drawn off the March 2008 peak near 520 and the October 2009 low near 150. It has had trouble with that level since the beginning of this year so yesterday’s achievement is very significant. It now has a clear shot at the 61.8% retracement level that comes in near the 379 level. If it can conquer that, technically it will be in position to make a run to near the 455-460 level. Most importantly from a trending perspective, the HUI took out the 100 week moving average yesterday which came in near the 359 level. That is no small feat. All of the major moving averages on the weekly chart are either moving upwards or are getting ready to turn higher.

The XAU also has taken out stiff resistance at its 50% retracement level on the weekly drawn off the peak and bottom made in the same months as denoted for the HUI. It has 153-154 standing in front of it which if that can be bested, sets it up for a run to near 200. I should also note that the 100 week moving average is at 150 for the XAU. Unlike its counterpart HUI, the XAU has yet to take out that 100 week moving average.

The Dollar – what more can be said about it other than the fact that it is finally reacting to the spendathon coming out of Washington DC. Violent selling of the nature hitting the Dollar is the result of long liquidation by the trading funds which according to the most recent Commitment of Traders report were net long by over 6,000 contracts. Quite simply- they got trapped long and wrong playing the safe haven game and getting snookered in the process. Now that so many important downside technical support levels have been violated, their algorithms are taking them out with the result that they will be positioning on the short side. Interestingly enough, the small specs have correctly played the Dollar as they were net shorts going into this week.

On the weekly Dollar chart, it has now closed solidly below the 50 week moving average. The ten week moving average has made a downside bearish crossover of the 20 week and is threatening a downside crossover of the 40 week moving average. The 100 week moving average is 79.20, which corresponds exactly to the last swing low made back in December 2008. Should the Dollar make two consecutive weekly closes below this level, gold will be at $1,000 + and the Dollar will be headed down towards 78.45 and then 76.00. The Greenback is very oversold so a blip upward cannot be ruled out but it is hard to envision it moving too far north before eager sellers step back in.

Something I find quite interesting is the strength in the Japanese Yen. Normally yen strength has been synonymous with gold weakness as it has denoted risk aversion. However, the Yen has rallied even as gold and the rest of the commodity complex as indicated by the CCI has moved higher. It would appear that the Dollar is so tainted, that even the lowly Yen is moving higher against it. That bears watching because a move higher in the Yen alongside of the Euro will shove the USDX down even harder because the Yen makes up approximately 13% of the basket weighting that comprises the USDX. It has tended to move lower alongside of the Dollar until recently and if this pattern is breaking down, it will mean an acceleration in the dollar’s rate of descent.

With crude oil breaking out above the $60 level and with index funds pouring money into the entire commodity sector, it is very difficult for the commodity bears to gain much downside traction. The sum of money flowing into tangibles is enormous as a great deal of those funds were sitting in cash on the sidelines and waiting for a signal to get long. That they have done and are now doing and that is where the buying pressure is originating from across the entire commodity complex. Keep in mind that they will buy until they get their allocation done irrespective of any particular fundamental factors. Technical money flows more and more dominate the world of trading and investing and arguing against that kind of money is worse than spitting into the wind. Just like when they are blindly selling – these guys blindly buy and very few are willing to step in front of such a freight train whether it is coming or going. When it comes to gold we know that the bullion banks, thanks to the largess of the US monetary authorities, are among the few participants who will fight such buying but even they cannot take on the entire world of index and hedge funds without the buying momentum pushing them back. I still often wonder what it would be like to see gold trade freely without their constant interference.

I am a bit surprised to see that the reported holdings of GLD have only increased a relatively minor amount these last few days. Perhaps that will change with the technical breakout above $930 and the sharp move higher today. We’ll see.

Silver has its 2009 peak targeted – that comes in near the 14.61 – 14.63 level. If it can best this level convincingly, there looks to be a lot of air between it and 16.25.

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