Today was “Back to the Reflation Trade, Part Deux”. Hedge fund money came out of bonds and into just about everything else. Tomorrow? Who knows?

For today, it did not matter whether the Dollar was up and the Euro was down – all that mattered was that equities were higher and risk appetite was restored as can be seen by the fall in the Yen alongside the bonds.

Gold continues to get a firm bid and was able to punch through the 10 day moving average setting off some light buy stops as well as attracting some new buying. The chart continues to look constructive with last Friday’s spike down towards $1165 now being confirmed as good technical support on the downside. Gold’s ability to get back above $1200 after such a rather small retracement in price is very revealing for it shows that there are eager buyers waiting on the downside to acquire the metal. I am especially interested in seeing this Friday’s COT data to see if those Swap Dealers further reduced their short side exposure. I suspect that they did and are doing more. That could very well explain why the metal is bouncing rather quickly. If this side of the short camp is so eager to reduce their exposure that they are not leisurely doing any buying into fund long liquidation but are instead snatching up their offers with great alacrity, then these same shorts are in effect competing with one another to get out. Of course, the usual culprits are still attempting to keep the price under wraps on any upside moves however but it is the Swap Dealers that have me intrigued. Either way, the resilience of the metal is impressive.

You’ll note on the http://www.goldseek.com/email/lt/t_go.php?i=2480&e=MzM0MTg=&l=-http--jsmineset.com/wp-content/uploads/2010/05/May2610Gold.pdf">chart that the horizontal blue line entitled, “short term resistance” was right near the session high. That horizontal line also intersects the upsloping red trendline. That red line served to hold price on previous dips to the downside and is now serving to hold it on the upside. That is why we now need a push back above this line on the pit close to set the market up for a push to $1240.

The action in the HUI is constructive also but I want to see this index get back above the high of last Tuesday’s big down day near 472 before the miners have a shot at testing the previous high near 500. Further consolidation above yesterday’s low would be constructive.

Strangely enough, while analysts were quick to point to the robust New Home Sales data as further evidence of a strengthening economy, the key Lumber Market at the CME dropped sharply lower as it continues to collapse in price. Something simply does not add up. Either the Lumber market has it all wrong or the home numbers are a one hit wonder.

If the guys that trade lumber felt that home building was making a comeback and on the mend, lumber prices would not have hit limit down.

The other bellwether market, copper was up today but considering the extent to which it has been beaten to a bloody pulp of late, it is not surprising that the housing number would give the shorts a reason to ring the cash register. I cannot get excited about the copper market until it gets back above $3.26. It might have bottomed out under $3.00 but that does not necessarily mean it is about to embark on a bull run. It must first repair the severe chart damage before that occurs. Copper is drawing whatever strength it has from prospects of future demand out of China and not necessarily from the US housing market which is perhaps the reason that while it is higher today, it is not particularly impressive.

Either way, this housing number has me scratching my head wondering exactly what is going on that two key futures markets are not responding to the data as one would have expected given all the hoopla surrounding the number.

That brings me to bonds – they are seeing a reversal of safe haven flows which judging from the housing data must not be making the feds happy. After all, watching mortgage rates falling to current levels is what has them all so revved up – where else can you print lots of money and have interest rates drop lower to spark the real estate market?

I still marvel how programmed so many investors are to stash money into US Treasuries when they get nervous. At one time that made sense but now, in my view, it is the height of folly. Forget the fact that the US bond market is so liquid; it is the fact that they are creating gazillions of these IOU’s. I read today that the US National Debt is now above $13 TRILLION giving the US a debt to GDP ratio over 90%. This is complete insanity and yet we have investors stupid enough to actually believe that a promise to repay this debt makes them a safe haven. What are these people drinking? At the rate this debt is growing, the US is going to look like a banana republic by 2015.

What is that saying, “Those whom the gods intend to destroy, they first make mad”. Madness is perfect word to describe this kind of indebtedness.

Crude oil popped higher today on the back of the reflation trade but in all honesty, gold has not been paying much attention to the price level of crude recently. A rising crude oil price is normally constructive for gold as it feeds into the inflation play but even as crude prices have fallen, gold has still been rising.

The S&P is getting a technical bounce today following through from yesterday’s late session rally off an important technical support level. You already have guys talking about a double bottom formation. The general public however are very suspect of the stock market right now after all the wild gyrations and near free falls of late. It has become an arena for the hedgies to chew each other up alongside the day traders and their 3 minute bar charts.”- Dan Norcini