Posted: Sep 24 2009 By: Dan Norcini Post Edited: September 24, 2009 at 2:17 pm

Filed under: Trader Dan Norcini

Dear CIGAs,

There appears to be a deadly contest occurring in the Dollar market over the 76 level on the USDX. As I have mentioned in my prior commentary, a closing downside breach of 76 and the USDX will promptly drop to 74. That will be enough to allow gold to shoot to $1,030 and take out that level. Once that level gives way on a close, momentum funds will flood into the gold market overwhelming the ability of Goldman and Morgan to suck down all the gold bids into their magic price capping box and we should see an acceleration higher. I am not sure who is supplying the bid to the Dollar to attempt to prevent this but their footprint is evident on the hourly charts. There was nothing in yesterday’s FOMC statement that was the least bit Dollar friendly.

One of the factors working against the Dollar is persistent strength in the Yen which continues moving higher with nary a peep out of the Bank of Japan or the Ministry of Finance. That it has been doing so is all the more remarkable considering the attention that the yen garners from those two quarters. As a currency trader I can remember more than a few occasions scanning the wire services in the wee hours of early morning for comments from those folks in an attempt to glean the level of the yen above which they would foray forth to beat us speculators into submission. Based on their silence one can only come to the conclusion that the Dollar/Yen level is losing its fascination with the monetary authorities in Japan who now appear to be looking across the water at China and further over to India as their future financial interest centers. Could it be that the 51rst state of the Union is “seceding” from Uncle Sam’s fiefdom as it witnesses the implosion of US economic might? I think so. After all, outside of the US everyone and their mother can see the handwriting on the wall detailing the demise of US economic might. Self interest still rules supreme not only in the individual but among nations. Japan is wisely doing what is in its long term financial interest.

A point of interest – the British Pound stinks to high heaven right now which is why gold priced in those terms continues to stay firmly above the 600 pound level. Britain’s currency is suffering from the same fate as the US Dollar – its masters are deliberately attempting to pull the rug out from beneath it so as to cheapen their exports on the global market. The bank of England’s governor as much as said so early this morning when he stated that a weak pound would help rebalance the UK economy. What is this – FOMC from across the pond? Yesterday we get the Fed abandoning the Dollar and today we get the BOE abandoning the Pound. Who is next? Is it any wonder why British investors are flocking to gold? A point of reference – the all time high in gold priced in BP terms at the PM fix was 690.353 back in February of this year. Today’s PM fix was 626.979.

Gold ran into a bout of selling as the equity markets followed through on yesterday’s technical sell signal which caused the usual knee jerk rush into Treasuries. That ran up the Dollar which brought in the hedgie algorithms and commodities began to get sold down. Crude oil in particular was rapped dropping $3.00 as I write this. With weakness in crude and a stronger Dollar, combined with option expiration, gold was taken lower and was unable to hold the $1,000 level. Seasonally we are into gold’s strongest time of the year however and once the fund long liquidation runs its course and support is established, it will resume its uptrend.

Technically gold is still attracting buyers down in that same zone that has brought them in since early September. As long as that holds, it will work sideways and consolidate while it waits for the next shoe to drop on the greenback. If the mid 990’s fail to stem the selling, then it will fall another $10 or so down to a more formidable support level. As Jim has said so often, just watch the Dollar to see what gold will do next.

The HUI is hovering right around that former resistance zone near 404 which is providing support for now. A bounce before the close up and away from 404 – 405 will establish that level as a floor and send it into more of a consolidative type trade. A failure there will set up a test of 385 or so on the downside.

There is a good chance that if equities continue to fall, we will see more “flight to safety” and out of commodity orders coming into the markets. The hedgies and the index funds have pushed a lot of hot money into these markets as fear of inflation has them looking for shelter from the collapsing Dollar. Any bear market flips north in the Dollar that might arise out of delays in inflationary forces, will see some of that money flow out of commodities and into bonds. Gold had recently been acting as a safe haven play with more and more investors growing nervous over the continued proliferation of paper debt to provide them a store of wealth. For the earlier part of this year, gold was trading in tandem with the “we love risk” or “we hate risk” psyche of traders/investors. When risk was in, gold was in. When risk was out, gold was considered risky and was sold. That changed a few weeks ago. We will watch how gold handles this situation should the equity markets move lower during October, a time in which they have a tendency to do just that. If its safe haven status is intact, it will find eager buyers on any price retracements. Again, just to repeat, gold’ s seasonal tendencies favor upside action into the 4th quarter.

Technically the Dollar has been showing some bullish divergence on the daily chart and is trading above the 10 day moving average. That is resulting in short covering which might be able to push it up closer to 77.30. Very formidable resistance for the greenback lies centered in the region around 78.

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