The December US new home sales number released this morning tripped up the equity markets and brought further buying into the long bond with risk aversion trades the play of the day. Analysts ( I sure wish I could grow up to become one of those!) were expecting sales to climb 2.8% when they actually were reported dropping 7.6% from November 2009. That was once again enough to send money pouring back into the Japanese Yen and to a certain extent, the US Dollar with the result that most commodities were hit by another wave of selling as Managed Money continues to liquidate long positions and some hedgies play the short side.

Gold was up overnight but the home sales number unnerved would-be longs out of fear of further long liquidation by the fickle, short-term oriented crowd allowing bears to shove prices lower. However, the same buyer/buyers of size appeared near session lows and were able to push it up off its worst levels midway through the session. Later on, a wave of fresh selling appeared which overwhelmed their valiant effort to move price higher. So far this buying is coming in any time gold dips below $1100. As I said yesterday, it remains to be seen whether they are large enough to eat into the Managed Money and Hedge Fund algorithm-based selling. The longer gold can hold above support layered between $1080 – $1100, the better the chance of it forging a trading range within a period of consolidation. I want to continually remind the readers that both China and India will become active (if they are not already) on setbacks in the price of gold as their long term strategy of acquiring gold for their reserves is precisely that, “long –term”. They are not momentum buyers but value buyers ( yes, some of them still actually exist in this world of hedge fund idiots). As such, they will look to make their purchases into any waves of speculative long liquidation that might occur. Value buyers show up during period of price weakness (where have you heard that before?)

I am still watching the long bond very closely for signs of any potential upside breakout as that would be the clearest signal to me that this market has voted on an “L” shaped “recovery” (I use the word ‘recovery’ very loosely here because there can be no ‘recovery’ without job creation but that is the favorite buzz phrase for MOPE these days) or worse, another leg down in the economy. A “V” shaped recovery would see the long bond dropping sharply and taking out levels last seen in December of 2009. So far the bonds are having trouble getting through the 118^25 – 119^00 level as sellers are appearing there in size so the jury is still out as to what this market is going to do. Suffice it to say the tendency of late has been for higher prices and lower long term rates. Even on the short end of the curve, the market is saying that the chances of any interest rate hike are basically ZERO. No one in the interest rate markets believes any of the BS coming from those yakking about the Fed moving to sop up excess liquidity. As if they needed any further convincing, today’s home sales number is evidence just how sick the real estate markets remain. Even with the feds throwing around taxpayer money to prop up sales, it just ain’t working. People without jobs do not buy houses. It is just that simple. For that matter they may not be buying many Toyotas either judging by the recalls. Ouch.

One further note on the bonds – supply issues are perhaps the only thing keeping this market from moving much higher for now. Traders are still looking at massive, and I do mean ‘massive’ amounts of bond sales, to finance the spending orgy by the current administration and its pals in the Congress. Any talk about “spending freezes” amounts to a snowball in hell since the amount being discussed is miniscule compared to the overall federal liabilities that are being generated. The current rate of spending guarantees an unsustainable increase in interest payments alone within the next 5 – 7 years. Throw into this hellish mix the pitiful fiscal condition of many of the US States, and the only way this sort of witches brew of fiscal poison can ever hope to be dealt with is through a Dollar devaluation.

While the Dollar was higher today due to risk averse trades, it still appears to be having trouble with the 79 level on the USDX chart. Momentum indicators are positive but momentum is also waning. Bulls will have to push price past that level in a convincing fashion or we are going to see further selling in the form of stale long liquidation. We will continue to watch its activity for signs of what is coming next.

The gold shares as indicated by the HUI were weak once again today. The technical indicators on the daily chart are approaching oversold levels so that might help put some kind of bottom in them but they have a lot of work to do yet to repair the chart damage that has been inflicted. The weekly chart has the 50 week moving average coming in near the 378 level which corresponds with the 38.2% Fibonacci retracement level of the rally from late 2008 through late 2009. The setback in price is pretty much typical of a bull market in a corrective phase. Price could theoretically move as low as 335 or so without doing any serious long term chart damage but that would certainly not be welcome for the friends of gold.

I should note here that since the week of Christmas 2009, gold has been moving almost in lockstep with the price action of the S&P 500. What that tells me is that hot money flows are ebbing and flowing as risk is either in or out. When equities tank, gold tends to move lower and when equities rise, gold tends to rise with it. That is the signature of Managed Money flows. These flows are automated algorithm trades and are the primary drivers of today’s markets. Without them commodities or currencies cannot generate a sustained move higher. However, in the case of gold, gold is also a safe haven trade and therefore a clash arises between these algorithms based on price momentum and value based buyers of large size who are not momentum oriented. The latter group are the pure fundamentalists who study the larger macroeconomic picture and based on their analysis acquire gold for wealth preservation, and in the case of the increasingly influential far-Eastern Central Banks, for diversification of their massive reserves. To further complicate the price action in gold, we have the usual orchestrated bullion bank price rigging activity to deal with which is always present on rallies.

After the move lower in gold since last week, it will be enlightening to have a look at this coming Friday’s commitment of traders data to give us some insight into just how much of this liquidation type selling was present and how much might be fresh short selling.”- Dan Norcini