Downside pressure in the US equity markets tripped up what looked like a pretty decent recovery move higher for gold in today’s session. Couple that with further weakness in the Euro and another rush away from the risk trades back into the Dollar, and gold was taken down well off its best levels of the session. The consistent weakness in the gold shares (HUI and XAU) did not help matters any as both indices look quite sloppy from a technical perspective. The HUI is perched perilously just above weekly chart support near the 377 level. Bulls will have to dig in their heels if they hope to prevent the bears from taking price down through the 50 week moving average.

There is rather significant speculative long liquidation occurring in the gold market at the current time as many funds are choosing not to roll out to the April contract as they leave the February to avoid delivery. That has allowed the bears to sell rallies with impunity. Yet the buying continues to come in down near the $1080 level. This buyer/buyers is putting up a valiant effort to hold the line in the face of the exodus of managed money flows. Unfortunately, they were overwhelmed with about an hour to go in the session as support cracked and down went gold. Price dropped some $6.00 below $1080 as stops were run before buying kicked in to take price back up above $1080, again. This is encouraging to see as it augurs physical demand is surfacing at this level and that the buyer/buyers are serious.

The physical market has always been the key to price bottoms in gold so we will see if that source of demand begins to ramp up even further now that price has fallen by such a substantial amount. Gold was trading above $1200 only two short months ago so a break in price of this magnitude will most definitely attract the attention of the physical buyers of the metal. Expect further scale down buying programs to kick in as accumulation slowly occurs at these lower levels. We’ll know when the bottom is in by watching the price action as the buying by the Eastern Central Banks will make itself evident on the charts. They are more than happy to take the gold off the hands of those in the West who are dumping it. Based on what I can see from the chart action of the last 30 minutes of pit session trade, those same Central Banks might have already been buying. Someone sure as hell bought in large quantities and scared the crap out of the shorts as price rose $10 off the session lows in 40 minutes.

Dollar bulls apparently mustered enough conviction to take the USDX up through very stubborn overhead resistance at the 79 level. You have to hand it to them, they were able to beat back the intense selling there. Once it appeared that they could maintain their footing above 79, gold bears wasted little time in pressing the market down through support. I still have to marvel at the notion that the US Dollar is a safe haven. Old habits die hard it would seem. When I see the fiscal train wreck that is only going to worsen for the foreseeable future coming rapidly down the tracks in the US, “safe” and “Dollar” is an oxymoron in my estimation. Let’s continue to watch this price action in the USDX to see if it is anything more than a one hit wonder. Already it looks like the Dollar is fading from its perch above 79.

Interestingly enough, in the rush away from risk, the bond market could not attract sufficient buying to overcome its stubborn resistance level up near the 118^25 level. It seems that bonds are leery about what they heard in last night’s State of the Union Address. Don’t blame them either – all I can see is spending, spending and more spending into the distant future. Thatsa whole lotta supply!

The S&P has some critical support near the 1067 level and if that gives way, stocks could take a rather severe dip in short time as that would get the attention of chartists and elicit calls of a top in the market due to economic woes and the lack of any serious job creation. This market has a tendency to pop higher every time it gets close to violating a downside technical level however (gee what a surprise) so let’s see if that occurs once again.”- Dan Norcini