Dear CIGAs,

After having to listen to the long-winded Senator from Connecticut, also known as “Senator What-a-Deal I got on my Home Mortgage”, pontificating on the current economic meltdown as he chaired Fed Chairman Bernanke’s Senate hearing, I am surprised that the DOW is only trading near 7,000 instead of 4,000 and that gold is not closer to $2,000. My initial reaction is” what did we do to deserve this band of fools and economic ignoramuses?”

“It’s all the failure of the bank regulators”, says he, affecting great disdain and terrible indignation. “They failed us all”, he snorts. Hey Senator – so explain to us all why when a few brave souls in the Congress were crying for reform and overhauls of Fannie and Freddie and were warning about heavy-handed government pressure being put on lending institutions to provide mortgages for people who had no way of ever meeting their contractual obligations, that you were standing in front of them with a big, fat, giant, red STOP sign. What? No answer – Oh yes, I forgot – you were too busy making speeches about fairness and some sort of ephemeral right you concocted in the Constitution stating that every single American citizen has a “RIGHT” to own a house. Watching this parade of fools is like sending the chief arsonist to investigate the cause of a 4 alarm fire who then blames the low water pressure in the fire hydrants as the culprit….

Scotty beam me up- there is no intelligent life among those now in charge of our Congress.

Once the lowest consumer confidence reading on record was released, the usual bottom pickers descended on the equities in the hopes of nailing that every elusive bottom at the exact low so that they could brag for years about how they caught the very end of the bear market in stocks and ask all others to join with them as they celebrate their own greatness and acumen. They were then egged on by Chairman Bernanke’s remarks which “were not as bad as possibly expected” as he assured us that the economy would recover at the end of 2009 and into 2010 “IF” the stimulus package works. No comment – the attitude speaks a great deal for the madness that now passes for investment analysis.

That pop higher in the equities then brought out the hedgies once again as they dumped gold (remember – gold is no longer needed when the economy is right, smack dab on the verge of recovering), which was taken down sharply. Funny thing is that the bond market wasn’t apparently buying it – bonds moved higher even as equities went higher. I thought there was something wrong with my quote service provider when I saw that taking place. The Yen was being pounded lower (Yipee – let’s hear it for the risk trades once again), gold was selling off, the Dollar was being unloaded, the commodity currencies were moving higher but bonds were not going down… Hmmm…. If money was flowing out of so-called safe haven bonds and into stocks, I sure as hell couldn’t see it happening. That action in the bonds is more than telling…

Let me just say this – day traders and scalpers have taken over the markets and are running the show for now. It is this crowd which is buying emini futures against the major support level in that index that dates back to October 2002. They are hoping against hope that they will forge a technical double bottom and then cause a technically induced short covering squeeze. Many longer term oriented players are getting out of the markets altogether and sitting on the sidelines because there is so much uncertainty, confusion and fear. Don’t let the one minute bar chart geeks keep you from focusing on the overall big picture which is deteriorating even more rapidly that some of us have envisioned. The drop in the consumer confidence numbers to that record low speaks volumes. People are fearful and the current mood is not going to be as easily turned as the hot shot hedgies and day traders flip market prices. Ain’t gonna happen…

I don’t even know what to say about the massacre in the mining indices. It is so utterly stupid and illogical that I really have no way of even attempting to come up with some sort of rational explanation for it. To see 6 or 7 days’ worth of gains to be wiped out in one session in a sector that has been one of the few bright spots in the entirety of the equity universe really has no rational explanation. Let others who are more imaginative than I come up with something. My own view is that those who are stupid enough to throw away quality mining shares in the face of the greatest financial collapse ever seen on the planet deserve what they get. Those who are buying the shares are in effect buying gold in the ground. To throw away the shares means that 1.) you either believe that the miners are not going to show any profits or 2.) gold is going to collapse or 3.) both of the above.

The rally in gold, while it has come a long way, is not, and I repeat this, is not the result of hot money chasing gains. It is rather the result of investors seeking a shelter from the coming financial tsunami. How do I know that? Easy – just look at the low open interest readings. It is 60% of what is was the last time gold rallied over $1,000. What you are seeing today in gold is the exit of that portion of the gold market comprised of the short-term oriented trading crowd. That crowd does not give a rat’s arse what the fundamentals are; they are purely technical traders whose long term horizon is a 60 minute bar chart. Once upward momentum stalls out, they sell. Opportunistic short sellers, of which there are plenty at the Comex, understand this phenomenon quite well and use it to their advantage. I would look for gold to stabilize soon and then move sideways for a brief period before resuming its uptrend. The conditions that have led to the sustained gold buying are not going anywhere and as it drops into support regions on the price chart, buyers will emerge and begin increasing their long side exposure.

Then again the Obama will tell us all this evening that he intends to cut the federal budget deficit in half. Maybe that is why the bond market is rising. They are too giddy laughing in scorn to realize that they inadvertently hit the “buy” button and not the “sell” button.

Try to shrug off this day as a wasted trading session in which the inmates escaped and took over for a brief period. Traders have to go with the flow, as idiotic as it may be on some days, but longer term oriented holders of gold, and particularly those who have yet to purchase any of the physical metal should welcome such days and rapidly avail yourselves of these opportunities to acquire the metal at a bit of a price break. Two years from now, these prices will look like bargains…

The last thing I would leave you with today as your watch the fools throwing away gold is the following article that came down the Dow Jones wire feed this morning. I have included the entire article because it is that important. Read this and then tell me that you want to throw away anything gold, or for that matter, silver related. Let the damn fool funds and day traders do their thing. Many of them are not going to be trading a year from now anyway…they will be busted and gone, more road kill on the floor of the commodity exchanges.

DJ Gold, Silver Dealers Report Strongest-Ever Coin, Bar Demand
Tue Feb 24 12:10:27 2009 EST
By Allen Sykora
Of DOW JONES NEWSWIRES

Veteran U.S. bullion dealers say the demand for gold and silver coins and investment bars so far during 2009 is perhaps the strongest they have ever seen.

Investors are snapping up physical metal amid ongoing worries about other financial investments, the health of the global banking system and fears about inflation down the road due to fiscal-stimulus efforts.

Buying gold in times of economic uncertainty isn’t new, but bullion dealers have noticed some differences in this investment surge. Dealers have reported growing institutional demand, rather than demand from just small retail investors, and a lack of backdated coins that historically could be bought at lower prices.

Bullion dealers said supply continues to be tight, although conditions have improved somewhat from 2008 when many of the mints around the world at times had to suspend sales due to a lack of blanks.

"We’re having some of our strongest months ever," said Scott Thomas, president and chief executive of American Precious Metals Exchange in Edmond, Okla. "The bottom line is our numbers are probably double what they were last year, and last year was very busy. The demand is incredible. And even the strong prices for metals are not slowing it down."

Most-active April gold futures on the Comex division of the New York Mercantile Exchange on Friday hit the $1,000-an-ounce level for the first time since July.

Through Sunday, Thomas said, his company had made nearly 10,000 trades so far in February, compared to 4,379 in the same year-ago period.

Officials at New Orleans-based Blanchard & Co. said the dollar value of their sales during the first 1 1/2 months of 2009 was more than all 12 months of 2007. This occurred as more investors read that gold and Treasury securities were about the only assets that survived the market "carnage" last year, said Donald W. Doyle Jr., chairman and CEO of Blanchard.

"People are moving out of stocks and bonds and CDs [certificates of deposit] in a large fashion," said George Cooper, senior account executive with Denver-based Centennial Precious Metals, who often works 12-hour days and describes business lately as "gangbusters." Many of the calls are from investors who lament losing half of their life savings to the tumble in stocks, he said.

James Cook, president of Investment Rarities in Minneapolis, said last week may have been the busiest for retail sales since he started his company in 1973.

"When they [Obama administration officials] came out with the new bailout plan, people were alarmed at what could happen to the purchasing power of the dollar," Cook said.

His company’s sales are roughly 75% silver and 25% gold. Physical sales of bars and coins last week totaled $5 million.

"Silver Eagles are still rationed," Cook said of the silver bullion coins available from the U.S. Mint. "We get 20,000 a week and they fly out the door. We can get 10,000 Silver Eagles on a Monday and basically they’re gone in 15 minutes. I have 55 guys on the phone calling out."

The industry veteran said the current demand has been more consistent and probably exceeds that from the bull run that carried silver to its all-time high above $50 an ounce in 1980 while also lifting gold to a then-record high that stood for 28 years.

Andrew Schectman, owner of Miles Franklin, based in Wayzata, Minn., described recent demand as "parabolically stronger" than in the past.

As an example of the interest in gold, he reported that a recent presentation he gave at the World Money Show in Orlando drew an audience of some 700 people, with more turned away due to a lack of space. By contrast, the audience at the same program a year ago was 75, he said.

Institutions, High-Net-Worth Investors Seek Coins, Bars

Several dealers said much of the current demand is coming from large investors and even institutional clients.

Most of Blanchard’s customers in years past were individual retail investors, Doyle said.

"More and more now, we’re finding we not only have individual investors but institutional buyers," he said. "That is a significant change even just in the past year or so."

And, Doyle added, institutional clients are buying in "significant quantities."

Cooper said more high-net-worth individual investors also are looking for coins and bars.

"Last year, it was the little guys, people with $10,000 to $20,000, up to $100,000," he said. "Now, we’re getting calls for $100,000, $500,000 to $1 million."

Yet another noticeable change is the absence of less-expensive backdated coins from past years, said Schectman, who has been in the business for 19 years.

During the last 15 years, if a client called wanting to place a large order for coins from any of the major mints around the world, Schectman would try to get coins from a past year. That’s because "an ounce [of gold] is an ounce is an ounce; it doesn’t matter," Schectman said. However, by purchasing an older coin, the investor could avoid a premium for a new-year coin caused by factors such as demand from collectors.

"What is unique about this time is that, since last year, roughly June, all of the backdated coins are gone," he said.

Thus, with no backdated coins, he anticipates there will be further back orders and delays from the world’s major mints.

"The secondary market for so many years made the industry, with people like yourself buying gold, holding it a few years and selling it back," Schectman said. "Nobody is selling. In $92 million of business done last year, if $5 million were related to buybacks, I would be shocked.

"If you are a small coin shop relying on the secondary market to give you supply, you’re going out of business."

In fact, with so many large orders from high-net-worth investors and the lack of metal on the secondary market, the "average person trying to buy gold and silver is going to have a very, very challenging time," Schectman said.

-By Allen Sykora, Dow Jones Newswires; 541-318-8765;
allen.sykora@dowjones.com

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