Posted: May 14 2010 By: Dan Norcini Post Edited: May 14, 2010 at 1:50 pm

Filed under: Trader Dan Norcini

Dear CIGAs,

Gold priced in Dollar terms made a brand new all time high in overnight London trade before coming into New York where the sellers tried their luck at taking it lower as the equity markets fell apart and the Euro plunged further into the abyss. Sadly for the sellers, once the initial knee-jerk selling response across the entire commodity sector was initiated and gold moved lower, buyers came back into the yellow metal and took it higher. There still appears to be a “buy the dip” mentality in gold which is providing support for the metal and allowing it to shrug off some of the algorithm Dollar related selling.

You have to feel a bit of sympathy towards the European monetary authorities (not really – my concern is for the citizens of these various countries and not the monetary officials or some of the political leaders). The poor guys dithered and withered while the Euro was crashing around them finally coming up with what they believed was their own financial version of “Shock and Awe”. The gargantuan sum of money they announced to shore up Greece and defend the Euro in the process turned out to be more of a Fizzling Fireworks Fiasco.

The Euro is now deeply below the level that it had reached prior to their announcement of the rescue package. If the Euro takes out the 2008 low, it is going all the way to 11600. If it cracks that, it could end up trading at parity with the US Dollar. German exporters seem thrilled about its demise – for now – but wait until the inflationary effects of a collapsing currency begin being felt. Be careful what you wish for; you are liable to get it!

The result of all this – Euro gold is closing in rapidly on the €1000 level as it was fixed at €993.971 at the afternoon in London. British Pound gold is moving up the scale towards £900 as it was fixed at £848.662. Both are new record high prices. I am not sure if we are yet seeing panic buying of gold in Europe but based on good reports, dealers are having trouble keeping coins and bars in stock. While that may not qualify officially as panic, it seems to me that the potential for such is increasing with the passing of each day and another new low in the Euro. These things can get rapidly out of hand and the speed at which a panic can ensue should not be underestimated.

Watch and see how the rivalries between the various countries that comprise the Euro zone, which were plastered over when the European Monetary Union was first concocted, now come to the forefront and nationalistic tendencies reassert themselves.

It reminds me of the former USSR. You had a situation where countries with different ethnic backgrounds, customs, religions, traditions, etc. and oftentimes little in common, were formed into a “union” and held together by the sheer force of military might. Once that restraint was taken out of the way, the forces that under normal circumstances would have prevented such a union from being viable, came to the forefront and ripped the entire thing apart. Perhaps what we are seeing in Europe is a similar thing. I do not know but trying to cobble a disparate set of countries together with oftentimes little but geographical nearness the only thing they share in common, seems to me to be an attempt to defy history. We will soon see.

The US Dollar on the technical charts now looks like it has a clear path up towards the 89 – 90 level. That should prove to be a very tough nut to crack. However, should it be able to do so, it would portend an unraveling of the Euro. In such a case, gold will still be strong as it will move higher against all fiat currencies, including the greenback. While gold is still being influenced somewhat by the Dollar, namely because the algorithms are programmed to sell it on dollar strength (those things are soon going to have to undergo some modifications to adjust them), there will be sufficient safe haven demand for gold against sovereign debt contagion, to power the metal higher even as the Dollar moves higher. At some point then the Dollar itself would come under attack since its fundamentals are no better than some of the countries comprising the Euro zone. Were that to happen, gold will then accelerate very sharply to the upside.

Besides, you have to consider, exactly what is the “value” of the Dollar? When we look at the USDX it is being measured against a basket of currencies with the Euro holding over a 50% weighting. If the Euro fails, what good is an index containing a currency that no longer exists? In other words, the USDX is merely a tool comparing one fiat currency against others. I might look like one strong dude if I bench press 200 pounds (please have someone standing by to lift the barbell off of my crushed chest) but what is that compared to a guy who can bench press 380? In other words, it is all relative. The Dollar may look strong compared to the Euro and the Pound, but so what. Both are rapidly becoming junk. All this means is that the Dollar is gaining value against two paper currencies headed to the toilet but it says nothing whatsoever about the intrinsic value of the Dollar on its own merits. Gold is telling us that the Dollar isn’t worth squat and that is the true and final estimation of the greenback’s merits.

The HUI is being influenced by weakness in the equity markets more so than strength in gold, although the weakness in silver is not helping the HUI any. I mentioned a few days ago that we might see some hedgies institute some new spread trades where they buy the miners and sell the broader equity markets. They might be doing some of that today based on what I can see from here. Such a strategy would tend to provide some support for the shares in the event of a further meltdown in the broad markets with the mining sector eventually decoupling altogether and moving higher along with the metals. For now it is evident on the charts that the HUI is experiencing pretty solid selling resistance near and just shy of the 500 level. Once it cracks that level, it should easily move towards 520. Support appears near 440.

Silver was caught in a tug of war today. It was pulled lower by the collapse in the base metals such as copper and weakness in the PGM’s, but was pulled higher by the stability in gold. It will now need to put in a close above 19.66 or a strong intraday push through that level to kick off the next leg higher.

Gold seems to have established some resistance near the psychological even number of $1,250. It has been up near there twice and been unable to breach it for now. Such is a common occurrence for the yellow metal. It likes these round and even numbers for some reason. The fact is that it is still well bid and holding support on the charts quite well. I want to see a weekly close above the former high at $1227 to really paint that particular chart strongly bullish as it would unequivocally pose an upside breakout. It is evident to me that there are entities present at the Comex who are attempting to prevent just that based on the way they are going after the bids here on the closing bell for pit session trade. A close above $1240 sets it up for a run towards $1280.

Crude oil continues to be pummeled both by the one-two punch of the stronger Dollar and the fading equity markets. It dropped below $72 today and looks poised to head low enough to test critical chart support near $70 – $69. If it fails there, it will be at $65 before you can change your socks. At least drivers and transportation related firms are smiling although how would you like to be member of OPEC trading your valuable black gold for paper currencies which are falling apart? Something tells me that a great deal of gold buying is coming out of the middle East these days.

Bonds, here they go again! After spending all of this week moving lower in a continuation of the peaking move once the stock market rout of last week finished its course, they are back where they closed the previous week as I write this. Further weakness next week in the equity markets and bonds will make another run at 125^00. The home mortgage crowd is crowing about how good this is for home sales. Yep – nothing like more cheap money to fix the problems created by more cheap money.

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