Once again we have a front row seat in the battle between China and the US when it comes to the Federal Reserve’s global inflationary policy, aka, Quantitative Easing 2.

With the Fed persisting on conjuring “wealth” into existence and working to manipulate and deliberately distort the long end of the yield curve, China is fighting to contain the effects of excess liquidity coming its way. It is almost as if Bernanke has uttered the command to: “Release the Kraken”, in this case the terrible Titan being the inflation monster.

The Chinese authorities have good reason to fear the rise of this beast as it, perhaps above all things at the current moment, has the single greatest potential to create unrest and social disorder in their nation. The Fed has been exporting inflation around the globe and nowhere is that showing up more forcefully than in the rising cost of food. Yes, basic material costs are soaring in China but the authorities can live with that – it is food that worries them seeing that the average Chinese worker spends a much larger percentage of their overall income on food than do their counterparts here in the US.

In yet another attempt to try to rein in price rises, the Chinese raised bank reserve ratios to try to slow down growth somewhat and perhaps pull back some of the fuel that might be contributing to the problems that they are dealing with. Of course, once the news hit the wires, out came the hedge fund algorithms, terrified to death that the world economy was now going to collapse, with the result that commodity sector was hit with massive selling all across the board. Down went gold and down went silver and down went the CCI.

Personally, while I understand what the Chinese authorities are attempting to do, I do not think that they are going to be a match for Ben who can manufacture more Dollars faster than Agent Smith could replicate himself in the Matrix. The Chinese are going to need their own version of Neo to combat Ben’s printing press; either that or they are going to have to upwardly revalue the yuan at a faster pace – something that the US schemers have no doubt long intended as part of their QE plan. I am sure Chuckie Schumer will be happy as he has been a one note Johnnie when it comes to blaming China for the US economic woes. “it’s all that currency manipulation by China”. Yeah sure – the US monetary authorities are pristinely pure having never even considered manipulating the US markets.

The move lower in gold takes it back down to the lower portion of the trading range that has contained it for most of this month now with important chart support near $1350 serving to hold it for now. There are plenty of bottom pickers active near this level but the key is whether the funds will sit tight or decide to liquidate some of their longs. Should they do so, price will fall to $1345 which is near the 100 day moving average and has been a level which tends to attract buying from those with a longer term investment view. A breach of that level would be much to the bears’ delight as that would set it up for a drop down towards $1325 – $1320. Asia of course would also be delighted as it would become picnic time for them, with the table being set by hedge fund algorithm selling.

First order of business for the bulls will be get price back above $1365 if they can hold it above $1350. Next they would need to regain $1380 to reaffirm a trading range market.

Along this line I am watching the Euro gold price to see if it can hold its ground above the €1000 level. If so, (the PM Fix today was €1021), that should also shore up the Dollar price of gold. Europe has been the epicenter of a great deal of economic fears so how the price of gold reacts in terms of the Euro will give us a clue as to how the investment world is thinking about the overall health or lack thereof of the wider global economy. Keep in mind what I have written so many times over the past years – the problem with most gold analysts here in the US is that they are too US Dollar gold price focused. All such Elliot Wave claptrap projections based only on the US Dollar price are worthless because gold is an international commodity, or perhaps even more appropriately, international currency.

Silver lost chart support at $28.50 but so far is holding more important support near the $28 level. Silver bulls would not want to see the metal close below that level as it would drop it back down towards $27 where I would suspect we will see very substantial buying emerge. Long term oriented investors would welcome such an occurrence should it indeed take place. The tightness in the physical market suggests that this is once again more of a paper trade thing related to the Comex that we are seeing and not a true reflection of the underlying physical market.

The HUI – what else can be said about the price chart except it stinks but then again, what is new about that during times of gold and silver weakness. It looks like it might want to drift down towards 500 if it violates this week’s low early next week. The 200 day moving average comes in close to that level and should prove to be a solid level of chart support as it has tended to hold dips in price over the last year and a half or so. Also, 500 was tough resistance on the way up back in late spring of 2010. It held on a dip September and October of last year so unless we have some sort of change in the fundamentals for gold and silver that I am currently unawares of, I would expect it to hold. The weekly chart shows an uptrend that is still intact but I would feel more comfortable if it would at least recapture 530. It will need to climb back above 550 to get me excited again.

I should note here that the two other commodity markets that I like to monitor as a gauge of investor sentiment toward the overall complex are acting quite resilient today in spite of the near sector wide selling barrage. Copper is actually higher and once again challenging that tough $4.40 level, a push through which will let it challenge its recent highs, and crude oil is hanging tough moving more than $1.00 off its worst level of the session and still maintaining a foothold above $90. That bodes well for the overall complex and should help both the gold and silver markets, particularly silver should they continue to hold relatively firm. There is some weakness in the grains but I do not expect that to last long as the fundamentals are too strongly bullish there and the market must insure adequate acreage for the upcoming planting season not to mention ration demand for corn and beans, both of which are running quite low in terms of supply of old crop.

In short, we are back to watching the sentiment shift from “all clear ahead on the economy”, to “there are still a lot of trouble areas and rough patches on the seas”. As one side or the other rises or falls, the effects on the commodity sector and thus gold and silver will vary accordingly. The long term trends remain intact – it is still the short term stuff that gives us all something to yak about. Besides, there really is nothing else important to do in life than to sit around for hours each day and watch prices change now is there?

Bonds? Back to being a yo-yo market again and look to stay that way unless we get some sort of economic news that would tip sentiment one way or the other.

The S&P (by the way, this is the one market where one never hears the term “overbought” applied to it) is yet again making another new yearly high as they have set the stage for the public to go running pell mell into stocks so that all the big banks can find someone to sell all those shares to they have been buying for the last year.

Monday is a holiday here in the US or the way I prefer to call it, a much needed respite from having to endure watching the idiocy of hedge fund algorithms careening through our markets.

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