Filed under: Trader Dan Norcini
Dear CIGAs,
Overnight news that China was hiking rates in an effort to remove some of the inflationary pressures that have been building in its economy served as a catalyst for the hedge funds to unload everything that remotely resembled a commodity. There was not a single commodity that was higher today no matter what its current fundamentals may have been. Even the soybean and corn markets, both which have a strong set of bullish fundamentals were sold off as hedgies unloaded some of their longs once their algorithms tripped into the sell mode.
Ditto for gold – it was not spared even though the Dollar was repulsed from its overnight gains. It initially bounced off a support level at this week’s low but then another wave of selling appeared after mid-morning which obliterated that level and dropped it down towards the next support level shown on the price chart near the $1,368 mark. That too did not hold as the longs surrendered their advantage to the shorts by failing to stand their ground. That is the nature of today’s trading crowd however and it is due to the fact that computers are making trading decisions, not human beings. I strongly suspect that quality buying is emerging on this foray lower using the hedge fund liquidation to accumulate the metal however.
Remember the reason gold is moving higher – it is trading as a currency. The failure of the G20 to produce any meaningful consensus in the way of the foreign exchange market leaves unresolved the tensions involving the current monetary system. The status quo remains the same in other words. The US Fed policy of QE is causing inflationary pressures throughout the rest of the global economy, particularly in the emerging market nations as capital flows to those quarters in search of higher returns. As long as the Fed employs its QE, that will not change. The Chinese don’t like what is happening to the cost of commodities and are attempting to slow down their price rise but investors are going to continue to search for areas into which they may protect their wealth from what the Central Banking class is doing do their currencies. Where else are people supposed to put their money? Even the bond market puked today – it is particularly weird seeing this because all the red on my quote screen today especially with bonds, gold, equities and the Dollar all lower, means that for today at least, THERE IS NO SAFE HAVEN TRADE. That is bizarre to say the least. Then again, with the Euro holding slight gains, maybe investors are buying Irish debt as a safe haven!
This is the reason I am not putting much stock in what is occurring today even though damage is being done on the technical price charts for many commodities. It is just money flows being generated by machines without any particular logic behind it. If there was a logic, the bond market would be higher; it is not. Money is coming out of commodities but it is not going into anything. It is just sitting there in trading accounts and investment pools. That tells me no one knows what the hell to do. Look for cooler heads to prevail next week as the sell off in many commodities is overdone and will be corrected as value buyers move back in.
Rest assured, if the stock market gives any indication that it is rolling over, the Fed will not hesitate to ramp up the QE. This could shape up to become a nasty battle between China raising rates and the Fed working to lower longer terms rates with additional QE. What a nightmare that would be! If this cat and mouse game keeps up, it might very well end in a currency war.
DAN'S CHART:
http://jsmineset.com/wp-content/uploads/2010/11/November1210Gold.pdf
Overnight news that China was hiking rates in an effort to remove some of the inflationary pressures that have been building in its economy served as a catalyst for the hedge funds to unload everything that remotely resembled a commodity. There was not a single commodity that was higher today no matter what its current fundamentals may have been. Even the soybean and corn markets, both which have a strong set of bullish fundamentals were sold off as hedgies unloaded some of their longs once their algorithms tripped into the sell mode.
Ditto for gold – it was not spared even though the Dollar was repulsed from its overnight gains. It initially bounced off a support level at this week’s low but then another wave of selling appeared after mid-morning which obliterated that level and dropped it down towards the next support level shown on the price chart near the $1,368 mark. That too did not hold as the longs surrendered their advantage to the shorts by failing to stand their ground. That is the nature of today’s trading crowd however and it is due to the fact that computers are making trading decisions, not human beings. I strongly suspect that quality buying is emerging on this foray lower using the hedge fund liquidation to accumulate the metal however.
Remember the reason gold is moving higher – it is trading as a currency. The failure of the G20 to produce any meaningful consensus in the way of the foreign exchange market leaves unresolved the tensions involving the current monetary system. The status quo remains the same in other words. The US Fed policy of QE is causing inflationary pressures throughout the rest of the global economy, particularly in the emerging market nations as capital flows to those quarters in search of higher returns. As long as the Fed employs its QE, that will not change. The Chinese don’t like what is happening to the cost of commodities and are attempting to slow down their price rise but investors are going to continue to search for areas into which they may protect their wealth from what the Central Banking class is doing do their currencies. Where else are people supposed to put their money? Even the bond market puked today – it is particularly weird seeing this because all the red on my quote screen today especially with bonds, gold, equities and the Dollar all lower, means that for today at least, THERE IS NO SAFE HAVEN TRADE. That is bizarre to say the least. Then again, with the Euro holding slight gains, maybe investors are buying Irish debt as a safe haven!
This is the reason I am not putting much stock in what is occurring today even though damage is being done on the technical price charts for many commodities. It is just money flows being generated by machines without any particular logic behind it. If there was a logic, the bond market would be higher; it is not. Money is coming out of commodities but it is not going into anything. It is just sitting there in trading accounts and investment pools. That tells me no one knows what the hell to do. Look for cooler heads to prevail next week as the sell off in many commodities is overdone and will be corrected as value buyers move back in.
Rest assured, if the stock market gives any indication that it is rolling over, the Fed will not hesitate to ramp up the QE. This could shape up to become a nasty battle between China raising rates and the Fed working to lower longer terms rates with additional QE. What a nightmare that would be! If this cat and mouse game keeps up, it might very well end in a currency war.
DAN'S CHART:
http://jsmineset.com/wp-content/uploads/2010/11/November1210Gold.pdf
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