DAN NORCINI'S COMMENTS ON DECEMBER 2, 2008

Hourly Action In Gold From Trader Dan Posted: Dec 02 2008 By: Dan Norcini Dear CIGAs, Today we are back into trading the “reflation trade”. Yesterday we were all trading the deflation trade. Tomorrow – who knows? Today was a near perfect inverse of yesterday’s price action in the commodity complex. Yesterday the index funds and some hedgies were throwing away everything and anything that remotely resembled a commodity. I remarked that my quote board was a solid line of red. Today that same quote board is a solid line of blue – everything that looks remotely like a commodity is up. Okay – let’s try to deeply divine this incredibly sophisticated and complex trading program that is being employed by the marvelously inept modern hedge and index funds – ready? Stock market UP – BUY COMMODITIES… Stock market DOWN- SELL COMMODITIES… I know it is hard to wrap your mind around such a complex algorithm, but I think that if we concentrate really hard and apply ourselves we will be able to grasp the vagaries of this amazingly sophisticated strategy. I sure am glad the best and brightest traders on the planet are handling this strategy as I for one would no doubt be lost in its complexities. Seriously folks – we are all trading the US equity markets nowadays whether we actually trade them or not. Even with the up day (thus far) in the equity markets, it does seem to me from watching the price action, that ongoing long liquidation and some small amounts of fresh hedge fund selling are emerging on rallies in the commodity markets. That is being confirmed by yesterday’s release of the supplemental commitment of traders reports showing further index fund long liquidation across the entire spectrum of the commodity complex. The exodus of that money from the complex has seen open interest in many of these markets cut by more than 50% from its peak. That is a tremendous amount of selling. These guys were the ones that drove prices north when they first came in to buy as investors were clamoring for commodity exposure in their portfolios and now they are the ones driving prices south as those same investors sour on world of tangibles. Assuming there are any of them left when the dust settles, they will also be the ones driving prices back up again once the fallout from this quantitative easing begins and the Dollar gives up the ghost. As a further point of reference, open interest took yet another big hit in yesterday’s price collapse dropping nearly 5,000 contracts to 266,000. We are now down to levels of open interest last seen in August 2005, more than 3 years ago! Gold was trading closer to $450 back then. I am beginning to think that the bulk of the index fund liquidation is coming to an end. A lot depends on whether or not the hedge funds decide to start building short positions in the gold market but as far as selling goes, the index funds are generally “long only” funds so once they have exhausted their selling and met all the redemption requests that they need to meet, the selling is going to either have to come from the hedge funds or the comex gold market is going to run out of sellers. If the hedge funds do not move in on the short side, gold is not far from a bottom. We just have to wait and see since attempting to ferret out just how large a long position the index funds had built up is pretty challenging since we do not have the appropriate data from the COT – instead we have to extrapolate from the current COT reports. Three year’s worth of positions dropped in less than a year is pretty revealing however. Technically, gold bounced off of the ascending 20 day moving average and climbed back above the 40 day – both are positives. It has not been able to recover the 50 day moving average however – that is a negative. The shorter term moving averages are moving higher while the longer term moving averages are headed lower. That means short term the picture is friendly while the intermediate term is still negative. An upside crossover by the shorter term moving averages above the longer term moving averages will further reinforce the friendly technical picture but to really give the bulls control of the market, the 40 day and the 50 day will need to turn higher. Above those two moving averages, the 100 day comes in near the $833 level. That will be a noteworthy achievement if gold can best that level. The HUI and the XAU are following the broader stock market higher today. I am still waiting for these to trade independently on their own merits. Crude oil dipped sharply overnight to nearly $47 before it too rebounded with the higher stock market. It is struggling however to maintain its minor gains on the day. I would be surprised to see crude oil much lower than the lower 40’s. OPEC has a meeting scheduled in a couple of weeks so its price action over this period will determine what they may or may not do in regards to any potential supply reductions. I am sure there are quite a few sad faces among that group considering that it was not all that long ago that they were fetching an additional $100 per barrel on their product. Not that too many celebrate Christmas over that way but I suspect that among those that might, the stockings are going to be a bit light this year. Incidentally, if you have not looked at a price chart of the long bond recently, do yourself a favor and do so. I was still sucking milk through a bottle the last time yields were this low. I would not be the least bit surprised, and this is the cynic in me, to learn that a good portion of the bond buying in the futures pits is actually front-running using bailout money to get into position for the Fed to begin buying across the yield curve to keep interest rates low. How else to explain the insane rush into US Treasuries in the face of nearly unlimited creation of US debt and collapsing yields? Since there is ZERO accountability for the use of this bailout money, what is to keep the recipients from using it to try to once again leverage it up for a “sure bet”? Answer – nothing! These are the same people who would sell those worthless alphabet soup structured investment securities to their own grandmothers if they thought that they could make a quick buck from it. Do not be under any illusions as to what these conscience-deprived cretins are capable of. Let me take a brief moment here to address an issue that seems to be coming up more often than not. I think some folks misunderstand what Jim and I, along with others, are attempting to do with our campaign to urge folks who want to buy gold in quantities of 100 oz or more to stand for delivery at the Comex. We are not trying to bust the Comex in the month of December. What we are attempting to do is to begin a systematic and sustained effort among potential buyers to REGULARLY buy their gold by entering long positions at the Comex and then taking delivery and doing this over and over again each time they feel prices are cheap or they have money to invest in gold. Every time the bullion banks raid the gold price, those who want to buy gold at a discount thanks to our “friends” there, can enter their long positions and then ride the contract into the delivery process. If enough gold buyers do this over and over again on a regular basis, the shorts will have been served noticed that their days of manufacturing unlimited amounts of paper gold with which they can attempt to drive the price lower are coming to a close. What it will do is force them to cover their shorts much more quickly effectively limiting the downside damage that they can inflict on the paper price of the metal. The more buyers that can be recruited to this effort, particularly buyers of large size, the more difficult the life of the paper shorts will become. Short of taking delivery of the actual metal, preferably pulling it out of the warehouses, the shorts can reign supreme over this market. What’s more – they are doing this with impunity as they pay no price financially to do so and profit quite handsomely I might add. Strip them of the metal and they are cooked. Then they will have to compete on a level playing field like the rest of us. Who was it that said, “He who sells what isn’t his’n, must pay the price or go to prison”? If the paper shorts are selling what doesn’t exist, namely tons of actual gold, forcing them to show us the actual metal will work to modify their behavior. This is the only way to keep the Comex gold market honest. Speaking of deliveries, another 307 deliveries were assigned this morning. I can tell you that 43 of those were retenders by Greenwich Capital Markets. The total so far this month is 11,473 contracts or 1,147,300 ounces. I want to see the warehouse totals over the next couple of days before commenting on that. Time is needed to actually move the metal that is going out.