DAN NORCINI'S COMMENTS ON LAST WEEK'S GOLD TRADING

Trader Dan Comments On This Week’s Action In The Continuous Commodity Index


Posted: Dec 12 2009 By: Dan Norcini Post Edited: December 12, 2009 at 1:05 pm

Dear Friends,

One of the fundamental inputs in a gold bull market is a steady rise in the price of commodities. While in a bull market, gold trades primarily as a currency, its association with the commodity world cannot be neglected in the sense that commodities become an asset class that is sought out by investors to inoculate themselves from the depreciation of the native currency. In general, if commodities are rising, it is a signal that:

1.) economic growth is strong, credit is relatively available and demand for underlying commodities is therefore robust resulting in rising prices across the board and/or

2.) confidence in paper assets is waning and investors are seeking wealth preservation in things tangible

We can see from the price chart of the Continuous Commodity Index that the former was the case prior to the crash in June 2008. The economy was vibrant, (we all now know that it was a bubble due to easy credit) but there was also a currency component to all of this as the US Dollar made an all time low prior to the bust. In other words, both of the above factors were in play. The result was a rising gold price.

However, after the credit crunch and associated meltdown occurred, the commodity class in general sold off sharply (the inverse of #1 above) while the Dollar rallied as leveraged carry trades were unwound. Investors sold off everything to raise cash to meet margin calls and deleverage, including gold. Gold too sold off for a season.

Once the Fed announced its Quantitative Easing program guaranteeing insanely low interest rates, factor # 2 came into play with astute investors rushing into tangible assets to shelter their wealth from the confiscatory effects of Central Bank currency debauchment activity. Commodities became sought out not because of a robust economy, but rather as an asset class to preserve wealth.

The result has been commodities regaining half of their losses from the initial bursting of the bubble that began last summer. Gold has once again rallied sharply, this time making yet another all time high in nominal terms as the Dollar also moved lower.

This chart therefore becomes significant in telling us the direction that gold prices will take moving forward. For the deflationists to be proven correct, this chart will need to break down technically which would require both a move below the 400 level and a downturn in the rising moving average in which price moves below that average as it trends lower. AS you can clearly see, the moving average is trending higher and prices are above it. This signifies that the inflationists have the upper hand and their assessment is currently the correct one.

Until this chart reverses its positive technicals, those calling for a major top in gold are simply mistaken in their assessment and are attempting to impose their view on the markets rather than reading what the market itself is currently saying. That’s the problem with analysts and even traders who cannot let the market speak to them and get stuck in a losing trade because they refuse to acknowledge that they might be incorrect. In effect, they end up fighting the trend or the tape as we used to say.

As I mentioned in my midday comments yesterday, the entire commodity class did not move lower as a block today as would have normally been expected if a wholesale deleveraging trade was underway. More than half of the commodity world was higher today with the energy sector the weak leg along with the precious metals. That is why I continue to believe that this move lower in gold is merely a retracement in a bull move and not the end of the bull run.

FOR CHART GO TO: http://jsmineset.com/wp-content/uploads/2009/12/December1209-CCI.pdf