Posted On: Wednesday, May 24, 2006, 10:37:00 PM EST
Market Commentary From Trader Dan
Author: Dan Norcini
Dear Jim,
The dollar looks like it is bear flagging to me. It will take a convincing close over the .86 level to change the technical picture and disabuse me of this notion.
Sugar is basically trading the crude oil market right now as is bean oil. Both of them are trading the alternative energy play. When crude rallies, they rally. When crude moves down, they move down. Fundamentals have given way to the day to day vagaries of the energy complex.
Heating oil is trading hurricanes already but natural gas is not. Go figure!
I have mentioned to just about everyone I have spoken with today that the volatility we are seeing is indicative of the nervousness, confusion and uncertainty that exists in the market. We have also seen something that we have not seen in a very long time, the presence of FEAR. In times past, this sort of environment would see money move into gold as the ultimate safe haven.
Today’s current crop of lemming investors have been conditioned that the safest place in the world to park money is US Treasuries. This is why bonds moved up today and is the excuse du jour given for the strength in the dollar. Money was flowing into bonds and out of everything else. Personally I find this quite laughable and can only wonder if that philosophy will still look sound when the dollar is knocking on the door from beneath the .70 level.
This kind of volatility does however usually presage some substantial moves. Currently there is absolutely ZERO conviction among the vast majority of players. The giant hedge funds have no investment strategy that they are even attempting to follow right now. Instead, button pushers are reacting to emotional swings which range from euphoric one day to panic the next as automated trading programs wreak havoc on these markets.
The result has been a large number of players in the gold pit at the Comex simply throwing in the towel, choosing to get out of the way of the wild swings while they wait for the market to calm down.
This includes both longs and shorts who are exiting, in the process dropping the open interest to 316,143 as of yesterday. With today’s estimated volume at 155,000 there is little doubt we will see a significant decline in open interest again tomorrow.
This is the lowest reading since September 8, 2005 (an eight month low) where the open interest was 307,933. Front month gold closed at $447.70 that day. The next day it jumped to 317,409 as gold moved up to the $450 level once again.
I find this current decline in the open interest quite remarkable to say the very least, since we are getting down to levels where I believe we can expect to see prices stabilize fairly soon.
The reason: the fuel for further significant declines simply is not there unless we see a wholesale entrance of hedge funds on the short side of the gold market, something which I believe is highly unlikely.
My point in what may seem like some meaningless rambling is that I view this situation as extremely bullish for the gold market. I was never of the opinion that this recent leg up to over $700 was due to “speculative froth” as has been parroted ad-nauseaum, but there is no doubt a huge number of players have exited the gold market. The fact remains that open interest levels are where they were when gold was last trading at $450. We have had what by any standard of measure could be considered a sizeable exit of traders and yet here we are sitting with the gold price $190 higher than the last time we were anywhere near this level of interest by the general trading public. This correction will give us a new point from which to consolidate and build the kind of base we need to see a further substantial price rise which will take out the recent peak near $730.
Your pal,
Dan
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Dear CIGAs,
The day they found the first hedge fund manager the population of mental institutions began to increase. These people have to burn themselves out until only one is left. The new “gold bulls in a china shop” create total havoc when they enter and even more havoc when they try to leave. Not one of them has figured out the gold market is a tiny affair. This type of gold action is going to favor the gold shares because survival in the highly leveraged paper gold market is rare, even among professionals. The battle of algorithms not only increases volatility, it also leads to increased consumption of Maalox and Imodium.
When I say yesterday’s $20 rise means as much as today’s $36 drop, you might gasp. Neither does anything but prove my long term goal of $1650 may turn out to be much too conservative. It also proves if the Sultan of Bahrain was to chase gold strength and run away from gold weakness the market would gladly eat his money.
Can you imagine how gold will range when the dollar is in the .7000s USDX? In time it will be.
The only protection the aggressive gold investor has is to sell 1/3 of their position into gold strength too early and buy gold back too early while not using one cent in margin.
For investors I recommend the above medicine, a brisk walk and a glass of cold water. You will be very right but gold always requires a deep understanding, which results in courage.