Peter Brimelow: What if gold gave a party and everyone came?

By Peter Brimelow
MarketWatch.com
Monday, July 14, 2008

NEW YORK -- Gold surges, but sentiment is soggy. The goldbugs smell a breakout, and this time they may have generalist backers.

Gold's performance last week was remarkable. Losing $10.30 on Comex in the first two days, it then turned round to add $27 on the week and $46 from Tuesday's intraday low, closing at $960.60 an ounce. Volume was extremely heavy. SPDR Gold Trust (GLD) added 45.99 metric tons of gold to its holdings on Friday, possibly its biggest daily increase, taking it to a record level.

Sentiment started the week low and apprehensive. LeMetropole Cafe's Bill Murphy remarked early on Friday: "It is remarkable to me how the Cafe Sentiment Indicator, a barometer of interest in gold and silver by the general public, continues to be a predictor of upwards precious metals price action. Tuesday, Wednesday, and Thursday of this week were collectively the worst three days in the last 10 years for that indicator. ... How typical, with that sort of terrible bullish sentiment, that this morning we are walking in to the most buoyant Comex pre-market upward gold price action that I can recall."

Murphy's Cafe Sentiment Indicator is proprietary, but it is believed to be heavily weighted to how many sign-ups this subscription site gets.

Despite the strong week, sentiment did not much improve. MarketVane's Bullish Consensus for gold rose only 4 points, to 82%. (In February-March it spent 19 business days in the 90s, peaking at 95%.)

And neither the Philadelphia Gold and Silver Index (XAU)nor Amex Gold Bugs Index (HUI) recovered to the level they were at on July 1, when Comex gold closed at $944.50.

Nevertheless, the more sophisticated gold bugs are excited. Dan Norcini, the respected technical commentator who posts on gold daily on Jim Sinclair's MineSet Website, pointed on Friday to "the importance of today's technical breakout. ... This is occurring against a backdrop of normal seasonal weakness which makes the move all the more impressive. ... Most noteworthy today was the action of the bond market ... with bonds tanking alongside equities as safe haven flows made their way into gold."

Australia's The Privateer noticed the same thing: "Normally, in times of fear of incipient financial meltdown, U.S. investors stampede into Treasuries as a 'safe haven.' That didn't happen on Friday, July 11. In fact, the opposite took place. ... The 10-year paper, for example, saw its yield increase by 17 basis points -- the biggest one-day jump since March 24."

The Privateer's paramount $US 5x3 point and figure chart looks extremely handsome. As its proprietor says, "We now have a 'breakaway gap' on this chart":

http://www.the-privateer.com/chart/gold-pf.html

As one of Le Metropole's contributors wrote, "Gold's friends are spoiled for choice, with excellent geopolitical, financial structure, and monetary arguments for a strong metal price."

Unfortunately for me, I remember the 1970s. Not just the late '70s, but the 1973-4 equity bear market, in real terms as bad as the 1929-1933 crash.

In late 1974, gold shares had a huge run -- in fact, by some measures the biggest ever proportionately. The standard explanation was that shares were being bid up ahead of the legalization of American ownership of gold, banned since the 1930s, which became effective Jan. 1, 1975.

But perhaps as important was the desperation of generalist managers to find something on the long side that worked. Something similar applied in 1979, although the market precursor then was stagnation rather than decline.

What happens if profit-starved generalists and momentum players wake up and take notice?

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