Peter Brimelow: Radical gold bugs say manipulation will fail

By Peter Brimelow
MarketWatch.com
Tuesday, September 2, 2008

NEW YORK -- Down but not out.

The radical gold bugs have taken some body blows recently, but they're still fighting, and gold is still struggling back.

When I last wrote about gold, I announced I was changing my formula. My previous three columns had noted that gold's fundamentals were favorable and that it appeared to be breaking out technically, perhaps beginning its long-heralded blow-off.

All were promptly followed by sharp gold price declines.
So I reverted to the formula that worked in the spring: noting a big decline in gold accompanied by ghastly technicals -- but also that the radical gold bugs grouped around Bill Murphy's LeMetropoleCafe.com remained cheerful because they lay far more emphasis on physical offtake market than is conventional.

The result this time, alas: another disaster, only worse. Comex gold dropped a stunning $36.50 that day and closed down another $36.20 the following Thursday -- at $792.10.

Since then it has been doggedly edging higher. But on Labor Day, unusually for a day with America closed, gold was very active, dropping $14 to around $817.

So now here is a third pattern, repeated again this week: technicals/sentiment appalling. Gold rise unexciting. LeMetropoleCafe gang cheerful -- in fact, ecstatic.

Scrupulously recognizing the facts, the Australian goldbug service The Privateer commented this weekend on its authoritative $5x3 point and figure chart:

"Technically, the formation on this chart is definitely the signal of a bear market. You can see this week's rebound on the chart, but the price still remains below the uptrend line."

The Privateer makes this chart available here:

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

So why are Bill Murphy's men so confident? Because the physical market is behaving in an unprecedented way.

LeMetropoleCafe lays heavy emphasis on India, by far the biggest factor in the international gold trade. The site evaluates Indian conditions by considering if the Indian gold price is high enough above world gold to permit imports.

Right now, it is. On Tuesday their correspondent said:
"I believe such a prolonged period of super premiums is unprecedented since gold imports were liberalized in India in the 1990s. It is a testament to the ferocity of the selling interest."

LeMetropoleCafe has found an ally in the person of John Reade of UBS, itself a major gold dealer. On Thursday the site quoted Reade, who issued a "Tactical Buy" that day, saying, "Over the past three weeks we have noted unprecedented physical gold demand from India, some European consumers, and other Asian clients. Demand is also very strong from Turkey and the Middle East. ... The last time we issued a strong tactical buy recommendation in gold was in August 2007 at $660/oz."

So what is standing in gold's way?

Plenty, if you read Moming Zhou's recent MarketWatch story: It appears that a small group of U.S. banks were shorting massively into the last swoon.

If, as the LeMetropoleCafe mob suspect, this selling is for official accounts, the gold price is fighting City Hall.

But this kind of intervention is extremely expensive -- because gold bars cannot be printed.

Gold Money's James Turk says he's seen it all before:
"The present situation reminds me of August 1976, just weeks before the Democratic convention confirmed Jimmy Carter as that party's presidential candidate. Gold slid down to $100 per ounce even as the inflation and economic outlooks were worsening. Gold looked dirt-cheap back then even though its price had risen three-fold from just a few years before.

"By the end of 1976, gold had climbed 32.3 percent from its August low. By the end of Carter's presidency four years later, gold climbed more than eight-fold. I wonder where gold will be at the end of the next president's first term in office?"

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