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?"

* * *

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?

* * *

Peter Brimelow: Indians buying up gold supplied by Fed?

By Peter Brimelow
MarketWatch.com
Monday, March 31, 2008

NEW YORK -- The gold bugs are coming out of their holes again.

When I last wrote on gold, the metal was challenging $1,000, a level which was passed that day.

After that, gold's stumbled, down $70 at one point, although up $10.60 over this past week.

But two crucial factors have swung encouragingly, rallying the gold bugs.

The first: the price of gold in India, by far the world's largest importer of the metal. India is a massive buyer of bullion for jewelry and cares little for the rest of the world's concerns. If the Indians want to buy, they will.

India has a fairly high import duty on gold. If you subtract the duty from the world price, you find whether the domestic price makes importing profitable. It has been moved decisively into profitable territory for legal imports this week. This has not been the case for some time.

For reasons that mystify me, the only regular source of this Indian data is Bill Murphy's Website, Le Metropole Cafe. Yet this is the key calculation for verifying Indian demand.

Over the weekend, Le Metropole posted this: "Indian ex-duty premiums -- Friday: a.m.$1.85, p.m. $2.55, with world gold at $943.75 and $944.55. Ample for legal imports."

Anyone familiar with the physical trade must find it hard to envisage much further price decline.

The second encouraging gold bugs: The lease rate for gold. This is the cost of borrowing gold.

Thirty years ago, this was a detail, but with the huge expansion of lending to gold mining companies in the 1980s it became a big deal. In particular it was an important part of the argument of outfits like Gold Anti-Trust Action Committee (GATA), which argued that secretive activity in the gold market by central banks was crucial to understanding what was happening with gold.

In the past few days a strange thing has happened. Australia's The Privateer says, "the shorter term (one and two-month) rates have actually gone into negative territory this week."

In other words, gold is being supplied to the market by the central banks. The Privateer goes on: "We do not recall a previous instance of this, and there certainly has not been one since the cold bull market began in 2001-02. ...

"We have not -- until now -- seen a situation in which the central banks are actually paying the bullion banks, hedge funds, gold miners, et al. to borrow the stuff. And please don't forget that, in this context, leasing gold is actually 'shorting' gold. Gold is not 'leased' to be hoarded; it is 'leased' to be sold for something that pays a far higher rate of interest. ... The practice of 'leasing gold -- and silver' by the central banks has been one of their best means of suppressing the prices of these precious metals for a long time."

Interestingly The Privateer's wonderful $US 5x3 Point and figure chart withstood this week's slump. See chart:

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

Goldbug conclusion: Central banks, led surreptitiously by the Fed, are supplying physical gold to the market. And wise heads like the Indians are buying it.

* * *

Gold probing towards the $1000 mark

Peter Brimelow from MarketWatch.com sniffs the precious metals air and finds it charged with anticipation from gold bugs everywhere....

"NEW YORK -- Gold finishes a fabulous February, and the gold bugs' attention is turning to gold shares, and silver.

When I last wrote about gold, with the pleasingly prescient headline "Gold's path to $1,000 now clear?," bullion had just staged a three day-bounce back after a terrible beating received on Feb 1st.

Since then, as Australia's The Privateer put it recently: "The last two weeks have been absolutely stellar for gold, as it has moved three-quarters of the way between $U.S. 900 and the big $U.S. 1,000 over that period."

The Privateer's $U.S. 5x3 point-and-figure gold chart is designed to respond glacially to gold price changes. Now it has been struck with scalding global warming: It has changed 18 times in February and now looks spectacular:

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

The questions now interesting the gold bug investment letters are:

-- Can gold go much further, percentage-wise?

-- What does this mean for silver?

-- Why aren't the wretched gold shares moving?

Silver leaped a stunning 9.7% in the past week, with Comex May silver closing up $1.767 at $19.915. The Privateer was a little dismissive: "For many of those who are dipping their toes into the precious metals markets, gold is simply seen as being too expensive. That is why silver ('the poor man's gold') has outperformed gold so far this year."

But other observers were more excited. At Le Metropole Cafe, Bill Murphy, who has followed gold closely for years, was motivated to put out a special Sunday alert: "To say that silver has been trading differently the past couple of months is an understatement. ... As a veteran commodities trader, I could see, on a daily basis, somebody quietly accumulating silver on price dips ... never pushing the envelope, but buying silver at times when it normally would get trashed."

At Jim Sinclair's MineSet, Dan Norcini plunged into the technical entrails of silver futures trading -- the "commitments of traders" supplied by the Commodity Futures Trading Commission -- and pulled out an unusual augury: "The funds have not been reducing their net long position. ... The funds continue to buy. Guess who is doing the selling -- the small specs! Apparently, some of the public is trying to pick a top in the silver market. They have built up the largest outright short position in two years. Talk about a bullish signal. The most undercapitalized traders on the planet are adding new silver shorts as the market breaks into a 28-year high."

Norcini adds: "Remember, it is a new calendar month on Monday and that often means new allocations of fund money to the markets. If that occurs, the silver shorts are in serious, serious trouble as the longs will show them not one ounce of mercy. Blood in the water draws sharks and the silver shorts are not only bleeding, they are hemorrhaging massively."

But gold shares, of course, continue to break their owners' hearts. GoldMoney's James Turk, in this weekend's FreeMarket Gold & Money Report, shows with a 20-year chart that the ratio of gold to the Philadelphia Gold and Silver Index has only been meaningfully lower briefly once -- right before the gold upswing began in 2001.

Perhaps the answer to the question if the shares will notice $975 gold is the same as that provided by The Privateer, discussing the general lack of attention paid by the public to the gold surge: In "the early 1980s, when the Dow Jones Industrial Average was challenging the all-time highs it had set in 1969 and slightly exceeded in 1972-73. ... It took quite a while, until mid-late 1985, in fact, for the majority of people to finally be satisfied that the Dow wasn't going to fail at the 1,000-1,100 level as it had done for the previous 15 years. Once that happened, the markets took off. ..."

Privateer's prediction: "That is what is in store for gold, as and when it exceeds $1,000 for the first time."

* * *