Peter Brimelow: Questions about gold market manipulation and missing M3 figures

By Peter Brimelow
CBSMarketWatch.com
Monday, August 7, 2006

http://www.marketwatch.com/News/Story/Story.aspx?guid=%7BD095B5EB%2D2E07...

NEW YORK -- On Wednesday I received Harry Schultz's latest Gold Charts R Us communication, (itself an object lesson about the alacrity with which some of the truly veteran newsletter writers (like Richard Russell) have adapted to the Internet.

Schultz's message was clear: "PS: If U don't buy gold today, go away & forget this mkt. Tuesday's close filled in the missing bits needed to give a trader's buy signal. I've never seen a day like it. Breakouts all over the place ... XAU in clear B/O...U can't win a jackpot unless u put a coin in the machine first."

This has to be seen as a significant statement by a very experienced market observer. I first wrote about Harry Schultz 30 years ago.

Gold and gold shares respectfully responded by going down for the rest of the week.

This of course did not deter Freemarket Gold & Money Report's James Turk, who wrestles in his latest piece with the Fed's very peculiar decision to stop reporting M3 (cast in even stranger light by, as I understand it, their having eliminated the M3 archives from their Web site). Turk for many years maintained a "Fear Index." which was a ratio of M3 and the U.S. gold price.

When last calculable, the chart of this was ominous. Turk not unreasonably comments: "Why does the Fed no longer want to report the total quantity of dollars in circulation? They know what's coming -- massive amounts of dollar creation to fund the worsening trade and federal government budget deficits."

But Turk goes onto assert that an implicit Fear Index he has constructed gives him the data to solve for the gold price, which equates to $900 per ounce ... even though the Fear Index has climbed a long way, it is still below levels reached at other key low points in the gold market, specifically, in 1971, 1976, 1982, and 1993. This low level means that gold is still way undervalued."

For what gray hair is worth, there is much in the news that reminds me of 1979. To me $900 does not seem outlandish, especially when $875, the previous fleeting top, in 1980 dollars is converted to today's values, at least double the price at $1,750 an ounce.

Dennis Gartman, of the Institutionally-favored Gartman Letter, generally rubbishes these kinds of concerns. But nevertheless this past week Gartman increased his portfolio exposure to gold to about half, depending on how you calculate it. He also bought back a position in Suncor Energy Inc., about as pure a bearish Middle East bet other than gold that I can see.

Technicians, however, are less enthusiastic.

My old friend Martin Pring, whose work turns on very long-moving average systems, is upset by the sideways movement in some of these measures: "The Goldman Sachs Precious Metal Index has just experienced a marginal KST sell signal. ... This is important since KST sell signals have a high degree of probability of resulting in a multi-week correction ... the three previous once have only been exceeded once before (in 1999) during the 11-year history of this Index. This means that an above average (short-term) decline would be likely in the event that a more decisive KST sell signal is triggered."

The KST sell signal is a proprietary moving average measure.

None of this is very disturbing intellectually to LeMetropoleCafe's Bill Murphy, who equates gold's more sluggish performance recently with Henry Paulson's arrival at the Treasury from Goldman Sachs: "Paulson, is ... blatant about his manipulation of the gold price. This arrogant fellow couldn't care less about who sees what they are doing. Probably because he knows the cowardly wimps in the mainstream gold world won't utter a peep."

If this view is correct, of course, the Martin Pring system would be effectively co-opted.

Whether the Middle East can be co-opted is another question.