Peter Brimelow: What's up with gold?

Tandem Movement Downward
With Stocks Raises Suspicions

By Peter Brimelow
MarketWatch.com
Friday, August 10, 2007

http://www.marketwatch.com/news/story/gives-markets/story.aspx?guid=%7B0...

NEW YORK -- A triple-digit down day on financial system fears, but gold gaps down too. What gives?

First, a proprietary word. The Hulbert Stock Newsletter Sentiment Index, which reflects the average stock market exposure among a subset of short-term market timing newsletters tracked by the Hulbert Financial Digest, stood at 8.6% Thursday night.

That's down sharply from 44.5% three weeks ago. But the Dow Jones Industrial Average is only down some 200 points.

I think that Mark Hulbert (I can't get him on the phone at press time) would view this flowering fear as positive from a contrary opinion viewpoint.

Which is essentially what the respected institutional service Hays Advisory thinks. Don Hays is a Wall Street Triumphalist permabull, but it periodically shows nuance and, hey, we've just been through a super boom.

On Thursday, Hays wrote: "Clients are way more Pessimistic than Euphoric in the John Templeton market cycle of 'Bull Markets are Born on Pessimism, Grow on Skepticism, Mature on Optimism, and Die on Euphoria.' Our Asset Allocation Model confirms what we have heard in the field; that clients are very nervous. This bull market still has a long way to go before Euphoria. Don't try to be the hero. Don't wait for the next pullback. It is not too late to put money in the market after yesterday ([i.e. Wednesday, when the Dow finished up 153 points--remember?) This is a young and vibrant bull market. ...Welcome to the party. The room feels a little empty, but that is just the way we like it."

Obviously, the young bull market has vibrated down dramatically since Hays posted. The room must feel even emptier. I'll be watching to see if Hays still likes it.

A service that absolutely doesn't like it is Bill Murphy's Web site, Le Metropole Cafe. Murphy and his writers argue that the financial markets in general and gold in particular are being manipulated by the central banks to sustain an inflationary boom.

Thursday's paradoxical combination of subprime-triggered financial system risk, overt central bank intervention, and sudden massive selling in the gold market was right up their street. Thursday night, Murphy published this comment:

"Barely an hour after gold's plunge, the European Central Bank was asserting its willingness to inject liquidity, which it subsequently announced it had done on an unprecedented scale. There was a time when liquidity injections in a situation of financial stress stimulated gold -- most notably in the great reversal in August 1982. Now the relationship appears directly inverted. Many will be inclined to join the dotted lines."

But the Cafe remains confident, partly because its research indicates that booming India continues to gobble gold. It writes: "MKS (the Geneva-based gold dealer) observes in its daily comment that physical demand 'was significant' this afternoon and gold, unlike the stock market, moved sideways in the final hours. These are dream conditions for the Indian public and its agents."

And then there's Richard Russell. As I wrote, the Dow Theory Letters veteran is on the rack, having finally abandoned his bearishness only to see the market apparently give a Dow Theory sell signal.

Russell is intensely jumpy. But Thursday night he wrote that the Dow Theory sell signal had not been confirmed: "The good news: the July lows are still intact and the new lows are contracting. The bad news Selling Pressure is rising to new highs, and an increasing number of people want 'OUT' of this market. Tomorrow is Friday, and by tomorrow's close we'll see how many traders are willing to hold stocks over the weekend. Fridays are always significant in rotten markets."

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