Peter Brimelow: Gold bugs savor Christmas cheer

By Peter Brimelow
MarketWatch.com
Monday, January 7, 2008

http://www.marketwatch.com/news/story/story.aspx?guid=%7BBBC65065%2D057C...

NEW YORK -- The allegedly traditional Christmas-New Year trading lull produced spectacular action in gold and gold stocks. The gold bugs think it might have been decisive.

Gold jumped $54 an ounce, almost 7%, over the two weeks ending Friday. It appears to have established itself quite cheerfully above the previous daily close high of $850 in 1980.

The consequence, on the spectacular point-and-figure chart kindly made available free by the wonderful Australian Website The Privateer --

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

-- is a decisive breakaway gap matched by maybe five others, in either direction, on this designedly-sluggish charting system in the past 25 years.

Perhaps more significant has been the response of the key gold share indices, the Amex Gold Bugs Index (HUI) and the Philadelphia Gold Silver Index (XAU).

These did not surpass their early-November highs (when gold peaked out $30 below current levels). But they showed unusual vitality, rising more than 15% off their mid December lows, and breaking important trend lines.

Some highly experienced technicians place great weight on the predictive power of gold share action, which was indeed impressive in the 1980s and '90s. As a result of the past couple of weeks, veteran long-term chartist Martin Pring of Pring.com has moved to his friendliest position yet on the recent gold move. He wrote in chartspeak recently: "The Gold Bugs Gold Share Index has now managed to break above the neckline of an upward sloping head and shoulders top. ... That should mean that the top has failed and that gold shares will move higher. Since the price of the yellow metal has also broken out from a triangle pattern, higher prices all round are called for."

Pring's wide-ranging work covering stocks, currencies, and commodities presumes that true fortune-making market moves inevitably break long-term trend lines. This can involve missing intermediate trends that most investors would deem playable. But the risk of whipsaws is reduced. A Pring signal is important.

What is going on?

Bill Murphy's LeMetropole Cafe team argues that, notable though gold's recent move has been, it is inadequate considering the economic backdrop. They believe official sector gold price suppression continues. Friday's sharp break is cited as an object lesson.

Murphy's investment concept: When intervention is defeated, an extremely large move in gold will occur, probably after many current longs have departed. This is what happened after gold's price was freed in the 1970s.

But LeMetropoleCafe does honestly report that Indian gold prices (which it alone seems to follow systematically) appear to be running "several dollars" below world gold. The world's largest bullion buyer therefore seems to be on the sidelines, in the most pronounced way since the gold bull market started in 2002.

At Jim Sinclair's JSMineset site, Dan Norcini makes an interesting if esoteric point. Charting the euro-yen exchange rate against gold, he notes that yen strength has recently meant general liquidation in commodities and gold. But in the past three weeks, for the first time, the reverse has occurred. The yen has risen sharply and so has gold.

He suggests this means that gold's traditional safe-haven status is reasserting itself.

MarketVane's Bullish Consensus for gold is only 83% (in contrast to the mid-90s for the grains). The often well-informed Gartman Letter opened the year by adding more gold to its model portfolio.

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