Peter Brimelow: Gold bugs' grit pays off

By Peter Brimelow
MarketWatch.com
Sunday, May 18, 2008

http://www.marketwatch.com/news/story/gold-bugs-grit-pays-off/story.aspx...

When I last wrote on gold, about the only gold-friendly group cheerful about the metal's short-term prospects was the hard core that gathers at LeMetropole Cafe under the leadership of Bill Murphy.

Their theory of gold, that the metal is blocked by (mainly surreptitious) central bank selling on the highs, but underpinned on the lows by powerful physical offtake, mainly from India, left them unpuzzled by the late-April break and confident the low had arrived.

They were right.

May 2nd's intraday $846.50 low was the bottom. Friday's $899.90 Comex close was $41.90 higher.

Furthermore, momentum is building in an exciting way. Australia's The Privateer remarked this weekend: "Have 'They' Gone Too Far With The U.S. CPI? On Wednesday, May 14, the U.S. Department of Labor ... announced the U.S. Consumer Price Index (CPI) for ... April. The official CPI figure for April was ... 0.2%. This prompted USA Today to run an article headlined: 'Inflation may be worse than consumer price index shows.'

"On May 14, the day that the April CPI figure was announced, spot future gold closed at $866.50. Two days later on May 16 it closed at $899.90. That's a rise of $33.40 or 3.85% in two days."

The Privateer says it's been a while since gold "gapped up" -- opened above its previous close -- as it did in the past week.

In my last column, I commented that the Privateer's authoritative $US 5X3 point-and-figure chart as looking "sad." That is certainly not the case now. See chart:

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

With the suppleness which makes it both derided and admired, the institutional service The Gartman Letter suddenly reinstated its gold-long position on Friday morning. Editor Dennis Gartman had been on TV programs earlier in the week expressing pessimism about gold, having abruptly sold a larger position at an early stage of the slide that started in mid-April.

Some gold observers feel that this expensive publication has extremely good trading connections. Over the years, I have noticed TGL's buy-gold calls to be very well-judged -- although every so often the conditions which motivate them seem to attract heavy bouts of selling -- which is what happened in April.

The Gartman Letter was musing last week about the extreme situation of the gold-oil ratio.

Similarly, the FreeMarket Gold & Money Report's James Turk noted: "Crude oil closed Friday at 4.429 grams of gold per barrel. Since the end of the Second World War, crude oil has been this expensive on only 33 days, or about 0.002% of the time. So clearly we are in the extreme tail-end of the bell-shaped curve, meaning that gold is extraordinarily cheap compared to crude.

"But here's the interesting point. All of these 33 previous days when crude oil cost more than 4.429 grams per barrel occurred in 2005. What's more, they occurred in a short period from the end of July to mid-September, which was another period of extreme price manipulation by the gold cartel. ..."

Turk is emphatically in the camp of those who feel that the present credit crisis has brought on more official attempts to manipulate gold.

Oil was 4.37 grams of gold per barrel on Friday. Quite possibly this extreme has caught the eye of important trading pools.

Interestingly, MarketVane's Bullish Consensus for gold, which on May 1 fell to a multimonth low of 68%, had risen to only 75% Friday.

Back in March the Bullish Consensus peaked at 95%. So it has a long way to go.

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