Peter Brimelow: Does surge in gold and commodities signal war?

By Peter Brimelow
MarketWatch.com
Sunday, June 8, 2008

http://www.marketwatch.com/news/story/story.aspx?guid=%7BD534C413%2D16E9...

NEW YORK -- Bears were blindsided by the past week's sudden spike in gold and commodities. But gold bugs have an explanation: the world smells war in the Middle East, specifically, an attack on Iran.

When I last wrote on gold, it had withstood a serious late-April selloff and had started a rally. The Gartman Letter, the widely-followed institutionally-oriented newsletter with a good record of catching rallies had jumped back in. An exciting time for gold's friends seemed ahead.

Well, it was exciting, both for bulls and bears. Euphoria and misery swept both camps in unprecedented quick succession.

Gold continued to climb, gaining to above $930 an ounce, but then it ran into stern resistance.

Late May saw concentrated waves of selling send gold reeling down as low as $864 at Thursday's New York open. Having been stopped out, the Gartman Letter actually went short on Thursday, for the first time in several years, loudly proclaiming that a wide commodity sell-off imminent.

Gartman, as is often rumored, may well have known something. Despite a general, powerful rally in commodities, gold, having opened with a violent drop, only partially recovered, finishing down $8.30 on the day. Australia's the Privateer noted: "On June 5 ... oil rose $5.50 and the $US index (USDX) fell 0.43 -- and gold fell $8.30. Even silver was up 23 cents on the day. We cannot remember the last time we saw a 'shear' of such magnitude between the gold and silver price."

But Friday, of course, saw the bears massacred. Gold rose $23.50, blowing Gartman ignominiously out of its stop. And this was only the quiet part of a sweeping commodity rally, led by oil. As the Privateer pointed out: "The oil price rise on June 6 was its biggest one-day rise ever in simple dollar terms. In two days, it rose 13.3%. To put this in perspective, had gold risen by a similar percentage amount over June 5-6, it would have closed the week this week at $992 instead of $US 899."

Nevertheless, Friday's gold move was enough to turn the Privateer's authoritative $US5X3 chart positive. See chart:

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

What is going on? And can it continue?

Answer to Question 2: Probably. MarketVane's Bullish Consensus for gold closed Friday up 3 points at only 74%, four points below its mid-May top. It spent a good deal of March over 90%. Oil closed up two points at 76%. It was at 90% as recently as of May 20. There seems to be no reason from a contrary-opinion standpoint that further advances cannot occur.

And the first question? I am temperamentally drawn to the radical gold bugs appearing on the LeMetropoleCafe Website.

One LeMetropoleCafe contributor formulated the issue like this: "Today's fantastic, 1979-style action, with gold up $23.50 in the Comex regular session (and more in the after-market) was of course matched by events in other markets, notably grain and oil. All have fundamental reasons for strength, but sudden moves of this magnitude need more explanation."

And another contributor offered the probable explanation: "To all; this smells like war to me. Oil has rallied $17 in 24 hours to new all-time highs. Diesel is currently locked "up limit". The equity markets are faltering badly. CNBC as usual has nothing but candy-a-- explanations of these market movements. Nothing in today's environment has any logical explanation. I smell war."

Wall Street hates having to think about politics, much less foreign affairs. But around the world, especially in potential war zones, people do think about them.

They also think about gold.

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