Peter Brimelow: For radical gold bugs, a rally is overdue

By Peter Brimelow
MarketWatch.com
Monday, November 17, 2008

http://www.marketwatch.com/news/story/radical-goldbugs-rally-overdue/sto...

NEW YORK -- Gold had a good week, in the end. And the battered bugs are regrouping again.

Things looked bad for gold on Thursday. As the stock market slumped, so did bullion, actually dipping briefly below $700 intraday. But when the stock market bounced, so did gold, up nearly $40. Gold on Comex finished the week at $742.50 an ounce.

To the hardy band of radical gold bugs gathered around the standard of Bill Murphy's LeMetropoleCafe.com, a rally is overdue. For a couple of weeks, one of this site's favorite indicators, the premium over world gold in India (globally by far the largest gold importer), has been very high, indicating strong Indian demand. This sort of reading is generally followed by a rise in the gold price.

And, perhaps unprecedentedly, LeMetropoleCafe and other similar sites have been carrying stories from all over the world of heavy buying of bullion items by the public, often accompanied by reports of shortage and unavailability from dealers.

Pre-Internet, this would have been difficult to track.

Now, Murphy's men just point to the bid prices on the Web site of major dealers -- for instance, the Tulving Co.

This is far more solid than rumors of possible new central bank appetite for gold, although they are floating around too. And LeMetropoleCafe reported earlier in the week that the sales by the European Central Bank's flock of central banks seem to have stopped.

But there remains the problem of overhead supply. As Dan Norcini, who supplies an incisive daily comment on gold price action at Jim Sinclair's www.jsmineset.com, put it on Friday:

"Once again the $750 level served to hold any gains in check. There is obviously a seller/s of great size at or near this level."

This supposed seller is central to the radical gold bug claim that the gold market has long been manipulated in order to sustain the financial bubble -- and to mask the consequence. After all, Armageddon arrived, but the gold price fell. Odd, eh?

Significantly, even observers who have historically been very cautious about allegations of government interference in gold seem now to be accepting the thesis. Dow Theory Letters' Richard Russell, a veteran gold bug, announced a major change in his thinking Friday:

"I've never been a big fan of the 'gold is being manipulated' thesis. However, I'm now giving the manipulation thesis second thoughts. Most of the world's central banks are now in the process of fighting recession and deflation. This requires government spending and the production of enormous quantities of new fiat money. The last thing the central banks want is for the public to realize what they are doing. Normally, surging gold would be the signal for the public to ask questions -- rising gold is a red flag for the fiat money creators.

"It's amazing and beyond coincidence the way gold rallies, and then immediately is hammered down below 740. I know that there are huge short positions in gold on the COMEX. I'm no longer a skeptic on the 'gold is being manipulated' claim. Somebody is selling gold every time gold rallies toward a breakout above $870 or more properly gold at $840."

But, Russell added, "I don't think the manipulators (if there are such people) can keep it up."

After all, as we have all been taught recently, in markets, even governments do not always get what they want.

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