Peter Brimelow: Gold bugs, grinches finally agree on something

By Peter Brimelow
MarketWatch.com
Wednesday, November 26, 2008

http://www.marketwatch.com/news/story/story.aspx?guid=%7B1891E8E0%2DA611...

NEW YORK -- Gold bounces. Both gold bugs and gold Grinches think it's made significant progress.

Recently I quoted Dan Norcini of Jim Sinclair's JSMineSet.com, whose incisive daily commentaries are widely viewed as a great starting point for evaluating gold events. Norcini said then: "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."

Norcini was still complaining about this last week. But then, boom! On Friday, Comex gold jumped $43.10 an ounce, and it went on to gain another $19.50 by Wednesday's close (although Wednesday itself saw a $9.20 loss). This ended gold's month-long oscillation below $750.

GoldMoney.com's veteran James Turk commented: "It is rare for gold to achieve such a huge one-day gain. In fact, I checked my records for the past twenty years and found only one other ... the other occurrence was on Sept. 17, 2008, barely two months ago. That rally also took gold back above $800."

What happened?

In the immediate sense, there's a consensus among gold bugs: the Comex option expiry, which happened at 4:30 p.m. Eastern time on Thursday. Gold bugs have long argued that the writers of these options trade aggressively to prevent them closing with value. Since gold open interest (the total number of gold contracts outstanding) dropped 3.1% by Tuesday's close as gold rose some $75, it does seem that short selling by someone had indeed been repressing gold, with subsequent short covering causing open interest to fall.

In a larger sense, the move appears to be a triumph for LeMetropoleCafe.com's system of tracking gold premiums in India.

This is done to assess if the world's largest gold buyer is in a mood to bid the global market for supplies. Last week, I reported that the premium over world gold in India had been very high, indicating strong Indian demand, and wrote: "This sort of reading is generally followed by a rise in the gold price." It was.

More conventional gold bugs think gold equities are a leading indicator of any gold price rise. For a long time, these have been very sluggish. But now they have responded with enthusiasm. The Philadelphia Gold Silver Index (XAU) 44% and the Amex Gold Bugs Index by 46% since Thursday evening. They were even up Wednesday when gold was down, causing Dow Theory Letters' Richard Russell's to ask: "Something different happening here?

What next? LeMetropole Cafe now reports that gold premiums have disappeared in India. But it expresses the view that they will return after a few days.

Not everyone is bullish. The well-connected, institutionally-oriented Gartman Letter shorted gold on Monday (at $813 with an $837 stop). This experienced observer is often scathing about gold bugs. (Call him a "gold Grinch" -- they're just as fanatical.) The Gartman Letter said it was motivated by the suddenness of the move and the clear evidence of large-scale short covering.

But on Wednesday, Gartman produced another card. It announced it believed a large seller had appeared around $825.

Gartman is an outspoken opponent of the LeMetropole Cafe thesis that the gold price has been manipulated by public and private interests. It does not usually use this sort of argument when discussing the metal. But Gartman is exceptionally well-informed, and its observation deserves attention.

Still, even Gartman apparently thinks the "seller" (if there is one) has retreated.

Until India shows its hand, gold bulls take comfort that the sharp rise does not seem to have inhibited the astonishing appetite for small gold items in the West, as tracked by the Tulving Co.'s bid page:

http://www.tulving.com/New%20Pages/buying_bullion_coins.html

Or by 24hgold's eBay tracking page:

http://www.24hgold.com/english/buy_sell_gold_coins.aspx?co_id=0

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