Peter Brimelow: Gold on verge of historic breakout?

By Peter Brimelow
MarketWatch.com
Monday, May 25, 2009

http://www.marketwatch.com/story/gold-on-verge-of-historic-breakout?

NEW YORK -- Is this it for gold? After a good week, gold watchers of all stripes think it may be. Again.

After Friday's $956.50 close, Martin Pring -- decidedly not a gold bug -- set the tone in his Weekly InfoMovie Report:

"Gold could be on the verge of a historical breakout. Watch that $990-1,000 area like a hawk."

Pring has always laid very heavy emphasis on the predictive power of gold shares. His analysis:

"The gold share ETF, the GDX [Market Vectors Gold Miners ETF has just broken out from a major base. Since the shares often lead the metal, this is a bullish factor."

Dow Theory Letters' Richard Russell has also been interested in GDX. On Tuesday he noted a "sensational" breakout. After Friday he said this:

"Ordinarily I would only add gold items on a correction, but gold seems on a roll now, so I added GDX."

Two developments are causing the excitement about gold. From a charting point of view, gold shares are generally agreed to have broken out, meaning that gold itself could well be about to do something very important. Australia's The Privateer (whose free U.S.-dollar 5X3 Point-and-Figure chart looks very handsome after Friday) describes the situation:

"What is being traced ... is a gigantic 'reverse' head-and-shoulders formation. The trading range between US$900 and US$1,000 was broken early in April. Over the month of April, a tighter range between US$870-US$910 was established. Now gold has broken back above that range. The 'right shoulder' on the 'reverse' head-and-shoulders formation is getting wider. ... There are two major resistance points. The first is at US$955 ... where the chart is now. The second is, of course, at US$1,000, the level reached in March 2008 and again in February 2009."

Several other commentators see the same thing.

The second bullish gold development: general economic conditions.

As the Gartman Letter noted on Wednesday: "The dollar does look vulnerable. ... Pushing government steadily leftward, the Obama administration has set up the possibility of a U.S. dollar rout. ... If this persists, commodity prices generally shall rise and rise materially, and gold shall too."

Dan Norcini at the JSMineset Web site saw things similarly on Friday. He offered "some remarks concerning the collapse in the long bond. Quite frankly, its weekly price chart has become a technical train wreck. ... While some of the immediate demand/supply fundamentals of various commodity markets are not particularly bullish, the fact is that the big funds are looking past all of that and are rushing in to buy across the board based on inflation expectations. ... The inexorable and relentless rise in the Continuous Commodity Index (CCI) presents the gold bears with a formidable problem. It is difficult to shove the price of gold down for long when the entire commodity world is rising."

FGMR's James Turk is so intrigued that in this weekend's issue he considers altering his normally cautious trading style:

"I think we are very close (7-10 months) to the beginning of a hyperinflationary spiral. ... If I am right ... there obviously is an exceptional opportunity to load up (i.e., a leveraged position) by buying gold."

But Turk has his fair share of trading scars and more. He warns: "Comex options expire this Tuesday, May 26, and options in the much larger over-the-counter market expire a couple of days later. We all know what has happened regularly over the years on option expiry. The gold cartel slams gold."

Turk is part of a faction I call the radical gold bugs, because they watch not merely inflation but what they believe to be the authorities' manipulation of the gold price to preserve the illusion of financial stability. Their expectations of a gold breakout have been frustrated repeatedly.

Nevertheless, Turk adds: "One of these days (and there's at least a 50 percent chance now is that time), gold will just keep rising."

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