Peter Brimelow: Gold hit hard but bugs buoyant

By Peter Brimelow
MarketWatch.com
Monday, February 8, 2010

http://www.marketwatch.com/story/gold-hit-hard-but-bugs-buoyant-2010-02-08

NEW YORK -- Gold had a pretty rough week, but some gold bugs remain remarkably cheerful.

Last Friday's down-$10.20 close at $1,052.80 in New York was the lowest since October 30th. Gold has now completely erased the spectacular November rally which carried it over $1,200.

True, gold and gold shares did participate enthusiastically in the peculiar late Friday afternoon rally which brightened the general stock scene. Nyse Arca Gold Bugs (HUI) and Phlx Gold Silver Index (XAU) in particular both rose over 5%, far outpacing the general market.

No one really knows whether to take this seriously -- gold normally barely trades late on Fridays. The possibility of window dressing is obvious.

What next?

The chart damage done last week was horrible. Martin Pring noted in his Weekly InfoMovie Report that gold "has completed an upward sloping head and shoulders pattern and has just violated the major up trendline ... that suggests to me ... a more protracted correction."

The Australian-based service The Privateer's famous $US 5X3 point-and-figure chart -- available here -- turned down and now looks dreadful.

And JSMineset's Dan Norcini came straight to the point about the gold shares on Thursday evening: "The HUI chart stinks -- not much more can be said than that. It has to get back above 400 to generate the least bit of bullish enthusiasm."

Of course last week was a pretty bloodcurdling week to own anything. The Gartman Letter's explanation of why it was not evicted from its gold position, as it frequently is in waterfall declines, has a lot of resonance: "We hold what we hold out of fear of the future, not out of love for gold."

Nevertheless, two types of gold bugs remain remarkably cheerful.

The truly hard-core financial system skeptics actually found last week delicious. They are exemplified by Australia's The Privateer, which (despite its grim chart) happily noted:

"The Global Financial Crisis has come back, but this time, it is not the risk of banks going under -- it is the risk of "sovereign nations" going under. Which sovereign nations? European ones, or more precisely peripheral European ones along the shore of the Mediterranean Sea.

"It was the same old herd reaction. Get out of trades -- ANY trades -- that were going to strangle the holder of same, most of them financed with U.S. dollars. Grab the proceeds and convert them back to U.S. dollars. Stuff the dollars under the mattress or into Treasuries."

From The Privateer's standpoint, gold will inevitably benefit after the short-term panic reaction is succeeded by the long-term despair reaction.

Are you really sure the financial system skeptics are wrong?

The other cheerful group, with arguably a more useful short-term orientation, is the radical gold bugs who muster at Bill Murphy's Le Metropole Cafe. They argue that the gold price has long been manipulated. Its nose-diving in the face of intensified financial system threat is exactly what they would expect, so they are not alarmed. As Murphy himself said of Friday's early action:

"Gold managed a modest rally to $1067 when The Gold Cartel's traders reported for work at 3 a.m. New York time and straight down she went."

What really cheers up the Metropole Cafe crowd are the reports they are starting to see signs of strong buying of physical gold by the public in India and the Far East. They last reported this in late January and were rewarded with a $40 rally. Now apparently it is being seen again.

Le Metropole Cafe also publicized this weekend the fall of MarketVane's Bullish Consensus for gold to 70%. It comments that this indicator "... was last at this level (for a single day) on April 6 last year which marked the climax of the late winter selloff. ... Gold closed that day at $872.80."

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