Peter Brimelow: Winning week for gold leaves bugs hopeful but wary

By Peter Brimelow
MarketWatch.com
Monday, April 12, 2010

http://www.marketwatch.com/story/winning-week-for-gold-leaves-bugs-hopef...

Gold closed last week at its high for 2010 and there are signs it may continue. But while gold shares were also up, they are generally well below their early January highs, a possible non-confirmation. And battle-scarred gold bugs are also worrying about signs that their traditional enemy, the Large Unknown New York Seller, has returned.

So gold's Wall of Worry is close, and steep.

One thing that has transformed completely since I last addressed the gold market is the chart outlook. Back then, for example, Pring.com's Martin Pring was talking of a head and shoulders top -- a bearish chart pattern -- and a likely major gold sell signal.

Now the reverse, a bullish "inverse head and shoulders" has occurred. Pring's two bellwethers -- the SPDR Gold ETF (GLD) and the market Vectors Gold Miners ETF (GDX) -- both achieved his specified breakouts of $113 and $47 respectively.

Pring thoughtfully comments in his latest weekly: "Typically, when the yellow metal experiences a breakout from a consolidation pattern like this a very worthwhile rally follows."

(Pring particularly likes the silver outlook: "Silver may well experience a great rally in the period ahead.")

Goldmoney.com's chart-sensitive James Turk -- one of the group I call the "radical gold bugs" who argue the metal's price has been massively manipulated by a cartel of public and private interests -- is also delighted by recent technical developments. But Turk carries enough battle scars to be sensitive to storm clouds:

"As gold climbed higher this past week, open interest on the Comex has soared. Clearly, the gold cartel tried to stop gold at $1,140 again, but this time they failed. However ... the gold cartel may shake out some weak players on the Comex, which could cause a correction in the gold price back to test support at the $1,140 breakout level."

Australia's The Privateer, an equally scarred veteran, is also concerned: "There has also been a HUGE turnaround in open interest on the U.S. paper futures markets too. Totals on all contracts have surged from 467,000 on March 30 to 521,000 on April 8."

(In essence, this means that buyers have been met with fresh supply, so that existing contracts have not been bid up.)

Nevertheless, The Privateer's magisterial $US 5x3 point-and-figure chart is now showing the biggest breakout since the huge November run. See chart:

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

One factor has not changed decisively this month: the state of the physical market, as tracked by the local gold premiums reported by Bill Murphy's LeMetropoleCafe.com. These continued to indicate buying most of the week. Even on Friday, they were only slightly negative. In large part this is due to the strength of the Indian rupee. LeMetropleCafe.com's conclusion: Any pullback will meet solid support.

Murphy is also adamant that there is another element in the market: independent traders now betting against the Unknown Seller, with whom they were previously prone to ally. Murphy thinks that there is now too much limelight shining to allow a very blatant repression. Another floodlight switched on at the New York Post on April 11. See article here:

http://www.nypost.com/p/news/business/metal_are_in_the_pits_2arTlGNbMK7m...

More prosaically, Murphy's site also points out open interest got materially higher in November that and sentiment indicators, including the Hulbert Gold Newsletter Sentiment Indicator, are not yet as high, pleasing to contrarians.

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