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Peter Brimelow: Gold glitters but some radical bugs are cautious

Section: Daily Dispatches

By Peter Brimelow
Sunday, January 4, 2008

NEW YORK -- The gold bugs are gathering. But, oddly, some more radical ones are currently more cautious.

Comex gold on Dec. 31 rose $28 intraday to close up $14.30 on heavy late volume. In the past five trading days, Comex gold was up $46.20, or 5.5%. Volume figures reportedly suggest that serious buying, not idle drifting, was involved.

Moreover, for gold bugs focused on the traditional view of the metal as an inflation hedge, the macroeconomic outlook can only be described as absurdly favorable.

GoldMoney's James Turk says in his Jan. 2 commentary: "The outlook for the U.S. dollar continues to worsen as ... the Fed's zero-interest-rate policy removes any incentive to hold dollars in an environment where ... rapid money growth portends a surge in inflation. M3 ... grew by about 10% in 2008, near record highs. ... M2 and M1 increased over the past year by about 10% and 17% respectively. These rates of growth in the quantity of dollar currency are highly inflationary. ... The Federal Reserve has thrown away the rulebook."

Turk uses's proxy for the late lamented M3.

This is also the view of Australia 's The Privateer: "There is no legal or political limit to monetary inflation -- except one ... confidence in the future purchasing power of the money. 2008 was the year in which that confidence came under increasing pressure. 2009 is the year when that confidence will break down. ...

"Since September, the Fed's balance sheet has grown from $U.S. 900 billion to $U.S 2. TRILLION plus, as the U.S. central bank has created new money and lent it out through all its new programs. The Fed now has plans to buy up U.S. mortgage-backed debt and consumer debt paper. That will take its balance sheet up to about $U.S. 3 TRILLION."

Privateer's free $US 5x3 Point and Figure chart turned up and broke through its recent downtrend this week:

And since their late October lows, the Amex Gold Bugs Index (HUI) has risen 93%. Traditionally, the predictive abilities of the gold shares have been accorded great respect, although the metal has far outperformed the shares in recent years.

Le Metropole Cafe's Bill Murphy, leader of a faction of radical gold bugs, is excited for a completely different, if trickier, reason. He wrote on New Year's Eve: "Gold's late burst was exactly how it traded the day before Christmas, the day after Christmas and today ... times when a great number of traders had left for the day, or were not paying attention. That is NO FLUKE! Not three times over a week's period of time. Somebody BIG is playing for BIG marbles."

Murphy's instincts were endorsed by a very different operator, The Gartman Letter's Dennis Gartman, who went long a few days earlier. Gartman, who has broad following among institutions, says he uses technical factors superimposed on a macroeconomic appreciation in his trading decisions. He advanced both types of reasons last week. But TGL is widely believed to be well informed as to the intentions of large players -- i.e., Murphy's "Somebody BIG ... playing for BIG marbles."

Ironically, LeMetropoleCafe also provides the only serious counter arguments to gold bullishness, albeit perhaps only short term. The site notes that physical markets are not supporting the surge -- there are deep discounts in the Indian bullion markets and signs of weak demand in Turkey and the Middle East. This is in sharp contrast to the situation for example this fall.

Of course, the LeMetropoleCafe's house belief is that gold manipulation has been going on a long time and ultimately stemmed from the authorities suppressing gold to prolong an unsustainable financial bubble. (Well?)
Perhaps they have been taking a snooze over the Christmas season.

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