Wholesale prices reported sharply higher just after metals prices are smashed

Section:

By John Brimelow
CBSMarketWatch
Thursday, April 22, 2004

http://www.marketwatch.com/news/story.asp?
siteid=yhoo&dist=yhoosnap&guid=%7B5156846C%2DB1C3%2D439A%2DAF7B%
2DEEB86E95A8A8%7D&

NEW YORK -- Gold is back below $400 -- but it may be about
to perform its version of the Indian Rope Trick. Again.

I first reported on this phenomenon in a piece in February, when
gold had also broken below $400. Subsequently, of course,
gold bounced back, to a high of $432 on March 31.

Now we've returned to fun and games. Gold has come crashing
down to test its 200-day moving average just below $390
Wednesday. Half that fall was in just 3 days last week.

Gold shares have fallen 20 percent in the same period. There is
gloom and despondency everywhere.

And puzzlement. The return of measurable inflation at home --
mounting chaos and bloodshed in the Middle East -- shouldn't
these be good for gold?

But the market action is undeniably intimidating. As adroit
traders Refco Research, currently the proud owners of an
enormously profitable silver short, said of gold on their Web
site Wednesday night:

"Despite decent ... physical interest; terrorist incidents ...
the prospects of an extremely tense summer, we cannot
bring ourselves to think long until current downside
momentum eases."

My view: It will. The bears have inserted their paws (at
least) into what is likely to be a very vicious trap.

The critical factor: the news from India, the world's largest
buyer. As I explained when gold got below $400 in early
February, it is possible to figure out if India is actively
importing gold by comparing the domestic price of gold
with the appropriately timed world price. Bill Murphy's
LeMetropoleCafe site carries my calculations every
evening.

The principle is demonstrated on the Web site of India's
National Multi-Commodity Exchange ("Commodity Study"
section, gold segment).

Since gold slipped to $400 last week, India has been
showing enormous premiums. Basically, the domestic
price now exceeds the world price by more than $10. This
means there will be massive imports.

This Indian premium is far higher than when gold went
below $400 earlier this year. In fact, and significantly, the
last time premiums of more than $10 were seen, briefly,
was at the bottom of the major gold slide in March 2003.

I conclude the Indians will be dining on bear curry.

There are other reasons to expect a rally. The gold market
shows all the hallmarks of an actively promoted short
position. In the final hour of stock trading on Tuesday, gold
shares staged one of their biggest and quickest drops of
recent times.

This was followed by a quick and massive ($5) decline in
gold on ACCESS, the overnight electronic trading system
operated by Comex.

Since Tokyo and the other Far Eastern markets currently
only open at 8 p.m. Eastern, for the first few hours after
New York's close the only global counterparty on ACCESS
is the Pacific Ocean. That's the easiest time of the day to
move the gold price. And that's when it happened.

But shorting is a dangerous game. The weak longs have
gone. And MarketVane's Bullish Consensus for gold dropped
Wednesday evening to 67 percent.

For the past couple of years, readings in the 60s have marked
bottoms.

Many shares have been savaged to interesting levels.
Especially if the dollar continues to pummel the South African
rand, Durban Deep and Harmony will be exceptional value.

I am intrigued by the special situation Crystallex.

Two no-load gold funds worth noting are Tocqueville Gold,
where the widely published manager plays a leadership role
in the gold world, and Gabelli Gold where the manager --
despite his comparative youth -- is actually the
longest-serving in the sector.

In gold, scar tissue is inevitable -- and it helps.

-----------------

John Brimelow is a stockbroker and a brother of Peter
Brimelow, who is a CBS MarketWatch columnist. He can
be reached through www.johnbrimelow.com.

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RECOMMENDED INTERNET SITES
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Free sites:

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http://www.financialsense.com

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http://www.minersmanual.com/minernews.html

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http://www.goldcolony.com

http://www.miningstocks.com

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http://www.321gold.com

http://www.SilverSeek.com

http://www.investmentrarities.com

http://www.kuik.com/KH/KH.html
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http://www.plata.com.mx/plata/plata/english.htm
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Subscription site:

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http://www.hsletter.com

Eagle Ranch discussion site:

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Ted Butler silver commentary archive:

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