Reg Howe: Decline in derivatives signals central banks'' retreat with gold

Section:

By Peter Brimelow
CBSMarketWatch.com
Monday, December 12, 2005

http://www.marketwatch.com/news/story.asp?guid=%7BC0FD3D7D%2DB309%
2D4F9F%2D99D7%2DED86A002EAD2%7D&;siteid=mktw

NEW YORK -- Gold gaps upward -- and the explanation may be alarming.

The Tokyo Commodity Exchange closed its Monday session (9 p.m. EST)
up 50 yen -- the limit.

Spot gold (for immediate physical delivery) was up over $5 from the
New York close -- yet another 25-year high.

What on earth is going on?

Sunday night, I called around several letter editors, whom I've been
talking to about gold for depressingly close to 30 years. Why is gold
going up? Why now?

Mostly, they are utterly stunned. Traditional gold bugs, they work
within the historic gold/inflation model, which is providing no
answers.

Except Bill Murphy of LeMetropolecafe.com. (Full disclosure: my
brother John, a stockbroker who has written for MarketWatch, also
writes for Murphy's site).

Murphy's dark view for several years has been that central banks, as
part of a fine-tuning strategy, have facilitated short positions
beyond the reasonable. The chickens are coming to roost, in his
opinion.

This theory that there is an official sector-supported "gold cartel"
suppressing the metal's price is almost universally regarded as
crankish.

But given the violence of the action Sunday evening -- and indeed
over the last few days -- this short covering explanation seems
unavoidable.

Gold's performance has been truly formidable. Richard Russell of Dow
Theory Letters quoted one of his many alert correspondents Friday
evening:

"Spring of 1974. Gold hits 180 and is 24% above its 34-week moving
average (in a bull market).

"Winter of 1979. Gold is over 500 and 35% above its 34-week MA (in a
bull market).

"Early 1980. Gold hits $850 and is 53% above its 34-week MA (in a
bull market).

"Early 1983. Gold is $509 and 17% above its 34-week MA (in a bear
market).

"Autumn of 1986. Gold hits $480 and is 25% above its 34-week MA (in a
bear market).

"Today. Gold is at $520 and 14% above its 34-week MA (in a bull
market)."

Very interesting. But equity investors demand to know: When do the
gold shares go up?

Traditionally, gold shares amplify gold moves three or four fold. But
in the last few weeks, the ratio has been dismal.

My old friend Ian MacAvity, of the Toronto-based Deliberations
letter, feels the promiscuous behavior of U.S. investment banks is to
blame -- encouraging the mining companies to issue too much stock as
gold began its two-year rally, causing too much dilution.

MacAvity draws an analogy with the behavior of the rapacious
Australian brokerage community in 1986 through 1989, which destroyed
U.S. gold investor confidence in that region's gold shares to an
extent still not fully recovered.

This is what generalist hedge fund managers really mean when they
express hostility to gold shares because of "poor management" and
weak earnings (per share).

The gold mining companies can reasonably point to the very unusual
explosion of oil costs compared to gold in the past several quarters.

But that has violently reversed since September, without any
appreciable benefit to gold equities.
Perhaps the only thing to do is accept that the action over the last
weeks has been exceptional and trust to long-term charts. Martin
Pring observes in his latest weekly that recent movements "could well
signal the blow-off phase for this stage of the (gold bullion) bull
market."

But it is in blow-off phases of gold moves that most of the capital
gains in the gold shares are made.

And if the official sector has been so active in managing markets
behind the scenes, reality could intrude with a bang.

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