Peter Brimelow: Gold crawls back -- radical bugs vindicated?

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By Peter Brimelow
MarketWatch.com
Thursday, August 5, 2010

http://www.marketwatch.com/story/gold-crawls-back-on-physical-demand-201...

NEW YORK -- Gold seems to have stemmed its recent summer slide -- perhaps vindicating the gold bugs who watch physical demand, primarily from India.

Last week, when I wrote about gold, gloom was (not for the first time) widespread. Gold had plunged 2.5% in two days to a level last seen in April. The gold-oriented Aden Report was alarmed, suggesting $1,135 and even $1,080 possible. And The Gartman Letter, which is closely read on many professional trading desks, was even contemplating shorting the metal.

(I noted many in the pro-gold camp would -- rather nastily -- see Gartman's move as a "reliable reverse indicator.")

... Dispatch continues below ...



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As it happened, that was about the recent low. (Blind luck, of course.) Gold has crawled up some 3% since then, briefly penetrating $1,200 on Wednesday. Can it go further?

Some in the gold camp are saying it does not matter. They are pointing to the dramatic agreed $7.1 billion takeover by Kinross Gold Corp. of the West African gold-mine developer Red Back Mining Inc. Owners of Red Back have made 700% from the 2008 low.

The point is that once gold gets to a level at which average gold deposits are viable, the discoverers of somewhat better ones make fortunes. So do patient prospectors amongst the junior gold names. It is a great time for what some deride as "rock hounds."

This is what happened during the circa-$300 plateau in gold that occurred 1993-96, when it was considered a healthy price.

This summer's gold decline was stopped by an eruption of physical buying from Asia -- just as the radical gold bugs I quoted last week expected.

Edel Tully, the UBS gold analyst, noted on Tuesday: "UBS daily sales to India were the second highest recorded this year. Perhaps more important, the five-day moving average of our sales index currently sits at its greatest level since late November 2008."

Needless to say this has greatly delighted the hard men of the gold world who are gathered around Bill Murphy at the LeMetropoleCafe Web site. I call them the "radical gold bugs."

It fits exactly with Murphy's comment last week: "As long as the physical market holds up, it is only a matter of time before gold and silver go back up."

This group stresses the seasonal demand surge from India, which usually is seen from late August into early next year.

A somewhat different group of gold enthusiasts is greatly excited by indications from China this week that it will permit broader and more flexible activity in the local gold market.

Nevertheless, gold has not healed the enormous technical damage inflicted by this summer's slide.

The Aden Forecast hotline posted last night equivocates: "Today's rise in gold is starting to look promising, but it's too soon to tell. If gold (basis December) now stays above $1,191, it will be stabilizing, but not until gold rises and stays above $1,202 will the decline be over. Below $1,162 means more weakness to come, and gold could then possibly test the major trend near $1,085. Some gold shares are oversold and rising from this level. The XAU index is in a solid major uptrend above 164. Keep your positions."

But Dow Theory Letters' Richard Russell offered a longer perspective in his posting on Wednesday night: "I sense a real battle in the gold market, with the primary bull trend pushing gold higher and the powerful anti-gold elements doing all they can to keep the price of gold down. Obviously, the next round in the gold battle is to move December gold into the $1,300s."

"Remember the struggle to get gold over $1,000? That battle is forgotten now. It's been one long brutal war for and against gold. But I have faith in the primary trend. The primary bull trend of gold is more powerful than all of the world's central banks taken together."

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