Peter Brimelow: What if GATA is even slightly right?

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Not Just Inflation Fears Boosting Gold

By Peter Brimelow
MarketWatch.com
Monday, November 8, 2010

http://www.marketwatch.com/story/not-just-inflation-fears-boosting-gold-...

NEW YORK -- Gold goes onwards and upwards. And key letters say there are reasons beyond looming inflation.

The metal’s friends must be wondering if it gets any better. The CME December gold contract rose $50.10 (2.95%) last week to close at a record high of $1,397.70. Silver, which many old precious-metals hands consider to be a purer reflection of U.S. speculative sentiment, was up even more.

What's more, gold expressed in euros managed to get above the early-September high. Gold expressed in U.S. dollars had risen substantially since then, and gold bears were pointing at the lack of progress in gold in other major currencies as evidence that the move was vulnerable. That argument has now failed.

... Dispatch continues below ...



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Even the long-sluggish gold shares behaved. The ARCA Gold Bugs (HUI) managed (at last!) to get above the 2008 high, achieved when gold was first briefly over $1,000; it managed a 5.3% appreciation for the week. It closed at an all-time high.

Dow Theory Letters’ Richard Russell points out that the major-gold-share exchange-traded fund Market Vectors Gold Miners ETF (GDX) is now being outpaced by the junior-share vehicle Market Vectors Junior Gold Miners ETF (GDXJ).

Russell says this "indicates speculative interest is rising."

Still, sentiment indicators do not rule out gold going further. The Hulbert Gold Newsletter Sentiment Index (HGNSI) did rise during the week by 11.4 points to 55.3%, and MarketVane's Bullish Consensus for gold added 5 points to 79%.

But the HGNSI held for 26 business days at 59.2% during the run-up to the mid-October peak. And a correspondent on Bill Murphy's LeMetropoleCafe website reports that the MV Bullish Consensus "spent 12 days in the 80s in October, peaking at 85% on Oct. 14." So current levels are not necessarily vulnerable.

Plus, it's not as if gold hasn't tried to correct. It plunged over $30 on Wednesday, before recovering, and there was another frustrated breakdown on Friday.

As JSMineset's Trader Dan Norcini remarked after Friday's close: "This type of price action speaks volumes as it is indicative of strong investment demand that is obviously anticipating much higher prices ahead. Buyers are in control of gold; it is that simple."

What is happening? One common explanation: Investors are construing Fed Chairman Ben Bernanke’s QE2 proposals as meaning a return to the inflation-happy 1965-1980 era.

But two recent news events suggest more specific forces might be at work. Silver's outperformance of gold really kicked in after CFTC Commissioner Bart Chilton announced Oct. 26 that he took seriously allegations of manipulation in the silver market.

And after last Tuesday's elections, Rep. Ron Paul, the incoming chairman of the House Monetary Policy subcommittee, has repeated his intention to press for an audit of the Federal Reserve.

The radical gold bugs, my name for the group of bugs mustered behind LeMetropoleCafe's Murphy and the Gold Anti-Trust Action Committee, have long argued that much of the U.S. gold stock has been covertly fed into the market.

But more orthodox editors and most financial journalists dismissed as paranoid the idea that Washington would surreptitiously intervene in markets and waste taxpayer property to skew prices to the advantage of a particular group in the private sector.

Well, that idea doesn't look so paranoid post-TARP.

What if Murphy and his friends are only slightly right -- say, to the tune of a couple of thousand tonnes? (U.S. reserves are reportedly over 8,000 tonnes.)

Would anyone want to be short?

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