Peter Brimelow: Is gold in a perfect (bullish) storm?

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By Peter Brimelow
MarketWatch.com
Monday, December 6, 2010

http://www.marketwatch.com/story/is-gold-in-a-perfect-bullish-storm-2010...

NEW YORK -- A good week for gold -- especially because China finally seems to be chiming in.

On Friday, gold for February delivery finished at $1,406.20, only $3.10 below the November 9 record close, having risen $42.20 or 2.94% on the week. The gold shares responded with enthusiasm, with the Gold Bugs Index (HUI) leaping nearly 8%. In recent years, gold shares have not always conformed bullion's action. When it happens, it's generally regarded as bullish.

Significantly, this was not just a move in U.S. dollars. In fact, gold in sterling, euros, and yen hit record highs during the week.

Of course the week also saw plenty of alarming economic and financial news from both Europe and America, all tending to cast doubt on the commitment of the European Central Bank and the Fed to the integrity of their respective currencies.

... Dispatch continues below ...



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Australia's usually very sober webzine The Privateer was even moved to make a joke:

"On Sunday, December 5, the venerable CBS 'current affairs' program 60 Minutes will be airing an interview with Fed Chairman Ben Bernanke. We suggest a suitable intro would be the helicopter scene in 'Apocalypse Now,' complete with the full soundtrack."

That's a reference to Bernanke's famous graphic endorsement of inflationary policies.

However, the news that most excited the gold bugs came not from the Atlantic basin but from China, and may not yet have been fully appreciated by the market. The head of the Shanghai Gold Exchange told a conference there that Chinese imports of gold for 2010 through October were 209.7 tonnes, compared to 45 tonnes for the whole of 2009.

This is a bombshell -- and not just because China has never disclosed its gold imports before. One of the correspondents at Bill Murphy's LeMetropoleCafe website said that he had "always been skeptical of the Chinese demand story in world gold-price formation, on the grounds that Chinese production growth has kept pace with reported consumption -- and a 45-tonne import number for 2009 vindicates this stance. ... But 209 tonnes in 10 months is a horse of a different color. ... It means China might actually be capable of getting into India's league as an importer."

India, of course, has long been the world’s largest importer of gold by a wide margin.

Veteran gold observer Jeff Christian of CPM Group told the Wall Street Journal: "Everybody in the gold market knew there was a surge in investment demand, but they didn't know it was China."

Standard Bank offered some calculations on Friday concluding that investment demand for gold in China "may be as high as 180 tonnes in 2010 -- a rise of 70 percent year over year."

What's happening? The Shanghai official attributed the surge to inflation fears amongst the Chinese public. These are not going to be assuaged any time soon.

Not to be upstaged, according to LeMetropoleCafe, an official of the Bombay Bullion Association on Friday suggested that Indian imports this year might be 700 tonnes, 46 percent above last year. A strong rupee this week apparently enabled the Indians to keep buying from overseas. UBS reported on Thursday above-average sales to India.

The bugs argue that because of this Chinese and Indian news, gold is in a radically different posture than it was around the end of 2008. Then, Western buying motivated by the financial crisis was met by heavy selling from traditional importing markets. Now, in contrast, the importers are buying.

As a LeMetropoleCafe correspondent remarked on Friday, gold seems to have met a perfect (bullish) storm.

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