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Peter Brimelow: Is gold melting up?

Section: Daily Dispatches

By Peter Brimelow
Monday, October 1, 2007

NEW YORK -- Could gold be "melting up"? Some letters think so.

Friday's close in New York, $10.70 above the previous week's close at $743.10, was the highest monthly close ever. (Gold briefly cleared $800 on an intra-month basis in back in 1980.)

The ultra-long term $US 5 X 3 Point and Figure chart made available freely by the public-spirited The Privateer Website looks stunningly handsome:

And after all, gold bugs reason, just about every other commodity price has smashed through to all-time highs recently. Why not gold?

This is the point of view of James Turk in his Freemarket Gold & Money Report, which has supplied a sophisticated assessment of gold for more than 20 years. Turk writes:

"A blow-off leg in gold is looking increasingly likely once it clears $1,000. Think about this a moment. The US dollar is now trading at record lows, with no bottom in sight. Commodity prices are soaring, with wheat at over $9 per bushel and crude oil looking increasingly well supported over $80 per barrel. Gold is rising against all the world's currencies, indicating that fiat national currencies backed by nothing but promises from over-indebted governments are becoming increasingly doubted. Britain just experienced the world's biggest bank run since the 1930s. ... We should be mentally prepared for the possibility that gold exceeds $1,000 within the next few months, and then just keeps climbing to a blow-off high.

"How high? A doubling of the gold price has happened before in blow-offs like the one I am describing, so $1,500 or more is not out of the question."

Sentiment indicators don't rule this out.

True, MarketVane's Bullish Consensus for gold jumped 3 points on Friday to 90 percent, which is the highest since May 2006 -- when gold made its previous recent high. On the other hand, back then gold spent a full two weeks gamboling happily with confidence in the 90s. Furthermore, letters with a direct commercial interest in the public's appetite for the gold story are complaining.

Bill Murphy, whose Le Metropole Cafe Web site depends on subscriptions, laments: "What is even more remarkable is the lack of enthusiasm over this coming historic move to the upside. The Cafe Sentiment Indicator fell to a 3 yesterday, as gold made a 28-today thus far. I just heard from a veteran broker of a major Planet Wall Street firm who specializes in the gold shares. He said his 'shop was very quiet.'

"What amazes me is how many Cafe members, both paying and trial members, have dropped by the wayside over the years and continue to do so."

Other much-cited evidence: the poor performance of the junior gold shares, the purest play on stock-market gold optimism. Neither the Amex Gold Bugs Index (HUI)nor the Philadelphia Stock Exchange Gold-Silver Index (XAU), indices of major gold shares have made new highs despite gold's performance. Reportedly, gold share mutual funds continue to experience redemptions.

The primary logical obstacle to a melt-up is the possibility of intensified central bank sales. Le Metropole Cafe was pleased last week to see Wall Street establishmentarian Citigroup Inc. acknowledging this possibility. It said: "Gold undoubtedly faced headwinds this year from resurgent central bank selling, which was clearly timed to cap the gold price."

Gold bugs, much scarred by two hard decades, worry that ballooning open interest on Comex suggests a determined, possibly policy-motivated, seller is present. Nevertheless, this is a market to watch.

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