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Peter Brimelow: Gold finishes a fabulous February

Section: Daily Dispatches

By Peter Brimelow
Sunday, March 2, 2008

NEW YORK -- Gold finishes a fabulous February, and the gold bugs' attention is turning to gold shares, and silver.

When I last wrote about gold, with the pleasingly prescient headline "Gold's path to $1,000 now clear?," bullion had just staged a three day-bounce back after a terrible beating received on Feb 1st.

Since then, as Australia's The Privateer put it recently: "The last two weeks have been absolutely stellar for gold, as it has moved three-quarters of the way between $U.S. 900 and the big $U.S. 1,000 over that period."

The Privateer's $U.S. 5x3 point-and-figure gold chart is designed to respond glacially to gold price changes. Now it has been struck with scalding global warming: It has changed 18 times in February and now looks spectacular:

The questions now interesting the gold bug investment letters are:

-- Can gold go much further, percentage-wise?

-- What does this mean for silver?

-- Why aren't the wretched gold shares moving?

Silver leaped a stunning 9.7% in the past week, with Comex May silver closing up $1.767 at $19.915. The Privateer was a little dismissive: "For many of those who are dipping their toes into the precious metals markets, gold is simply seen as being too expensive. That is why silver ('the poor man's gold') has outperformed gold so far this year."

But other observers were more excited. At Le Metropole Cafe, Bill Murphy, who has followed gold closely for years, was motivated to put out a special Sunday alert: "To say that silver has been trading differently the past couple of months is an understatement. ... As a veteran commodities trader, I could see, on a daily basis, somebody quietly accumulating silver on price dips ... never pushing the envelope, but buying silver at times when it normally would get trashed."

At Jim Sinclair's MineSet, Dan Norcini plunged into the technical entrails of silver futures trading -- the "commitments of traders" supplied by the Commodity Futures Trading Commission -- and pulled out an unusual augury: "The funds have not been reducing their net long position. ... The funds continue to buy. Guess who is doing the selling -- the small specs! Apparently, some of the public is trying to pick a top in the silver market. They have built up the largest outright short position in two years. Talk about a bullish signal. The most undercapitalized traders on the planet are adding new silver shorts as the market breaks into a 28-year high."

Norcini adds: "Remember, it is a new calendar month on Monday and that often means new allocations of fund money to the markets. If that occurs, the silver shorts are in serious, serious trouble as the longs will show them not one ounce of mercy. Blood in the water draws sharks and the silver shorts are not only bleeding, they are hemorrhaging massively."

But gold shares, of course, continue to break their owners' hearts. GoldMoney's James Turk, in this weekend's FreeMarket Gold & Money Report, shows with a 20-year chart that the ratio of gold to the Philadelphia Gold and Silver Index has only been meaningfully lower briefly once -- right before the gold upswing began in 2001.

Perhaps the answer to the question if the shares will notice $975 gold is the same as that provided by The Privateer, discussing the general lack of attention paid by the public to the gold surge: In "the early 1980s, when the Dow Jones Industrial Average was challenging the all-time highs it had set in 1969 and slightly exceeded in 1972-73. ... It took quite a while, until mid-late 1985, in fact, for the majority of people to finally be satisfied that the Dow wasn't going to fail at the 1,000-1,100 level as it had done for the previous 15 years. Once that happened, the markets took off. ..."

Privateer's prediction: "That is what is in store for gold, as and when it exceeds $1,000 for the first time."

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