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Peter Brimelow: Bugs triumphant about gold, terrified about U.S.

Section: Daily Dispatches

By Peter Brimelow
Monday, March 23, 2009

NEW YORK -- Last Wednesday's Federal Reserve debt monetization announcement was the event gold bugs have been anticipating all their professional lives, or at least since the last gold bull market blowoff 30 years ago. They are triumphant -- and terrified.

Australia's The Privateer said on Sunday: "On March 18 ... U.S. Fed announced plans to begin to buy U.S. government debt paper with Federal Reserve Notes (aka U.S. Dollars) created out of thin air. ... On our Web site, we announced that decision as the 'END GAME.' That is precisely what it is."

Even more impressive: the reaction of less committed gold gazers. The Gartman Letter, which had been debating shorting gold a few days earlier, remarked:
"We thought 'quantitative easing' was a matter of time, a matter of 'when, not if.' Yesterday, 'when' came."
And Gartman bought a significant gold position.

Dow Theory Letters' Richard Russell was even more dramatic. On Friday he said: "I've written in the past that if you want to make 'BIG' money in the market, you have to take an over-sized position and be dead right on the trend. The last time I did that was in late 1958. ... I did extremely well on that fateful ride, and I never again had the nerve to take that large a position -- until now.

"I started building my gold position in 1999. ... My gold position now is comparable to my market position back in 1958 ... maybe 30% of my total worth. Why have I done this again?

"1) I believe gold is in a major or primary bull market. I believe the gold bull market is currently in its second phase. This is the phase where sophisticated and seasoned investors and the funds enter the market. ...

"2) If there is only one bull market in progress, it will attract broad new coverage and attention -- just as Thursday's $70 rise in gold did.

"3) I believe the bear market in stocks will continue erratically and the deflationary trends will persist. ... Bernanke will stop at nothing (including massive printing of dollars) in his effort to halt deflation."

Some gold enthusiasts are even sensing that gold shares might start outperforming gold -- after a long phase of dismal relative behavior.

GoldMoney's James Turk said in his Freemarket Gold and Money Report on Sunday: "The mining stocks remain one of the few areas of strength within the stock market. ... I particularly like Friday's action. The Phlx Gold Silver Index (XAU) shrugged off the early weakness in gold, and also the late-day slide in the Dow Jones Industrials and other major averages."

This point is also made at Bill Murphy's LeMetropoleCafe. His writers have a particular fear of late selloffs in the gold indices because they suspect it heralds market manipulation. But there was no sell-off on Friday.

A gold-skeptic recruit to this view is long-term chartist Martin Pring. In his Weekly InfoMovie Report, he wrote: "The Market Vectors ETF (GDX) is right at this potential reverse head and shoulders. ... If the shares can complete the pattern with a break above $37.50, they will probably lead the price of the yellow metal higher. ... Gold could be on the verge of a historic breakout."

GDX closed Friday at $37.55.

But while the gold bugs are triumphant, they are terrified about the implications for the U.S. economy.
Martin Pring writes: "The Fed's policy of buying an unprecedented amount bonds, in effect monetizing the debt, represents an extremely high-risk gamble. ... It will require some uncharacteristically clever sleight of hand and will power down the road to preclude extreme inflationary pressures from building."

James Turk wonders: "How bad is it out there that the Fed would take this big gamble to risk hyperinflating the dollar to try saving insolvent banks? What does Bernanke see that he would expand the Federal Reserve's balance sheet by another $1.2 trillion? What is he not telling us?"

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