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Peter Brimelow: Gold price down, gold bugs up

Section: Daily Dispatches

By Peter Brimelow
Monday, September 28, 2009

NEW YORK -- Looks like the gold bugs had reason to be wary when gold broke through $1000. But now it's back down, they're not particularly worried.

When I last looked, Australia's "The Privateer" Web site was calling for a confirmation close around $1,015 on its magnificent long-term U.S. dollar 5-times-3 point and figure chart -- available for free here:

It got it. Then, however, although every chartist I follow was screaming, "Breakout!" gold churned for several days before slumping some $25 late last week. Spot gold closed Friday below $1,000 at $990.70.

Most shorter-term charts now have an ominous "head and shoulders" top appearance. Even The Privateer's long term chart has slipped back into formation and looks sad.

In the gold market, it seems, even carefully constructed long-term charts have weak predictive power and are prone to being whipsawed.

But the radical gold bugs -- my name for the group mustered especially around Bill Murphy's LeMetropoleCafe Web site -- have long argued that the gold price is manipulated by a Washington-Wall Street alliance, which they call "the Gold Cartel". They say gold's odd behavior just reflects the repeated appearance in the gold market of a non-profit-maximizing outside seller.

This much-derided, long-standing contention looks a lot less paranoid after the massive government intervention in the financial markets during the Crash of 2008.

As Murphy put it on Friday:

"Yesterday morning gold was offered at $1,020. Fast forward to today and we have $990 gold. What's different in the world? Nothing, except the price is $30 lower after The Gold Cartel's temper tantrum."

Conventional commentators commonly refer to the recovery of the dollar to account for gold's stall. But radical gold bugs point out that since mid-month there has been essentially no recovery. On a short-term basis, for instance, gold in euros has tracked U.S.-dollar gold quite closely.

Even among more conventional commentators, degrees of negativism towards gold vary. For example, chartist Martin Pring has been whipsawed as badly as any -- in late August, he wrote that "the trigger for the next big move will be $1,000 on the upside."

But he was not especially disturbed by last week's closing action. In his weekly InfoMovie report on Friday, he defined $91 in the gold bullion Exchange Trade Fund (GLD) and $39.80 in gold share Exchange Traded Fund Market Vectors Gold Miners ETF (GDX) as being the danger levels. Both closed well above these levels on Friday.

Similarly unperturbed is The Gartman Letter, which reportedly has a strong following among professional money managers. TGL is holding gold, but hedged against the euro and the U.K. pound -- effectively gold in euros and sterling. The latter in particular did not suffer much last week.

But neither commentator can claim to have made much money, either.

Curiously, the most optimistic service currently is the conspiracy-oriented LeMetropleCafe. This has always laid great stress on the condition of the physical market as demonstrated by the local price of gold in key buying counties. India, repeatedly cited as the world's largest gold buyer, is a favorite. Recently, prices in Vietnam, a surprisingly large buyer, have been added. According to LeMetropleCafe, both counties were buying with U.S.-dollar gold just below $1,000 on Friday morning.

Most gold watchers would be surprised if this down move reversed into a short squeeze, with a resulting price spike. But it may.

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