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Peter Brimelow: Gold bears gathering but bulls defiant

Section: Daily Dispatches

By Peter Brimelow
Monday, October 19, 2009

NEW YORK -- Gold ends the week weakly, and the gold bears scent blood. But the gold bulls are still bellowing.

Last week saw the highest U.S.-dollar gold price ever, just over $1,070, and the highest London P.M. fix ($1,059.50). Yet by the end of the week gold was $13.50 off its peak, less than $3 up on the week. Many voices were to be heard predicting an important -- possibly short-term -- decline.

The bears cite a variety of technical indicators. The bulls deploy sweeping fundamental arguments, often very impressively.

The trouble with these, of course, is that you can famously drown in a 6-inch deep river -- in other words, it there a pothole straight ahead? But to this crucial challenge, the bulls do have responses.

For example, a lot of experts have suddenly emerged on India, by far the world's biggest gold importer. Specifically, they predict a big fall-off in Indian buying, now that the great Diwali festival -- which occurred on Saturday -- is over.

To this, Bill Murphy's LeMetropoleCafe, which can lay claim to having pioneered using India as a guide to the gold market, simply reports that the country has been a steady buyer of world gold in the past few days, based on the local price premiums.

The site notes the recent strength of the rupee has protected the Indian buyer, and commented in mid-week that it does not recall ever seeing a discernable shift in premiums after Diwali. Its attitude seems to be that, on lower prices, Indians will buy more. Also, it reports, Vietnamese and Turkish premiums are high.

Gold bears are very pleased by the speculator position revealed in late Friday's data from the Commodity Futures Trading Commission. The Web site NewsFlashed in hushed tones: "Commitment of Traders data for the week of October 13 shows speculative longs in all-four metals increased -- AU up 2M ozs to a record 32.46M ozs."

But gold bulls respond by pointing to sentiment indicators. The Hulbert Gold Newsletter Sentiment Indicator has been stuck at 53.8 percent since Oct. 7. It has been as high as 89.58 percent. This lack of movement from the lower level is not consistent with a blowoff.

Neither is MarketVane's Bullish Consensus for gold. It showed an 86 percent close on Friday. This indicator actually lost a point on the week. During major tops, readings well over 90percent, sometimes for a week or two, are the norm.

A powerful edition of the Australian gold letter The Privateer asserts: "We have what economists love to call a 'paradigm shift' in the US$ gold price. ... There is a HUGE difference between a three-figure U.S. gold price and a four-figure one. Now that gold looks to have consolidated ABOVE the US$1,000 level, the future of the U.S. dollar has become the number one item of global financial and economic analysis."

"When the price of something changes from $xxx to $xxxx -- from US$999 to US$1,000 in the case of gold -- holders of that investment AND people who are contemplating buying start looking ahead to HIGHER prices rather than LOWER ones."

This is not what the gold bears want to hear.

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