Peter Brimelow

May 21, 2012, 1:27 a.m. EDT

Gold bushwhacks bears

Commentary: Is a central bank buying?

By Peter Brimelow, MarketWatch

NEW YORK (MarketWatch) — Gold bushwhacked the bears last week. It’s even got gold bugs talking about gold stocks … again.

After breaking gold bugs’ hearts by plunging to a new low for the year on Thursday, gold violently reversed. Measured by the CME floor close, the benchmark gold contract (CNS:GCM2) gained $38.30 on the day. It followed up on Friday by adding another $17, for a two-day gain of 3.31%.

The NYSE Arca Gold Bugs Index (NAR:XX:HUI) jumped 5.29% in these two days.

Gold stocks’ outperforming the metal is significant, because they have been atrocious this year. As of Friday’s close, HUI was down 20.5% on the year, while gold was actually up 1.4% on the year. Just a restoration of late 2011’s multiples could produce serious gains.

If gold’s reversal sticks, it will be a triumph for the contrary opinion sentiment indicators. Nothing else had been offering any comfort.

The Hulbert Gold Newsletter Sentiment Index has been negative for a record 29 days. ( See Mark Hulbert’s May 4 column. ) The previous record, which ended in early 2005, was followed by a 72% rise in gold over the next 15 months.

When MarketVane’s Bullish Consensus for gold hit 51% on Wednesday, it was at the lowest except for one day — 49% on Nov. 13, 2008 — for many years.

The far-sighted Australian bullion commentary The Privateer thinks something really significant has happened.

This weekend it observed: “What is interesting about the snap-back this week — in both the physical and paper forms of gold, including gold stocks — is that gold has once again started to rise, while other asset markets (especially stock markets) are still falling.”

Another positive voice, from an unusual source, is veteran gold analyst Frank Veneroso.

As I noted during last Christmas’ gold gap-down, Veneroso earned an important place in gold-market history for conceptualizing, in the 1990s, the importance of Eastern physical demand to the gold price, then a new factor. But for several years he had dismayed gold bugs by ignoring the metal. ( See Jan. 2 column. )

After the Christmas gap-down, I reported that Veneroso had surfaced expressing a “hunch” that efforts by “a bunch of traders” to cause a technical breakdown would be defeated by central-bank buying. And, indeed, by Feb. 23, gold had risen 14%.

Now Veneroso has circulated another essay entitled “At The Threshold Of The End Of Central Bank Independence, Gold Is Compelling.”

He writes: “It may finally become clear to market participants that the body politics around the world will demand that central banks implement debt-eroding inflations.”

“With the death of the myth of independent central banking, gold should assume a unique position as a monetary asset. I think we are very close to this point.”

This represents a tremendous shift for Veneroso, formerly a dogged skeptic about the influence of monetary matters on gold.

Gold bugs are also excited about some strange technical news about Thursday’s rally. With bearishness previously so intense, it would have been normal for Thursday’s big jump to involve considerable short covering, which would have slashed the number of outstanding contracts on the CME — the “open interest”.

But precisely the reverse happened.

As Bill Murphy, proprietor of the LeMetropoleCafe website, put it on Friday evening: “The gold open interest rose a whopping 16,891 contracts yesterday to 433,847, which is new recent high, by a substantial degree. Almost everyone thought yesterday was about short covering. … It was new buying. The sort of major-league buying brought to your attention for weeks now in this space.”

A correspondent at Le Metropole Café remarks: “If indeed gold is underpinned by some enormous strategic buyer — probably a central bank — which is what the data implies, a number of market participants will have to do some serious rethinking.”

Rethinking the value of gold shares will be top of that list.