http://www.marketwatch.com/story/gold-stumbles-but-bugs-see-rebound-2010-03-29

NEW YORK (MarketWatch) -- To paraphrase a dead German philosopher: What doesn't kill gold, makes it stronger. After last week's stumble, a variety of gold bugs expect a renewed surge.

Ian McAvity of the chart-oriented Deliberations letter periodically declares of gold that "they opened the trap door and no one jumped." Last week merited McAvity's comment.

Sentiment indicators slumped, gold shares stumbled, gold itself saw a six-week low -- but a strong rally Friday meant spot gold gained slightly on the week. Those gold observers who emphasize the condition of the physical market have turned snortingly bullish. And, significantly, inflation-oriented bugs are joining in too.

How bleak the situation looked midweek is captured in Martin Pring's Thursday evening report on his (also chart-oriented) Pring.com.

Pring said: "It looks as if the price is in the terminal phase of completing a head and shoulders top. That would require a daily close decisively below the neckline at $105 basis SPDR Gold Trust ETF (GLD 108.72, +0.75, +0.70%) [PB -- that would be $1,050 gold]. The stakes are extremely important because the longer-term chart shows the price to be resting on the18-month up trendline. ... A major gold sell signal now appears likely."

On Wednesday, MarketVane's Bullish Consensus for gold broke below its 2010 low to 68%, a level not seen since January 2009. The Hulbert Gold Newsletter Sentiment Indicator [HGNSI] dropped to 18%, last seen during gold's low last month.

Contrary opinion suggests that low sentiment numbers are ultimately bullish, of course. But getting there involves capitulation.

Nevertheless, not all gold observers were alarmed. As the week progressed, the LeMetropoleCafe Web site, which tracks physical premiums in the East, began reporting high levels, implying buying -- not just from reliable bottom fishers like India and Vietnam, but also from Turkey and, most intriguingly, China. (See Web site.)

(This week was a big one for LeMetropoleCafé. Editor Bill Murphy got to testify before the CFTC about his contention that there has long been rigging of the precious metals market. The Gold Anti-Trust Action site has a full discussion here.) http://www.gata.org/node/8467

From a completely different angle, those who view gold through the prism of U.S. monetary conditions have something equally exciting to contemplate: a possible massive breakdown of the 30-year bond chart after a poor auction this week.

Dow Theory Letters' Richard Russell said of this on Wednesday: "I believe it would mark the end of the 25-year bull market in bonds. That bull market (a trend of lower interest rates) has been a major force for the great bull market in stocks and the economy that began in the early 1980s. ... The current yield on the 30-year Treasury bond is 4.62%. Technically, this chart implies that the yield on the long bond could rise to near 7%."

A gold-friendly interpretation of this: rising inflation expectations.

By week's end, gold had rebounded fiercely. Noting that gold futures volumes have increased sharply, a LeMetropoleCafe commentary Sunday concluded: "With sentiment as measured by MarketVane and the HGNSI quite washed out and strong signs of life in the physical market, the stage is set for a meaningful rally.