June 7, 2010

By Peter Brimelow, MarketWatch

NEW YORK (MarketWatch) -- Gold jumps as stocks slump. Gold bugs are increasingly confident -- even though gold shares continue oddly weak.

The yellow metal bounced off the ropes ferociously on Friday. After two weak days, the metal slipped below $1,200 spot as New York was opening. Then, as it became clear how ghastly the day was going to be in the financial markets generally, a powerful $20+ rally set in.
From a relative strength point of view, this was a spectacular performance. Everything else was down horrifically, except U.S. Treasurys, and the U.S. dollar -- usually gold's adversary.
Gold in other currencies did even better. In fact, gold in euros closed at a record high. This will greatly delight The Gartman Letter, which can claim to have pioneered trading gold in this way, and which was expanding its positions this week.
Can gold really be a safe haven at present? Dow Theory Letters' Richard Russell answers emphatically yes -- in fact, his anti-stock market and pro-gold advocacy this week is the most strident I can remember.

And Friday repaired a lot of technical damage. At veteran gold observer Jim Sinclair's JSMineset site, correspondent "Trader Dan" said in his daily analysis:
"Gold rebounded sharply ...through the 10-day and 20-day moving average and...above all the moving averages once again.

"Price action indicates the presence of strong buying support on dips with the usual suspects active on the rally...this price action is giving the physical market buyers time to become acclimated to the new and higher price level above $1200."
This conforms to the position taken at Bill Murphy's LeMetropoleCafe webzine, which among many other things watches Eastern gold prices as measure of physical market vitality. A piece posted on Friday was laconically entitled "India buys," and also noted that Vietnam, an interesting newly-significant gold market, appeared to have moved to the buy side as well. Stories about strong gold buying by European Central Bank-despising Germans have been appearing here and elsewhere for several days.

All of this gives resonance to the remarks of another Old Gold Hand, Harry Schultz, in his GCRU service on Wednesday morning:
"Bullion's capacity to shrug off the shackles of intervention at this crucial chart point ...invites a near term re-test of the May 2010 high -- with a possible overshoot towards the $1345.00 measured target ... and $1425.00 theoretical upside target. On the downside, a sustained break below bullion's March uptrend line (now $1178.50) would be necessary to destabilize what appears to be the energetic resumption of gold's primary uptrend."
An Ugly Feature/Big Problem (?) marring this happy scene: the wretched performance of gold shares. The NYSE Arca Gold Bugs (NYSE:HUI) and the Gold & Silver Index (NASDAQ:XAU) both finished the week down. A correspondent on LeMetropoleCafe notes sourly that heavy losses on Friday happened in the afternoon only -- exonerating the general stock market as a possible cause, because it was plunging all day.

No one seems to understand gold shares' malaise. Unlike gold, they have yet to approach, let alone exceed, their last December highs. Some blame the rise of the gold ETFs like SPDR Gold Trust ETF (CONSOLIDATED:GLD) which expanded its bullion holdings to a record this week) and the closed end Gold Funds like Central Fund of Canada Limited (CONSOLIDATED:CEF) and Sprott Physical Gold Trust (CONSOLIDATED:PHYS) . But these are not leveraged to gold, which has been the gold shares' traditional appeal.

Could gold shares just be the last train to leave the station?