The Short-Term Bull Case for Bullion

The gold bulls have stopped bucking.

There is caution now among investors when it comes to the yellow metal, as they fret about where the price of the “barbarous relic” is headed in the short-term. The hand-wringing is understandable: after surging nearly 30% in the past 12 months, gold has now lost some of its shine.

In these first couple weeks of trading in 2011, the SPDR Gold Trust ETF (GLD), which tracks the price of bullion, is down 3%. The miners have been hit harder: The Market Vectors Gold Miners ETF (GDX), which included holdings like Barrick Gold (ABX), Goldcorp (GG), Newmont Mining (NEM), Kinross Gold (KGC), and AngloGold Ashanti (AU), is down 6%.

Of course, as Frank Holmes of US Global Investors reminds us, volatility is always inherent in commodity investing. It’s a non-event for gold to go up or down 15% in a year. In fact, this occurs 68% of the time. For gold stocks, Holmes points out, the volatility is even more dramatic -- plus or minus 40%, historically.

Still, the zigging and zagging has some longtime traders spooked. For instance, Dennis Gartman, editor of The Gartman Letter, writes this morning that he will not consider owning gold in US dollar terms. In fact, for the first time in a very long time, Gartman told his readers, he’s injecting a note of caution to owning gold in any form.

“We will not recommend new positions, and we shall recommend “shoring up” stops to protect what we have gained over the past many months,” Gartman tells his readers as the technicals have him worried: even with spot gold trading $1,385 this morning, he says, it is still trading below its 50 day moving average, and that average has tended to define the bull move since mid- September of last year.

Still, despite losing some of its luster, other strategists specializing in the precious metals remain upbeat about gold’s trajectory. These metal-heads acknowledge the possible headwinds for gold, but they nevertheless favor a positive bias in the short-term due to sentiment readings, technicals, and a possible resurgence of investment demand.

To begin with, although Gartman might be cautious about gold in the near-term, he’s joined in that worry by many others. The mood among gold traders has turned more markedly subdued.

Mark Hulbert, in his latest column, asks us to consider the average recommended gold market exposure among a subset of short-term gold market timers tracked by the Hulbert Financial Digest (as reflected by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). This average currently stands at 33.6%, which means that the average short-term gold timer is allocating two-thirds of his or her gold-oriented portfolios to cash.

Six weeks ago, in contrast, the HGNSI stood at 40.3%.

From a contrarian investing perspective, this increasing worry is a bullish development. Major market tops are usually accompanied by excessive levels of bullishness that are adhered to in the face of any market weakness, Hulbert says. “On neither count does the current sentiment picture qualify,” the market pundit posits.

In addition to improvements on the sentiment front, Tom Pawlicki, the precious metals and energy analyst at MF Global in Chicago, outlines three other reasons for why he’s remaining positive on gold in the short-term and argues that the market could advance to $1,425 over the next couple of weeks.

For one, support will come from technical factors. He says that Friday’s trade bounced off the lower boundary of a bullish flag continuation pattern to create a bullish reversal. Upside follow-through Tuesday and Monday indicate that the next resistance at the 50-day moving average at $1,383.50 will soon be removed.

Second, there are reasons to believe that investment demand is picking up. Pawlicki points out that a 1.5 tonne addition to holdings in the SPDR Gold ETF on Monday broke a trend of liquidations that has lasted over three weeks and saw 25 tonnes of metal move out of ETF warehouses.

“If a change in investor sentiment can be maintained, it may also bolster the short-term bull case for gold,” the analyst argues.

Finally, there could be a fresh focus on strong demand for the Chinese New Year. Specifically, the Year of the Rabbit falls on February 3, and it’s traditionally a time of gift giving. In December, the Shanghai Gold Exchange reported that China imported five times more gold in 2010 than 2009 and that was just during the first 10 months of the year.

Analysts acknowledge opposing pressure on gold in the near-term could come from different sources: there’s the possibility that the Fed’s bond-buying program is coming to an end. Fed presidents Plosser and Fisher have both indicated the US economy is recovering and this monetary experimentation should conclude in June, as scheduled. Second, there’s the potential that Beijing policymakers keep raising interest-rates to temper growth.

However, with subdued sentiment, bullish technicals, and evidence of renewed investment demand, some metal mavens are telling clients to remain positive: gold should shine in the short-term, they argue

--------------------------------------------------------

Note:Dennis Gartman statement is troubling.