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Will gold sector miss the party?

Will gold sector miss the party?
By Peter Brimelow, MarketWatch
Last Update: 12:01 AM ET Mar 14, 2005

NEW YORK (MarketWatch) -- Last week, the Commodity Research Bureau Index (CRB) surged to levels not seen since the alarming weeks of late 1980. The dollar index slipped 1.4 percent. Gold, which was up $11.70, or 2.7 percent, therefore rose in terms of foreign currencies. But gold shares were ominously soft.

Both the Amex Gold Bugs index (HUI) and Philadelphia Gold/Silver Index (XAU) were only up some 2 percent. On Thursday they actually fell, although gold rose. Are the shares suggesting the gold sector will sit out the commodities ball? Why?

This commodities up/dollar down bash is some party. Asserting that the CRB has "TAKEN OFF" and illustrating this with one of its beautiful trademark point and figure charts, Australia's The Privateer Web site headlines, "Ignore The Booming CRB Index At Your Peril." Bridgewater Associates "Daily Observations" on Friday was cheerfully talking of "The Break Down of The Dollar System." Perhaps most impressively, the well-connected institutional service The Gartman Letter, which adroitly predicted the dollar's New Year rally, berated itself on Wednesday for recently reiterating bullishness ("We were wrong ... hubris of the first and highest order ...") and has completely readjusted its model portfolio.

Yet the gold bugs are furious, and they do have something to complain about. Dan Norcini documented on LeMetropole Café that all previous times the CRB index has been at this level, gold was around $600. The Privateer observes that if the CRB and gold had kept pace since the latter's $456 peak on Dec. 3, gold would now be $510.90. Apparently the gold shares are right to detect something troubling about the performance of the metal.

The pro-gold community generally agrees as to what it is: covert selling by central banks. In an important development for this group, the March issue of Jefferson Financial's Gold Newsletter carries an essay by Frank Veneroso. Veneroso, who led revolutionary analytical developments in the gold world in the early '90s, addresses the World Gold Council market prepared by the consultants Gold Field Mineral Services (GFMS). He has said little on this subject for several years. Now, in a powerfully argued piece, he declares the GFMS estimates "so removed from historical trends and current market trends that they have become ludicrous." Further, accepting the view that the gold market is managed, Veneroso gives cautious approval to the contention favored by the LeMetropole site that the "manager" is in retreat. This is the point which gold shares currently do not accept.

An elegant and exhaustive discussion of the immediate empirical evidence for this view was published this weekend in the new issue of James Turk's Freemarket Gold & Money Report. Turk concludes: "Central banks have created a wonderful opportunity ... All they have managed to do is to make gold ... very undervalued." He adds a long-term technical argument for gold shares.

Buying the end of a long-running liquidation -- a "clean-up" -- is a respectable strategy. With dollar and commodity sentiment as it is, the tide has not run so strongly for the gold bugs for many years.

But Mark Hulbert worries that his gold indicator is high at 71.43 percent (it crested at 78.57 percent in early December). MarketVane's Bullish Consensus for gold reached a 2005 high of 75 percent on Friday (it peaked at 81 percent on Dec. 3). The Wall of Worry is definitely here. Perhaps this time it will give us a better vantage point into this traditionally inscrutable market.


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