Gold bulls watching gold elephants

By Peter Brimelow, MarketWatch

NEW YORK (MarketWatch) — Gold’s gyrations on Friday were dramatic, probably exhausting to both sides — and possibly important. Some gold bugs think a new attempt on the highs of last month may have started.

Gold was firm in Europe, but plunged on serious selling during the New York morning — then dramatically reversed on heavy volume to close up $16.50 at $1,508.40 in the CME June contract. This meant gold was up over 1% on the week. More importantly, gold appears to have broken the downtrend which had been in place all month.

Gold stocks, as measured by the Arca Gold Bugs, also seem to have reversed their May downtrend — particularly important to the many observers who think gold shares lead the metal’s movement. The HUI was up 2.75% on the week.

This action must have been a relief to the respected, institutionally oriented Gartman Letter, which overcame its earlier worries and very early on Friday morning added two “units” of gold to its model portfolio (one of which was hedged into yen). This makes the portfolio 7/11ths gold.

During the morning, Gartman must have been wondering if its actions (and those of its hedge-fund clients) were being targeted by hostile forces — a suspicion sometimes heard in the past. As it is, Gartman appears to have judged gold momentum well.

Gold’s recovery on Friday closely followed the announcement that the Fitch ratings service had cut its ranking on sovereign Greek debt. This sparked fears that a wave of anxiety about euro-zone defaults might sweep the market. (Standard & Poor’s subsequently made matters worse by warning of a possible downgrade for Italy.)

One of the correspondents on the LeMetropleCafe webzine pointed out that the rally in gold, as Europe was closing and on a Friday, nevertheless involved heavy estimated volumes, and asked: Did Fitch bring in Western Elephants?

That is, have the powerful speculative forces which have previously run gold up on euro fears appeared again?

All of this will certainly exercise Australia’s attentive and sophisticated gold observer, The Privateer. It has contended for some time that bouts of negative publicity by the ratings agencies are orchestrated to distract the markets from America’s problems.

As it acidly observed over the weekend: “… it is clearly the ‘policy’ that the U.S. and its debt problems will NOT be the focus of the global public in general and the U.S. paper markets in particular. … The U.S. was last faced with the necessity to raise their Treasury’s debt limit in late 2009 - early 2010. That was when the European sovereign-debt crisis first hit the headlines — duly conjured up by the U.S. ratings agencies. …”

“Now, we are in the same situation again, the only difference being that the U.S. Treasury is now officially $2.2 TRILLION deeper in debt than it was at the end of 2009, less than a year and a half ago.”

“The problem is that the European sovereign-debt crisis is becoming increasingly ‘old’ news. Something BIG had to be done to resuscitate it. It was.”

The Privateer continues to be bullish on gold.