Has Gold's 'Heroic Seller' Gone Away?

Peter Brimelow MarketWatch January 27, 2011

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Peter Brimelow

Jan. 27, 2011, 12:01 a.m. EST

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NEW YORK (MarketWatch) "” Gold has taken a hammering in 2011 so far. But the gold bugs think that may end soon "” maybe beginning with the recent rebound.

There is a school of thought that believes very short-term action in the gold shares has predictive power in the immediate future for gold itself. So Wednesday's action in gold shares really got that community's attention.

Gold, as represented by the CME February contract, was down $8 in mid-morning. But gold shares were decisively up. With gold's subsequent recovery "” it ended the floor session up 70 cents "” gold shares surged.

In the electronic after-market, gold leapt over $10. Gold shares exploded. Arca Gold Bugs /quotes/comstock/10t!hui.x (HUI 503.52, -13.91, -2.69%) closed up 3.73%. It appears to have broken a downtrend in place since late December.

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Could this mean the end to gold's dismal experience in January so far? At Tuesday night's close "” the low for the year so far "” the February contract was down $89.10 or 6.3%, reportedly the worst opening to the year since 1997.

JSMineset's Dan Norcini sees a chance: He remarked this evening that "bulls have to be encouraged by the day's action, as the technical indicators are so deeply oversold on the [Arca Gold Bugs] HUI that any signs of stability will turn them to issuing buy signals rather quickly. If nothing else, it will force the bears, who have made some pretty good profits on the way down, to snatch them before they disappear."

So too does the proprietor of the website Jesse's Café Americain. On Tuesday evening, he noted: "This intermediate gold top and correction bears a striking resemblance to the May-August 2010 top and correction just prior to gold's amazing break-out rally."

And, acidly, he added on Wednesday evening: "Nice bounce off a deeply oversold condition, as we noted yesterday."

"And of course, today was the anticipated option expiration on the Comex. How unusual," he said.

(The group I call "radical gold bugs" have long maintained that gold is openly manipulated by the official sector and its chosen instruments around the U.S. option expiry dates. See July 29, 2010, column.)

A recovery in gold would be particularly welcome to the radical gold bugs mustered behind Bill Murphy at LeMetropoleCafe. As I reported recently, the weight they place on the meaning of high premiums for gold in key Eastern markets caused them to be confident of a quick recovery from gold's year-opening plunge. ( See Jan. 6 column.)

But as the month wore on, gold slumped further, premiums went up more, and these bugs began muttering about an abnormal seller being in the market.

This week's news suggests they might have been right. On Tuesday the CME announced a staggering 81,752-lot (14.1%) plunge on the number of gold contracts outstanding ("open interest") following Monday's trading.

Added to this, SPDR Gold Trust /quotes/comstock/13*!gld/quotes/nls/gld (GLD 128.16, -3.00, -2.29%) has disclosed a record drop in stated gold holdings. Someone appears to have disposed of a lot of gold.

LeMetropoleCafe said on Wednesday evening: "Clearly some huge transfer of gold ownership has occurred, and the fact that it has been allowed to become public probably means the transaction is complete. "¦ If it is complete, then, in the absence of another heroic seller, a sharp rise in gold seems very probable."

Peter Brimelow has been an editor at Barron's, Fortune and Forbes and is the author of "The Wall Street Gurus: How You Can Profit From Investment Newsletters."

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