Near-record gold close has bugs divided

In a horrible week, stocks are savaged but gold goes up -- clearing $1200 and closing virtually at an all-time high. Gold bugs are divided, but some think it can continue.

But not, the nervous bugs note, according to the gold shares. Nyse Arca Gold Bugs and Phlx Gold Silver Index closed down on the week by 2.15% and 3.9% respectively. Since a number of bugs consider gold shares to have some predictive power, this is alarming.

One prominent long getting nervous is The Gartman Letter. On Friday morning, this influential institutionally-oriented service cut more than half the gold positions in its model portfolio, saying the trade was getting crowded. (TGL also said it would buy the positions back and "a little bit more" on what works out to be roughly a 6% correction.)

Hard-core gold bugs will greet this news with glee. They rudely maintain that Gartman has a habit of getting out early, so marked that it amounts to a contrary indicator. (In fairness it must be said that TGL on Thursday had more than half its model portfolio in different types of gold plays, with good profits in them.)

In fact, a puzzling anomaly has developed in the gold shares. A writer on the Le Metropole Caf? site points out about the two closed-end bullion trusts:

Central Fund of Canada Limited (CEF)closed at a 13.1% premium to Net Asset Value and Sprott Physical Gold Trust (PHYS at a startling 20.952%, a record for the latter and the highest for the former since before its last secondary early last November. Demand for bullion exposure is running very high."

Edel Tully, the gold analyst for UBS, also flagged this demand for bullion in a comment on Friday:

"Our Zurich and Geneva sales desk experienced exceptionally strong demand for small bars and coins...demand yesterday was the greatest that we have experienced since 2008...Coin demand is so intense that supply is struggling to match... German investors have turned to gold."

This is a moment when an accurate strategic view could be invaluable. The remarkable Australian service The Privateer offers one forcefully in its weekly commentary:

"Last week, we titled this report 'A Watershed Week For Gold?' Note the question mark (?) at the end of the title. This week we are removing the question mark. The market 'action' of the last five days has definitely confirmed the hypothesis....what was signaled last week by Gold refusing to go down as the world debt markets seized up again was confirmed this week.

"This time, there are only four global investments left fighting it out for supremacy. They are, in no particular order, the US Dollar, US Treasury debt, German sovereign debt - and GOLD...in the face of this renewed headlong rush into 'safety', Gold is up substantially in terms of EVERY major paper currency in the world - INCLUDING THE US DOLLAR!"

(Of course The Privateer's magisterial free $U.S. 5x3 Point and Figure chart is looking wonderful.)

The idea that something seismic is happening to gold is definitely gaining credence in more conventional, non-gold bug investment circles. James Steel, gold analyst at HSBC, commented on Friday evening:

"Gold seems unlikely to retrace significantly until the reason for its rally -- escalating sovereign risk worries -- abate...we believe that buying interest in gold is unlikely to diminish appreciably, short of a clear resolution to the crisis."

MarketVane's Bullish Consensus at only 78% -- last year's high was 89%. And our Hulbert Gold Newsletter Sentiment Index is at 46.6%. versus 68% last year.

Which could be another contrary opinion sign that the Bulls still have scope.

(from MarketWatch, May 10, 2010)