Is gold headed to $2,200?
Commentary: Do charts sense Chinese buying?

Last week's report from Bloomberg noted that 21 out of 22 traders are bullish for gold this week, the highest since 2004 and the amount of gold shipped to the Chinese mainland jumped from an average of 18 tonnes to 56.9 tonnes.

By Peter Brimelow
Nov. 14, 2011, 2:13 a.m. EST
Market Watch

NEW YORK (MarketWatch) — A rugged and alarming week for gold (and other markets). But not all the news is negative.

In the end, gold GC1Z -0.48% closed up $32 or 1.82% on the week at $1,788.10, its highest in eight weeks. The NYSE Arca Gold Bugs Index XX:HUI -1.35% gained 2.2%, outperforming both gold and the S&P 500 Index SPX -0.67% , which was up 0.85%.

Which means the interesting prospect of gold shares taking the lead, which I noted last week, is still present. ( See Nov. 7 column. )

Gold’s action is frightening some of the more fundamentalist analysts. On Friday Edel Tully of UBS, a very powerful gold dealer, said: “Gold hit our one-month forecast of $1,775 this week, but we’re sitting tight for now, rather than making any short-term forecast changes. Right now, physical demand has moved to the background, leaving gold heavily dependent on the actions of specs and investors, a less-than-ideal position. Physical buying out of Asia is much diminished.”

And, indeed, over at LeMetropoleCafe, there have been repeated complaints about discounts to world gold in India and thin premiums in China, suggesting no Asian offtake.

Similarly, Friday’s news that Bloomberg’s weekly survey of gold traders showed 21 of 22 traders bullish for the coming week, the highest since 2004, did not please everyone. Bloomberg itself says the survey is right only half the time.

In contrast, however, the Hulbert Gold Newsletter Sentiment Index has been at 27% for the past two weeks. That’s not high. And MarketVane’s Bullish Consensus for gold was 74% on Friday. Uneuphorically, it was 75% the previous Friday.

Of course, what UBS calls “specs (speculators) and investors” do sometimes drive the gold price. UBS itself notes a pickup in bullion demand from Europe. Certainly, there is no shortage of speculation-stimulating news.

More significantly, the week brought a report described on LeMetropoleCafe on Tuesday as “the crucial gold news for Q4 2011. … This practically guarantees a strong close to 2011.”

As UBS summarized it: “The amount of gold shipped from Hong Kong to the [Chinese] mainland jumped to 56.9 tonnes during [September], from an average monthly flow of 18 tonnes to August. The September figure is nearly 500% higher than in the same month last year and lifts total shipments for the first three quarters of 2011 by 128% year-over-year.”

The point here: China burst upon the world gold market as a massive importer for the first time only last year. ( See Dec. 6, 2010, column. ) Observers have been watching closely to see if it will happen again.

So, while the next few days might be as alarming as last week, there is more than just chart evidence to support the November Aden Forecast’s view: “The trend is your friend and for now, the gold trend is very strong by staying above $1,700. The key level for this decline is the Sept. 26 low at $1,594. If this level is broken, then a sharper decline could take gold to the $1,490-$1,500 level. ... On the upside, if gold closes and stays above the $1,903 level, then a leg up in the bull market could take gold to the $2,000 to $2,200 level as the next target.”

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