Dec 19 2007 2:55PM

Gold's flirtation with record highs has been met with deafening silence. But gold bugs need to remain patient, because powerful forces are not only supporting gold, but continuing to pressure it higher.

Since bouncing up against its record nominal high of $850, gold has experienced a couple of significant sell-offs, and struggled back from each in fits and starts. Often, the metal has defied rhyme or reason — some days, for example, it gained ground even when the U.S. dollar was strong and oil prices were weak.

While gold’s behavior has puzzled most analysts, some say the trading patterns can be easily chalked up to consistent, concerted micromanagement by an anti-gold cabal.

I certainly don’t doubt that official actors have been meddling in gold for years. At this point, the “hidden hand” has been all but revealed, and some degree of gold-market manipulation by central banks is nearly a consensus view.

But I think the manipulations have been primarily of the broad-stroke variety. I just don’t believe government bureaucrats feel the gold market is all that important; they are likely much more concerned with their tee times than the daily price of gold.

For my part, gold’s behavior over the past few weeks and months left me not with a coherent explanation, but rather a series of interesting observations, including:

•  Gold has to consolidate the rapid gains since mid-August, and is in the process of doing so.

The dire predictions of a correction into the low-$700s or even high-$600s have not panned out (yet!) and, in fact, gold’s recent behavior fits a well-established pattern. Widely-followed trading guru Dennis Gartman recently put it best:

“Gold's history...is one of a series of military-like advances where the market's forces are marshaled into a swift strike, followed by a longer period where the supply lines are re-established; the wounded are tended to; the equipment is re-conditioned; morale is regenerated and a new advance is begun. Advance; consolidate; advance; consolidate; advance; consolidate. That is the history of gold in the past several years. We had advanced previously. We are consolidating now, doing so at important "psychological" numbers such as $800/oz and EUR550.” (dennis@thegartmanletter.com)

These consolidations can take weeks or months to work through. But, considering the speed and degree of the advance since mid-August, plus the credit crisis and geopolitical factors now working in gold’s favor, the consolidation phase may be briefer than usual.

•  We are still in the " crisis " phase of the recent turmoil; gold and other markets will remain volatile until we clearly enter the " bailout " phase.

The gold rally that began mid-August was fostered by the market’s perception that we had seen most of the worst news, and that the recovery efforts were ramping up. In other words, the consensus view was that we had passed the “crisis stage,” and had entered the “bailout stage.” Because the bailout stage entailed an easy-money policy from the Fed and massive injections of liquidity, investors bought gold and stocks.

However, as the cavalcade of SIV and CDO write downs showed no signs of ending, investors began to worry whether there were more shoes to drop in the subprime mess. And soon, it became obvious that there would be not just one or two more, but a veritable Imelda Marcos closet-worth of shoes to drop in the weeks ahead.

Thus, we have yet to clear the crisis stage, even though the bailout has begun. The real estate, mortgage and subprime credit crisis will get worse before it gets better, and the Bush administration’s meddlesome efforts to forestall mortgage-rate resets and foreclosures will only exacerbate and extend the problem.

Throw in the Federal Reserve’s haphazard pattern of rate cuts (the quarter-point cut on December 11 being the latest example), and it’s apparent that the gold and stock markets will be driven by emotion and the daily headlines for awhile to come.

The good news for gold investors is that the loose-money recovery efforts will continue for quite some time, and the effects will last even longer. So the downtrend for the U.S. dollar, and the uptrend for gold, will remain firmly in place, despite the sometimes-sharp squiggles in those trend lines.

•  There are powerful undercurrents of demand supporting gold.

Frankly, I am quite surprised at gold’s resiliency, considering how over-extended it had become, and the huge speculative long position that was dramatically reduced during the recent correction. This indicates that, even at prices approaching and exceeding $800, there is a large and powerful contingent of investors who view gold as a bargain relative to other assets, and in consideration of today’s dangerous economic situation.

Who are these buyers? Perhaps they are Asian savers, whose stronger currencies have somewhat muted gold’s advance. Maybe they are Middle Eastern buyers, skimming from the flood of petro-dollars to diversify into something of lasting value. Perhaps some of the demand is coming from official sources — central bank reserve diversification as well as sovereign fund investment.

Almost assuredly we are seeing demand from all of the above, and more. And this buying often drives gold higher on days when the metal is fighting headwinds from a stronger dollar or weaker oil. That’s a sign that these gold-buyers aren’t too concerned about the daily vagaries of the markets, and view gold as going much, much higher in a bull run that will extend for years to come.

•  This is a " stealth bull market," and exceptional upside still remains.

These days, as I run into colleagues involved in gold in some way or another, it isn’t long before one of us comments on the remarkable lack of public enthusiasm for the metal, especially when compared with the last time it traded over $800, in January 1980.

Back then, people lined up for blocks to buy and sell precious metals — many figuratively tossing priceless family heirlooms into the furnace in exchange for a quick payoff. You certainly aren’t seeing anything like that today.

Don’t get me wrong — the coin and bullion dealers I know aren’t exactly Maytag repairmen, waiting dejectedly for their phones to ring. There is some level of interest. But by and large, the buzz in the gold market is nothing close to what one would expect. It’s enough to leave people scratching their heads in bewilderment.

The answer, I believe, lies in the different factors that have driven gold in this and the previous bull market.

In the 1970s, for example we had double-digit inflation and interest rates. With long gas lines and spiraling food prices, people didn’t have to read the Wall Street Journal to discover what was going on in the economy — they could feel and taste it in their everyday lives.

Now, however, the factors driving gold are thousands of miles away — literally on the other side of the globe — in the exploding economies of China, the rest of Asia and most of the developing world. They have little impact on the average citizen of the West.

The good news is that the lack of attention on gold right now means that the end of this bull market — when the gold price goes parabolic and lines of buyers and sellers reappear outside of bullion dealers — is still far away.

In the meantime, new factors are emerging that will power gold, and these will definitely affect the lives of everyday citizens. As the credit crisis continues to grow ever larger before the market’s amazed and frightened eyes, we are quickly reaching the point where massive bailouts, including further rate cuts by the Fed and other central banks, will begin to shower easy money onto Western economies.

Precisely like a child’s see-saw, this monetary expansion will drive the value of fiat currencies lower, and the relative value of gold and other precious metals inexorably higher.

Of course, the dollar will occasionally be oversold and gold overbought, and oil will continue to bounce violently up and down. But the primary uptrend for gold will remain in place.

*****

To learn more about Gold Newsletter, visit www.goldnewsletter.com. Mr. Lundin is also the host of the famed New Orleans Investment Conference, the world’s oldest and most respected gold investment event. To learn more, visit www.neworleansconference.com.