By Peter Brimelow, MarketWatch

Last update: 12:01 a.m. EST Feb. 11, 2008

On Feb. 1, gold was hit with massive waves of selling. By Tuesday's close it had lost over $40, taking it below $890. The technical damage was serious. Australian gold commentator The Privateer's long-term $U.S. 5 X 3 point and figure chart) turned down. See chart

The Gartman Letter was spooked out of 40% of its gold holdings on Tuesday, and started talking of gold going down to $800.

Then gold counter-attacked. In The Privateer's words: "In the three trading days since Feb. 5, it reversed and stormed upward by $U.S. 32.50, closing (spot future basis) on Friday, Feb.8 $918.40 ... the gold price fell below both 10 and 20-day moving averages this week only to turn right around and move above them again by the end of the week. The shorter term moving average remains above its longer term counterpart."

Why? Close observers of gold futures' noted that "open interest" (the total number of futures contracts outstanding) rose as gold was going down and fell (sharply) as it recovered. This suggests short sellers being routed.

Bill Murphy's LeMetropoleCafe triumphed with its proprietary monitoring of Indian gold prices. On Tuesday, with gold down around $890, the site reported that India, the world's largest gold buyer, was apparently importing, for the first time in weeks. This stopped again when gold rose back above $900. Implication: Indian demand, which has followed up since 2002, will underpin gold below $900. See Website

But gold bugs say there is more to gold's powerful recovery than the usual cycle of short sellers being bushwhacked by physical buyers.

For one thing, to quote The Privateer: "This snap back in the U.S. gold price has come in the face of a rising U.S. dollar ... Yes, the USDX did lose 0.3 points on Feb. 9 (while gold was rising $ 12.30) to close for the week at 76.82, but it still posted a gain of well over one full point in the week. Gold rose in spite of this."

Another thing: gold rose some $4 in after hours on Friday. This usually means aggressive U.S. fund activity.

But most of all: other commodity markets started behaving oddly at the end of the week. Dan Norcini, writing on Friday for Jim Sinclair's put it succinctly: "The entire commodity complex was on what can only be called a "roaring tear" today ... platinum, palladium, copper, crude oil, wheat, soybeans, corn, sugar were all soaring today. Sugar rallied 5%, stunning the shorts, while Minneapolis wheat was once again locked-limit bid with the hapless shorts completely unable to exit the market ... folks, I have seen some bull markets in my time as a trader but I have rarely seen anything like the Minneapolis wheat market. Take one look at what is happening to food prices and tell me that gold is not seeing what is taking place there ..." See Website

This past weekend, yet again, the International Monetary Fund announced it would like to sell some gold. Since gold went bullish in 2002, official sector noises of this type have often appeared just as gold began an important move up. Further back, the IMF gold sales in 1978-80 heralded the great gold surge of that time. The Gold Anti-Trust Action Committee, one of a number of gold bug operations that think gold's price is manipulated, put out a scathing press release. See Website

Nevertheless, as Dow Theory Letters' veteran Richard Russell put it: "Gold only 10 bucks from its high, and so far it hasn't let any of the "profit-takers" back in at lower prices. Ah well, the danger of trading out in a bull market."