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Gold Grows Volatile as Retail Investors Threaten Stock Market Crash

Commodities / Gold & Silver 2009 Feb 24, 2009 - 11:22 AM GMT

By: Adrian_Ash

Commodities THE PRICE OF physical gold dipped 1.5% at the New York opening on Tuesday, growing volatile against all major currencies as world stock markets fell for the eleventh session running.

Poland's WIG20 index – down by more than one half since Feb. '08 – lost another 0.9% despite pan-European proposals to rescue former Soviet Bloc states.

Ukraine's currency, the Hryvnia, sank 3.4% to a record low vs. the Dollar after credit analysts at Moody's warned they may cut its debt rating. Latvian bonds were today downgraded by Standard & Poor's.

Crude oil crept back to $38 per barrel, while the US Dollar surged against all other big currencies and reached a 12-week vs. the Yen.

Bond prices pushed higher, knocking 10-year German Bund yields below 3.0%.

Meantime on the political front, the North Korean regime said it's ready to test-launch the Taepodong-2 missile, now able to reach the United States with a range of 4,200 miles.

Late on Monday, head of Russia's general staff, Nikolai Makarov, said the Kremlin is "looking at how far the [Arctic] region will be militarized" as neighboring states vie for mineral rights.

"$1,000 could be just the beginning of gold's first-half 2009 journey," says Mitsui, the London gold dealer, in its latest Gold Investment analysis.

"The rationale for owning the yellow metal has never been more apt. However, it is hugely important to maintain a keen eye on daily changes...for any sign of exhaustive activity."

Friday and Monday both saw the huge SPDR Gold ETF listed in New York add nothing to the stock of gold "backing" its shares – only the third and fourth times so far in Feb. respectively.

"Three or more days of no interest would have our 'gold bear' antenna on hyper-alert," says Mitsui. "We are concerned by the lack of jewelry demand right now. If Gold ETF investors pull the plug, this market is very open to a swift and acute pull back."

Over on the other side of the trade, however, "We are becoming very, very concerned that the public is on the brink of abandoning their [broad] share holdings en masse," wrote Dennis Gartmann, editor of the eponymous (and much-followed) newsletter, on Friday, "facilitating a literal 'Crash' in prices.

"Bombarded daily by the fact that his/her stock portfolio or 401K has been decimated, the retail buyer of stocks is on the verge of dumping everything...Once that [decision] has been reached – and we fear greatly that we are reaching that point now – there is no telling how seriously share prices can fall in the very shortest span of time."

Here in London, home to Europe's multi-trillion forex market, professional traders also "look ready to throw in the towel," said one veteran dealer to BullionVault this morning.

"Guys I'm talking to have had enough. They're just closing out and not opening any new trades.

"The one bright spot is gold."

Looking at the fundamentals of Gold Investment demand, "We believe that until the Fed balance sheet stops expanding – which does not appear to be any time soon – and other central banks rein in monetary stimulus, there will be an underlying bid for the yellow metal," said Strategas Research Partners of New York in a note to clients late last week.

On a technical analysis, the "moving average formation is increasingly supportive," Strategas adds. "50-day average has convincingly broken up through 100 & 200-day averages. 200-day average has flattened and recently hooked higher."

Moreover, "A consecutive series of 3 lower-highs has been broken" since the Gold Price turned higher in late October.

Over on the economic front early Tuesday, new data showed total business investment in the United Kingdom shrinking by 7.7% in 2008.

US home prices meanwhile dropped 18.5% on the S&P/Case-Shiller index, while new industrial orders across the 16-member European currency zone fell for the fifth month running in Dec., down 22% from a year before.

Rumors surrounding the nationalization of US banking giant Citigroup meantime raised the stakes to $45 billion-worth of injected capital, while – already buoyed by $150bn of government cash – American International Group (AIG) is set to announce a fourth-quarter loss of $60bn, according to some analyst forecasts.

That would be the biggest loss in world corporate history and more than twice the Q3 loss that prompted Washington's second rescue of AIG.

Fed chairman Ben Bernanke will recommend "strong and aggressive policy action" in the hope of stemming US unemployment when he gives testimony to Congress today.

Tonight Barack Obama will speak on US television, but following this month's 10% plunge in New York shares – which came despite the president's $787 billion stimulus bill – "It won't be enough just to look presidential," says one political scientist to Reuters.

"What he needs to be is explainer-in-chief."

By Adrian Ash

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2009

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

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