Good Day,

Gold prices remained under selling pressure for yet another overnight Asian session on Tuesday, but the trading range remained quite narrow and was confined to the $988-995 zone prior to NY's morning opening. Background conditions had the dollar still rising (by 0.23 to 77.13 on the index) and oil falling (by $0.25 to $66.59) ahead of yet another set of key US economic data, due later in the day. For its part, oil was seen as falling due to concerns that there are growing supplies of crude as well as refined product in the US. Perhaps, just as well- the weatherman expects the nastiest, coldest winter in a decade in the Northeast, due to a weak El Nino pattern.

Gold's massively net long positioning remains a troubling item and has led to the slowing down of eagerness with which fresh such positions become established by latecomer funds. Practically the entire surge that has unfolded since September 1st has been fueled by paper specs who have built a near 800-tonne mountain of positions. This, while gold perma-bulls tried to assure everyone that there were solid fundamentals behind the move, and that this was the beginning of the end for the US dollar. Fundamentals, in fact, have rarely been poorer for the yellow metal than in the current year. But, hey, they are not supposed to matter, according to the same crowd.

The Tuesday morning NY open had gold start off with a $5.30 loss per ounce, quoted at $985.20 basis spot bid, and the decline came in the absence of fresh significant dollar gains, as well as despite continuing tensions between the West and Iran. Using a page straight out of Kim Jong Il's playbook, Iran's Mr. Ahmadinejad has been playing some kind of poker and/or Russian roulette as he tests the new US President's resolve. Gold practically went to sleep on such news. Not a good sign, indeed.

The last and most notorious example of gold paying attention to souring geopolitics was the May 2006 N. Korean missile situation - it propelled the metal to $732 an ounce. It is starting to look like the week-long advance to, and at, levels above four digits was walking on very shaky legs after all. Silver was off by 18 cents at the open, quoted at $15.98 per ounce, while platinum sank another $8 to start off at $1263 per ounce. Palladium fell $1 to be quoted at $286 the troy ounce.

Dollar strength continued to be manifest in the overnight and early Tuesday hours as the speculative debate over the state of health of the global economy translated into more risk aversion. A near two-week low against the greenback was thus seen in the euro (1.457) while oil prices, which had also been...pumped up by the previous wave of risk appetite, sank to the mid-$66 area. Another worrisome item continues to be Japan. The country's second episode of deflation in this decade deepened, and was reflected in a sharp, 2.4% August fall in core consumer prices.

Dollar vigor under current circumstances -especially when taking into account the 11 percent drop the currency suffered since the new US President took the helm- is understandable. Whether or not it proves transitory still hinges on the flow of economic data coming from the US in future months. Today's housing price index and consumer confidence data will likely play into that equation for example. The bigger question -that of its ability to maintain reserve currency status-appears not to really be a question, at least in some officials' minds. Not for decades to come, anyway.

Former Japanese Finance Ministry advisor Toyoo Gyohten opined that there is no 'better alternative to the dollar' presently, and that his country's government should support the greenback's current status. Mr. Gyohten's comments came one day after ECB President Jean-Claude Trichet suggested that a strong dollar is 'extremely' important to the global economy.

You may recall that -back in June- UBS expressed some client-originated concerns about gold and gold mining shares vis a vis the conventional equities markets, and the issues of asset allocation, expected performance, etc, came into question at that time. The article may still be found on Mineweb -with an archived date of June 1. Now, our own NBC is raising similar questions and is trying to adjust the framework within which to consider exposure to the precious metal.

We remain hard-core advocates of the '[investment] life-insurance policy' concept for gold and will continue to envisage a prudent ten percent earmark for most investors who have meaningful assets in play. Not as a 'trade' but as a savings allocation in what is essentially a trans-national currency. However, we would invite the perma-bulls to take note of the fact that these columns have not been the only ones to raise the yellow caution flags amid September's euphoria, and that ignoring gold's commodity components and fundamentals can only lead to portfolio trouble:

National Bank of Canada is revising its outlook for gold, following other forecasters who have questioned whether the metal's run-up may be over. Since 2005, National Bank economists have promoted gold as a commodity likely to improve the performance of investors' portfolios.

However, despite the recent rally that propelled the price of gold to new heights, National Bank economist Matthieu Arseneau said Monday that it appears more and more clear to us that the time has come to revise our position. The weak U.S. dollar has been a major driver of this year's surge in the price of gold. However, the currency has recently been showing signs of stabilizing, and could be about to turn upward, National Bank chief economist Stephane Marion said last week.

Following up with a research note Monday, Mr. Arseneau said investors who dared place some of their eggs in gold in recent years have been nicely rewarded for what they did. However, the time has come now to revise their positions as signs of a global economic recovery start to emerge, he said. Headwinds are building against the price of gold. Risk aversion is gradually returning to pre-crisis levels and inflation fears should abate, Mr. Arseneau said in his report.

If the past 30 years are any indication, gold does not constitute an attractive investment over the long term. Moreover, in times of economic recovery, the return on gold falls well short of the return on the stock market. Gold edged down below $990 (U.S.) an ounce Monday as the U.S. dollar rose versus the euro, prompting a liquidation of long positions in the market after bullion failed to stay above $1,000 an ounce.

Mr. Arseneau noted that gold has acquitted itself well as a safe haven by outperforming the S&P/500 over the course of the past two recessions. However, it is important not to hold on to this investment for too long: Historically, the return spread has swung far in favour of the stock market in the two years following a market trough.

Maintenance of support near $985 remains the mission, should gold choose to accept it. Absent such success, we would have to first look for $975 as the next objective. Take the dollar completely out of the gold equation and you have $770 metal at the end of the day. This tape will self-destruct in 5 seconds.