Gold fell a further 2.7% yesterday (silver nearly 4.8%) as the animal spirits from the G20 communiqué and much vaunted IMF gold sales led to further selling and the shorts continued to press their advantage. Dollar strength and oil weakness also contributed to the sell off yesterday.

Interestingly, gold has risen strongly overnight in Asia and in Europe this morning despite continued dollar strength and oil weakness. This may be a technical rebound from oversold levels but the fundamentals remain sound and this will likely see gold remain well supported at these levels.

Gold fell as low as $866/oz yesterday which is just above its important 200 day moving average which is now at $860/oz. Bargain hunters are again buying the correction and there is evidence of physical demand in the Middle East, Asia and India (there is informed speculation that imports to the subcontinent may resume) at these levels. The 200 day moving average may provide support and given the bullish fundamentals it seems unlikely that gold will fall far below the 200 day.

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The global financial system and economy is far from out of the woods yet. We and many others have pointed out in recent weeks how the US banking system is insolvent. George Soros concurs and told Reuters that he believes that the U.S. economy is in for €œa lasting slowdown€ and €œthe banking system as a whole is basically insolvent.€ He warned about the danger of watering down mark-to-market accounting rules, saying this creates conditions for prolonging the life of US €˜zombie€™ banks. This is true but even more seriously, these irresponsible measures pose a long term threat to free market capitalism itself.

In the current massively uncertain financial and economic climate, the smart money continues to accumulate gold (physical bullion) while what is patronizingly called the €œdumb money€ continues to sell gold as seen in Joe and Jane Public€™s mad dash to sell their gold jewellery at €œgold parties€ and to pawnbrokers internationally. They clearly believe that gold is at record highs and they are getting good value for their gold. Gold is at record highs nominally € but is only at the nominal price it was in 1980 and if one adjusts for inflation gold is less than half the price it was in 1980. Gold is likely to reach its inflation adjusted high of over $2,400/oz in the coming years and when it does Jane Public will wish she had never sold her rings and bangles and will likely resume buying again.