If anyone thought that Friday's heart-stopping $100+ free-fall in gold was, well,...heart-stopping, they had better be thankful that they were asleep overnight as the yellow metal fell some $130 and touched the $1,531 (not a misprint) level. Safe-haven seekers remain on a quest that thus far has yielded only one safe asset and not much of a haven in many a market.

Financial writers quickly ran out of superlatives and, frankly, out of comparisons as well, because while gold was set to notch its largest decline in nearly 30 years, the aforementioned $128.40 swing from high to low actually represents its largest such gap yet on record. As for the question of what kind of safe-haven is to be found in an asset that swings from 2 to 7 (!) percent during one-day market sessions and does so precisely at the time when it should be soaring to the stratosphere due to global angst, well, we will leave that one hanging with a sizeable question mark...

Spot gold dealings opened $41 lower this morning, with a bid-side quoted at $1,616 per ounce while spot silver dropped $2.28 to start Monday's session off at $28.65 the ounce. Platinum was down $56 at $1,552 and palladium slipped $3 to the $631 per ounce mark. No change reported in rhodium; it appeared to be immune to the carnage elsewhere in the complex with a bid quote at $1,800 the ounce. In the background, the US dollar was relatively steady at $78.20 on the index while crude oil attempted a small comeback with a 27-cent gain that brought it to $80.12 per barrel.

The recent implosion in precious metals has now made for the largest premium in gold over platinum that has been manifest in two years' time. SocGen analysts opine that the premium between the two metals may yet widen to as large a gap as 26% next year as investor anxiety over the state of the global economy keeps the noble metal beneath its ten-year average premium of roughly 39% vis a vis gold. Still, if the late 2008- early 2010 period serves as any example, the price of platinum basically doubled over the following 18 months while gold only advanced 38% as perceptions of recovery across the globe benefited the noble metal to a much larger degree.

The quest for cash and the preference for liquidity were best characterized by UBS analyst Edel Tully who noted that gold is a victim of its own success as liquidity trumps.  Curiously, some media outlets remarked that many analysts had warned about the extreme levels of speculation and potential risks that had developed in the gold and silver markets. Funny; we only seem to have found..one or two amid the uber-bullish throngs ranging from mining firm CEOs, to newsletter scribes, to fund managers. Hopefully, soon, we will learn just which funds let go of how much of the precious metal while their front-men were out there extolling its virtues at the same time.

At least one former such uber-optimist has changed his (short-term) forecasting tune in the wake of recent events in gold. Marc Faber, he of Gloom, Boom & Doom fame, has warned that the yellow metal could drop to $1,100-$1,200 if the $1,500 support area gives way. Who knows what kind of hate mail of meaningless, silly wagers he will now be the recipient of for uttering such heresy? We know.

In the case of silver, the overnight 16% slide (it reached $26 precisely as we had projected in the event of the $30-32 support failing to hold) produced the unenviable record of the worst three-day decline in the white metal ever tallied. The open interest in poor man's gold now stands at the lowest level of 2011 and it reflects -in the words of Standard Bank (SA) analysts-serious doubts on silver's prospects.

Commerzbank analysts go one step further and (unsurprisingly) now warn that silver is not suited as a store of value and that [it] is behaving more like an industrial metal. Curiously, the massive slide in precious metals failed to ignite Indian appetite for them in part as now represents an inauspicious time to buy metals and as fears that further losses are in the cards manifested themselves. As mentioned before, it was a dark night; one to pull the covers up and hide during. Well, maybe not in China, just yet. The country has just witnessed the launch of its first gold-vending machine. What kind of sign of the times that such a premiere represents, we will keep wondering (or, not).

To be fair, gold-hungry shoppers who utilize the machine will only (!) be able to insert one million yuan into its shiny slot and take out no more (!) than 2.5 kilos of yellow metal. So notes the press release. Groan. No takers for the 5.5 lb gold withdrawal maximum just yet. Maybe a visit by Don the Trump to Wangfujing Street in Beijing is in order?

The mass-exodus from the commodities' niche is approaching Calgary Stampede levels and the accompanying devastation is in evidence across the niche; platinum was trading at its lowest level in nearly 16 months while palladium touched lows not seen since October of 2010. We could go on with copper (14-month lows) crude (2-month lows) or the S&P GSCI Spot index (10-month lows).

Reflecting such sell-offs or perhaps contributing to them, money managers slashed their net-long positions by 20% in almost all commodities in the week that ended Sept. 20. In the interim, and for the protection of some, the CFTC has raised the necessary margins required to trade Comex gold and silver by 21.5% and 15.6% respectively, effective with tonight's closing. The margin hike is thought to add to selling pressure and could yet aggravate that which is now being labeled as serious near-term chart damage in the yellow metal. Who knows how the next CFTC report on futures and options positioning and margin requirements will shape up...

Long-time and level-headed market observer Ned Schmidt notes in his most recent Value View Gold Report comments that We also need to keep in mind that the big holder of GLD is in trouble. The Paulson hedge fund, largest holder of GLD, has had a disastrous 2011 thus far. For example, they own Bank of America and the collapsing Sino Forest. We would expect that they will soon need to start liquidating their GLD to meet withdrawals and lower the fund's risk.

Perhaps they have, already. One will soon know exactly who sold what, when, and where. In the case of silver, the VVGR observes that [silver] broke down through the last remaining support level of hope, $32.25. That silver is in a bear market should be obvious even to the silver charlatans on the web. Bear markets only end when price reaches a gut wrenching low, and silver is not immune to that reality. Fear not; the blogosphere overnight still offered headlines that proclaim silver to be the investment of the next decade. In this case, one might want to take that proposed timeframe...ummm, literally.

Until tomorrow (and who knows what that might bring, these days?)...

Jon Nadler Senior Metals Analyst 

Kitco Metals Inc. North America

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