A further gain in the US dollar overnight prompted losses in the commodities sector as some of the speculators who had been crowding the relatively small driver's seat opted to bail and take a position a bit further back on the runaway dollar-carry train. Gold, other precious metals, and oil, fell, but not by very much. Ditto, the base metals.

The Thursday session in New York opened as follows for the complex we normally track: Gold was off by $5.30 per ounce, bid at $1138 basis spot. Silver was down 16 cents to $18.40 per ounce. Platinum lost $8 to ease to $1433, and palladium fell $3 to $366 per troy ounce. Rhodium however, added $50 to climb to $2380 per ounce. All of this, against the background of a US dollar that added 0.40 to 75.47 on the index (the 75 level still appears to be posing difficulties for dollar sellers in their attempt to convincingly breach it), and traded at 1.488 against the euro.

Oil prices fell marginally, losing 36 cents at $79.22 per barrel. Options expiry in gold comes on Monday. In the interim, we have jobless claims coming in flat on the week (helping the dollar remain higher), US leading indicators -due in a few hours- and finally, look for book-squaring activities tomorrow. Support in gold is thought to be found down around the $1060 area, should a more substantial profit-taking wave get underway any time soon. Although conditions still indicate that the longs will try to squeeze every last ounce (no pun) of life out of this spike (and we think they will try a couple of times more, for sure), there are some potentially drenching clouds building above this market. More on that, below.

Elliott Wave interim updates characterized yesterday's fresh pinnacle as follows (never mind the 84 reading on the RSI that the market also showed):

Gold's rise has now engendered back-to-back days of 97 percent bulls, the first time this has occurred in the 22 years of Daily Sentiment Index data that we have from MBH Commodity Advisors. Today's $1153.50 high is within the $1151.90-$1167.56 range we discussed Monday night. The lower end of the range is where waves 5 and 1 are equal, while the upper end is where wave B (circle) would be 1.382 times wave A (circle), the most common wave relationship in an expanded flat (see EWP, p.46), as noted in the previous Update.

So, gold prices are right there. Whether or not there is one final spike that results in the price peak and the trend reversal, we are uncertain. But we've seen the grip of this manic fever many times before, most recently with respect to oil into its July 2008 peak and subsequent crash, so we know the progression of the psychology. By the time wave C (circle) down is complete, pessimism toward gold's prospects will be as deep as current optimism is high.

Some of that optimism will have to be tempered by the latest in findings by the World Gold Council. If nothing else, the numbers fly squarely in the face of those who are trying to describe the past half a year as some kind of unprecedented stampede into the yellow metal. Unprecedented, in some ways, perhaps - but this running of the bulls has been aiming strictly towards the paper side of he market. We tried to tell/warn in these columns that the underlying physical conditions were not what was being reflected in the market's price performance. Alas, deaf ears were everywhere. MiningMx describes the clouds mentioned above as follows:

The ferocious heat in the demand side of the gold market seen a year ago seems to be cooling, with investment and jewellery consumption of the metal falling in the third quarter of this year, the latest figures from the World Gold Council show. The WGC, an industry body set up to promote gold, released its gold demand trends reports for the three months to end-September.

Demand for gold in exchange-traded funds (ETFs) fell to just 41 tonnes from 149.5 tonnes in the same period a year earlier. Quarter-on-quarter, the decline was 27%. The WGC said the absolute level of investment in ETFs, which have physical metal backing the paper issued to investors, was still healthy. There were modest redemptions of ETFs in the world's largest fund, the US-listed SPDR Gold Shares in July and August, leaving the fund slightly below June's close. Much of this gap was subsequently closed during October, the WGC said.

Total identifiable investment, which includes sales of ETFs, bars, coins and other retail investments, was 46% lower than a year ago at 227 tonnes, but up slightly on the second quarter. In the first quarter, 609 tonnes of gold flowed into the sector.

Jewellery demand has fallen by a third from levels a year earlier, with India - traditionally the largest consumer of gold - Russia and Turkey showing declines of between 42% and 55%.

In volume terms, the demand for 473 tonnes of gold is the lowest third-quarter result this decade, the WGC said, adding high prices were suppressing demand around the world except for China where a strengthening economy fuelled buying, pushing demand up eight percent year-on-year. Comparing the volumes, jewellery demand has improved from the first and second quarters of this year, but fares badly compared to the same period a year ago.

Some other ways to slice the same statistical pie were calculated by other sources as well this morning. The conclusions are largely the same. At recent price propositions, gold takers are not taking. The market appears to be arguing for a value range that is more realistic, and more connected to realities on the ground, and is awaiting the eventual departure of 'hot' money and a rebalancing of values. India's Economic Times continues with the numbers:

Investment demand for gold slipped from high levels in the third quarter of 2008. Retail investment in products such as coins and bars was down 31 per cent year-on-year, while ETF inflows tumbled 72 per cent to 41.4 tonnes. 

Total gold supply edged down 5 per cent in the third quarter, meanwhile, the WGC said. Mine production rose, but a dearth of sales from central banks -- which turned net buyers of gold in the quarter -- and producer dehedging cut into total supply. Central banks bought 15 tonnes of gold in the third quarter, their second straight quarter as buyers. 

Supply of recycled gold to the market rose 31 per cent to 283 tonnes, but was still significantly down on the 569 tonnes it hit in the first quarter of 2009 as prices powered through $1,000 an ounce. 

India's gold retail investment demand fell 67 percent on year to 26 tonnes in the third quarter to September as high prices and poor monsoon dented consumer sentiment, the World Gold Council said on Thursday.

Jewellery demand fell 42 percent to 111.6 tonnes, while total demand, which comprises jewellery and retail investment demand, fell 49 percent to 137.6 tonnes.

Precisely the fundamentals-based conditions this writer tried to depict on BNN television a couple of weeks ago, as not indicative of a true bull market, and the mere mention of which, caused an uproar of disbelief. As was previously mentioned however, one is not allowed to talk out loudly in church. And, of course, the next wave of rhetorical questions will be: then how come prices went up to new records? Gee, who knows? Perhaps funds had something to do with it? Perhaps the dollar carry that Prof. Roubini keeps warning about is for real?

We close today, with a lengthy but worthwhile read from Minyanville's Todd Harrison (he a regular on Marketwatch). Todd offers a mix of pondering where we go next, of wishful thinking that is well-intentioned, and of stark findings the underscore current conditions. Add another opinion to the growing mountain of same:

Albert Einstein once said that the definition of insanity was doing the same thing over and over again and expecting different results. Through that lens, the current course of fiscal and monetary policy is absolutely insane. One would hope we've learned from the past as we prepare for the future but there's little evidence we have. Consistent with previous patterns of government intervention, policymakers -- many of whom never saw the cumulative imbalances building -- have overcompensated with reactive response and created the conditional elements of the next phase of crisis.

According to Scott Reamer of New York based hedge fund Vicis Capital, global central banks and government agencies have thrown upwards of $30 trillion dollars at the markets through direct lending and indirect backstops, with roughly 65% of that coming from stateside sources. That begs the natural question of whether the needle is now pointing towards hyperinflation.

Not necessarily, says Reamer, If they were creating currency , that would be the most probable path and I would own any physical asset I could get my hands on. But since they're creating credit , it's an entirely different analysis with regard to how other countries will respond. That jibes with my view that we're sitting at a critical crossroads, one that will come to define the socioeconomic state of the world; the resulting dynamic may indeed be binary.

The first scenario is the continued socialization of markets, bearded nationalization of troubled institutions and inflation through dollar devaluation, punishing savers who've preserved capital. By administering drugs that mask the symptoms rather than medicine that cures the debt disease, the crisis could evolve from the percolating societal acrimony to social unrest and quite possibly, geopolitical conflict.

The other path is the destruction of debt that paves a path towards true recovery through an eventual outside-in globalization. This dictates a higher dollar and lower asset classes in the intermediate-term but creates a solid infrastructure for economic expansion thereafter. It would be a bitter pill for many to swallow but most medicine that works typically is.

The banking system, stymied with credit dependency, is not operating normally. Hidden behind a litany of bailouts, stimulus, conduits, mortgage freezes, foreclosure programs, working groups and government sponsored investment efforts are politicians attempting to engineer a business cycle that long ago lost its way. Alan Greenspan was the chief architect of this grand experiment, trying anything and everything to juice risk appetites -- including his infamous endorsement of adjustable rate mortgages -- before whispering recession over his shoulder as he rode into the sunset. He then handed the economic reigns to Ben Bernanke, a gentleman who once opined he would drop money out of a helicopter if necessary to induce inflation.

Deflation in a fractional reserve banking system means policymakers have, for all intents and purposes, lost control of the economy. It would also impact the top-tier of the societal spectrum tied to financial assets, which would be problematic for politicians and the constituencies that bankroll them. Election aspirations, however, may be the least of the concerns; this economic maelstrom is bigger than any particular political agenda.

Policymakers understand the enormous stakes given our derivative-laced finance-based economy. They've postured, positioned and proffered assurances, pulling out all the stops in an attempt to flush the system with liquidity despite the clear and present danger of a total system unwind, with currency markets possibly providing the release value. As the state of our economic union steadily deteriorated the last eight years--a dynamic masked by the lower dollar and skewed by the spending habits of a slimming margin of society--the greenback was intentionally devalued with hopes that a legitimate economic recovery would replace the debt-induced largesse that dominated this decade.

As the world reserve currency lost 38% since 2002, foreign holders of dollar-denominated assets have grown increasingly frustrated with the status quo. Liu Mingkang, chairman of the China Banking Regulatory Commission, and Don Tsang, Chief Executive of Hong Kong, are among the latest leaders to voice displeasure, warning of unavoidable risks and the next global crisis, respectively. Shortly before the credit mess arrived in September 2008, we warned it would manifest as a cancer or a car crash. The government responded by buying the cancer and selling the car crash, staving off a systemic collapse by inhaling the disease in its entirety. It worked, but it came at a profound cost.  

Asset classes continue to trade as a monolithic monster on the other side of the dollar. We call this dynamic asset class deflation vs. dollar devaluation in Minyanville and while both sides of the equation can decline, they would be hard pressed to rally in sync. That's important to remember, particularly as the carry trade becomes part of the mainstream lexicon.

The favored scenario of those pulling the strings is akin to a bovine relay race. The 2009 government sponsored euphoria enabled corporate America to roll mountains of debt, potentially buying itself a few more years. If the plan plays through, those same corporations will transfer the risk (through issuance) to an unsuspecting public before the next wave of crisis arrives. Rinse and repeat again and again, consistent with the definition of insanity.

This progression is predicated on the rest of the world cooperating, presumably because they're unable to extricate themselves from the interwoven financial machination. The other alternatives are isolationism and protectionism, which could conceivably separate world commerce into standalone regions as nations attempt to protect their interests at all costs. While the path of deflation and debt destruction would cause paper wealth to evaporate, it would forge a path towards a prosperous future. Rich nations would pour real money -- as opposed to cheap debt -- into developing economies as a redistribution mechanism of wealth and the resulting global community would be more profitable, and dare I say safer, for generations to come.

It's not too late to reverse the curse of the lost cause of capitalism. If our policymakers make proactive decisions, demonstrate humility and take steps to rebuild a stable foundation for the future, we could avoid waking up one day to find that our policy has been altogether outsourced to foreign central banks.

A page from the NYU Professor's book, Todd. You have warned. Alas, the deaf ears are abundant, and the addiction to bubbles is hard to break. Hardly anyone listened back in 2006, either. Who cares about real-world conditions, and about eventual fallout, when prices are going up? Why, it's the only thing that matters! Aha.

Until tomorrow - keep the umbrella handy.