Good Afternoon,

Selling pressure in gold increased on Tuesday, as the quest for cash and a preference for risk aversion sank the metal to a low of $904.10 per ounce. Thus, half of the near-$200 upward swing in gold prices achieved since mid-January has now been filed under 'profits taken.' This morning's StandardBank analysis found gold investment demand to have slowed significantly, as seen in the 300 kilos added by the gold ETF last Friday. More than twice as much gold flowed into the gold market the same day from scrap sellers. For now, all that can be said is that the metal has had seven sessions of declines and the largest fall in seven weeks as well.

The shift in the market's fundamental flow equation continues to unfold. It is still being masked by the string of news headlines that (unsurprisingly) mushroomed at the four-digit level. Those headlines (or at least the gold or newsletter vendors they quoted) would do well to glance at the following chart and observe the emergence of a double top in bullion. If nothing else, the line clearly reveals where the comfort zone of the metal may be found, and where the action becomes...shall we say, dicey?

The math is simple, yet compelling. For every panic-driven latecomer to the gold party, there were two price savvy holders willing to let go of the metal due to expectations of lower prices ahead. Go ahead and call that pattern a conspiracy to suppress anything. We normally call it...human nature - and the need for cash. Current support for bullion is seen only at the round figure, despite the late afternoon rebound. Much of gold's further progress (or lack of same) is now linked to the fluctuations in the need for margin-call cash among equity players.

Silver fell remained in sub- $13 territory today, losing 15 cents to $12.80 per ounce. Platinum dropped another $25 to $1033, but palladium rose $3 to $194. Automobile sales continued in reverse at full speed last month. GM, off 53%, Ford, down 48%, Chrysler down 44%, and Toyota off by 40%. We could go bad news is not in short supply out there. Troubles with a capital T at GE, Blockbuster could go be going bust, Virgin Megastores will close it US stores, AIG warns (?!) of insolvency if downgraded by Moody's (there is a word for such a 'warning' - it just escapes us...).

A few words of tempered optimism directed at inflationists and Obama Depression advocates, from the columns of the NY Times -offered by Paul Krugman recently:

Many will ask whether Mr. Obama can actually pull off the deficit reduction he promises. Can he actually reduce the red ink from $1.75 trillion this year to less than a third as much in 2013? Yes, he can.

Right now the deficit is huge thanks to temporary factors (at least we hope they’re temporary): a severe economic slump is depressing revenues and large sums have to be allocated both to fiscal stimulus and to financial rescues.

But if and when the crisis passes, the budget picture should improve dramatically. Bear in mind that from 2005 to 2007, that is, in the three years before the crisis, the federal deficit averaged only $243 billion a year. Now, during those years, revenues were inflated, to some degree, by the housing bubble. But it’s also true that we were spending more than $100 billion a year in Iraq.

So if Mr. Obama gets us out of Iraq (without bogging us down in an equally expensive Afghan quagmire) and manages to engineer a solid economic recovery — two big ifs, to be sure — getting the deficit down to around $500 billion by 2013 shouldn’t be at all difficult.

But won’t the deficit be swollen by interest on the debt run-up over the next few years? Not as much as you might think. Interest rates on long-term government debt are less than 4 percent, so even a trillion dollars of additional debt adds less than $40 billion a year to future deficits. And those interest costs are fully reflected in the budget documents.

Also tempered words are to be found in the warning issued by the British-S.African money management firm Investec (a quote darling for gold zealots whenever it published bullish research) for those who seek to 'get rich' in gold at this difficult juncture in the global quagmire. While the house does not propose putting the box labeled 'gold bull market' on the shelf and filling it with mothballs, it does bring a dose of sobriety to the rooftop chants of To Da Moon! you are being deluged with, in every forum and on practically every gold-oriented website.

There is no doubt that gold is getting a lot of coverage in the media, among global macro investors and the real money community. The suggestion is that everyone is long – expecting the price to rise further – and that the move has become overextended on both an absolute and an historical basis.

However, while it is true that gold has reached record highs in most currencies, it is still $70 below its dollar high reached almost a year ago and, when adjusted for inflation (CPI), the high point reached in 1980 is the equivalent of over $2,500 an ounce.

The gold price may well continue to suffer further short-term falls as part of a general upward trend, as has already been the case during this rally. However, it does not appear that we are approaching the stress point that a market often reaches near the end of a sustained price move as the graph becomes parabolic.

Indeed, the positive gold price trend is being tempered by the drop-off in Indian and Middle Eastern jewellery demand flows. Conversely, as jewellery manufacturers’ stocks decline, their willingness to buy the dips may diminish the downward moves of gold.

Gold behaves like a currency – it can be traded globally at the same price and has adequate stocks to back it up – yet it cannot be printed. It must be mined at a cost. It is hence a real asset, which generally holds its value in inflationary conditions. Gold has typically done well during periods of rising inflation and negative real interest rates.

The only episode approaching the severity of the current recession and the accompanying shock to net worth came in the aftermath of the first oil shock of 1973-74. That led to negative real interest rates at the short end of the curve in the US for five years, to higher inflation and ultimately to a major bull market for gold. Encouragingly, the current gold price is still about 60pc below its mid-1980 peak in real terms.

Gold appears to be benefiting both from being the traditional hedge for inflation hawks (some of whom are now beginning to worry about the risk of hyperinflation) and from the mistrust of some investors towards cash assets and government obligations during the current financial crisis.

It would probably require only a minority of investors to believe that they need to continue to allocate more towards gold to have a significant price impact.

Even though inflation risks remain low in our view, we believe that these forces are likely to continue to support gold prices.

(Daniel Sacks is co-portfolio manager, Global Gold and Precious Metals at Investec)

The only question for many, is at what level such support is to be found. As of now we see $900 and $880 as the numbers to try. Of course, that said, the metal has to move higher tomorrow. Otherwise, no angry e-mails from perma-bulls will come in. After all, the expectations are that one must be proven wrong on a daily basis.

Everyone already know the upside targets. They are incessantly being broadcast by...(surprise!) mining company CEOs (among others, such as newsletter and gold vendors). Perhaps they might care to enlighten us as to the price beyond which bullion will never fall again. The line of guessers starts here.


Until tomorrow,