Gold Review for 3/2/09


"Buyers should view this correction as a buying opportunity but may want to include some sort of put protection."

Flight to quality apparently did not provide any support today. One might think that a general collapse in the equities would provide a boost for gold, often thought as a safe haven for capital. However, the market is already quite long of gold by many indicators and reports are surfacing that physical buyers in India and the Middle East are backing away from purchases. It turns out that there is another market also garnering flight to quality attention, and that is none other than the U.S. dollar.

While the U.S. faces a host of economic and fiscal problems, it is not alone in the global recession. Conditions in Eastern Europe have deteriorated rapidly and Western Europe has balked at a second round of bailout money for the region. Fears of turmoil in the Euro Zone are gathering, as well, with some harking back to Milton Friedmanís thoughts that the Euro would not survive its first recession. Japan is facing a demographic bomb, with its population plotted to shrink by half by 2050. For investors, tough choices are abound and money has to be put somewhere, even if it is the best of a bad lot. The U.S. economy is still the largest in the world and has the most capable military force still.

That leaves traders chasing dollars, and the net effect of that today was a deflationary tone. The dollar closed at its highest level in nearly three years today. Nearly every major commodity was in the red as traders fear further slowing in demand. Even as OPEC contemplates another cut in production, oil dropped over $4 a barrel today as demand concerns trump supply concerns.

Buyers should view this correction as a buying opportunity but may want to include some sort of put protection. Given the volatility of gold, a pullback could encompass a price range to as low as $880.

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