Quite frankly no body can say short term what will happen.

When the paper markets are multiple times the size of the physical markets price discovery takes a back seat to speculation. What we should expect is volatility in all markets and huge price swings in either direction is possible as longs liquidate or shorts cover when a trade goes against them.

The tail that wags the dog, eh? I agree. For some time now I've watched the commodity markets being pushed around by speculative money whose ultimate source was the credit expansion - money chasing the inflating asset, in other words.

It starts out innocently enough with rising stock prices, which everyone loves, then works its way into bonds, housing and ultimately the commodity sector. That's where the buck stops, because price signals here cause the ultimate misallocation of capital which leads to overproduction followed by falling prices.

Longer term the fundamentals will reassert themselves.

I think that's happening now. We've had bubble driven expansion in oil and mineral production for instance, and now we're seeing the results. The mining sector's been signaling this for over a year, and now the oil sector has joined the chorus.

This is a basic theme I'm working on: that the original purpose of futures markets - hedging by producers and consumers - has been stood on its head by an excess of speculative capital, source the credit expansion. Now that it's over, prices will come down, and even overshoot their equilibrium point.

I would not be on margin and would add gold is not a short term investment here.

Gold is behaving in much the same way as the rest of the commodity complex, as outlined above. Longs are liquidating previous speculative positions, which is driving down the price. In the case of gold however, there is no backstop in the form of production cutbacks because gold isn't really a commodity. To be a true commodity it has to be consumed, but all the gold ever mined (except for a small amount lost at sea or in pirate hoards..yar!) is above ground waiting to come to market at the right price. So, what is that right price that draws that gold out? Is it higher, caused by hoarding in the face of monetary inflation, or lower caused by panic selling into a falling market that could drop off a cliff at any moment?

Do I have the answer? Nope. But at least I'm open to both possibilities, whereas the goldbugs, who can't seem to explain anything without conjuring up a conspiracy, have yet to offer what I'd call a reasonable explanation for the failure of their predictions. I mean, seriously.... look at the amount of monetary expansion worldwide. Markets are supposedly forward looking, thus if the expectation was for future inflation, gold should be at $2000 already. Saying gold will eventually respond as inflation works its way into the system is just hand waving IMO. Worse, its a de facto argument for inflation, which I'm increasingly skeptical of. The market could be wrong of course, but to me it looks like it's signaling deflation al la Japan. A really deep protracted slump in everything, including so-called tangibles like gold (which can be expected to maintain relative purchasing power - but that doesn't mean it goes up).

The fact of the mater is that there really is no safe place to hide anymore. Not even US cash/TBills are safe when foreign creditors could dump them for political or financial reasons whenever they want.j

I'm hiding under my bed! They can't get me there!

ebear