Excerpts from Justine Little.

-----------------------------

As a trader, you look at how a market reacts to news, good or bad, to determine how strong or weak the trend really is. If a strong market reacts poorly to good news, that’s a sign that maybe it wasn’t so strong after all... or that maybe the strong trend is now weakening.

Conversely, if a bearish and beaten-down market shrugs off a round of further bad news, that’s a sign that perhaps the bearishness has run its course.

Getting back to the Russia-Georgia shooting conflict. The key “tell” for traders here is that gold didn’t jump up when conflict broke out. Under more normal conditions, you would expect gold to see a huge pop on news of military conflict in an unstable region.

So when that didn’t happen, it was sort of like Sherlock Holmes’ “dog that didn’t bark.” The fact that gold reacted poorly, when it should have acted strongly, caused traders to rush for the exits. And that stampede in turn caused the price of gold to fall through the floor.

...

In other words, these guys were already as nervous as a long-tailed cat in a room full of rocking chairs when the Russia-Georgia shooting war broke out... and so when gold failed to respond the way it should to the prospect of military conflict, they ran like hell for the door.

...

Oh, and as to why gold will come roaring back?

In a nutshell, inflation isn’t dead. Not by a long shot. That’s another thing Wall Street doesn’t really understand... why the prospect for a massive inflationary tidal wave actually requires slowdown fears to kick in first.