By Jon Nadler
A fresh break by the US dollar to under the 75 level on the trade weighted index prompted more...of the same during the overnight trading hours. Namely, fresh additions to the price of gold and oil. The price tag of the former is starting to look much like a Weimar Republic-era chalkboard; one which sees values change during the dinner at a restaurant.

The now parabolic rise in the metal, fueled almost exclusively by feverish speculation among momentum funds is now making for some very tired news writers in the financial press; their headlines for "New Record" are becoming hardly read unless there is a very specific time stamp attached to the story. Hard to tell whether the reference is to a week ago, a day ago, or just an hour ago. We will repeat that which should be obvious, in case you have doubts about where this writer stands: Gold is NOT in a bull market. The dollar is in a bear market. That much, you have also heard from the logical brain of Paul VanEeden, several times over the course of this past year.

Thus, we record this morning's trace on the parabola as follows: Gold opens with a $7.20 gain, quoted at $1063.90 (after having touched an overnight high of $1069.50 per ounce). It drags silver 19 cents higher, to 17.91 per ounce. Platinum plays catch-up with the yellow metal and surges $23 to $1358.00 while palladium adds $6 to rise to $332.00 per troy ounce. And, the dollar plummets to 75.80 (off 0.38) on the index. In the interim, the non-dollar factored gold value as shown on the KGX Kitco Gold Index is trading at the 807.38 figure per ounce.

The chasm between the gold market and the rest of the background situation grows wider with every passing day. To wit: inflation fell to the lowest level in seven years in the UK, crawling along at 1.1% per annum now, after having fallen from the 1.6% level in just August. A somewhat similar slowing in the US inflation rate is expected from the data to be released on Thursday.

To wit: there is a notable absence of geopolitical turmoil following the simmering down of the Iranian nuke impasse recently. Thus, absent the two key historical drivers of the gold price equation, we are left with nothing but the dollar as a catalyst here. But, as we have repeatedly warned, that is not enough to make for anything but a short-term plethora of headlines. Why take our word for it, however, when you can have the opinion of one of the two veteran statistical firms in the business? Here is what our friend Paul Walker -he of London-based GFMS- had to say this very morning, when characterizing this market:

"Weak physical demand for gold raises doubts about the sustainability of high prices, although it may hold on to the $1,000 level for the next few months, a senior official at major metals consultancy GFMS said on Tuesday. Investment and jewellery demand have been key drivers behind the steady rise in gold prices over the past few years, and current weakness in jewellery demand is a worrying sign," said GFMS chief executive Paul Walker.

"My concern is that this market is becoming increasingly uni-dimensional," Walker said at a seminar in Tokyo. "One pillar, jewellery demand, has become eroded. The question we must ask is, is there a compelling, sustainable case for investment in gold in the short to medium term?" Gold prices hit record highs above $1,060 per ounce last week, propelled by the persistent weakness of the US dollar.

Speculative net long futures positions hit an all-time high in the week ended Oct. 6, suggesting growing risks for these long positions to be cleared and putting downward pressure on prices. At the same time, gold is supported by inflation fears as central banks keep interest rates very low and leave ample cash in the global banking system, with healthy investment demand underscored by steady inflows into gold-backed exchange-traded funds.

"Positive investment flows are likely to stay for the next few months," Walker said, adding that another wave of investment flows could push prices to $1,100, while a rise above $1,100 was "not an impossibility. But the issue is sustainability," he said.

Another worrying trend for the price outlook is how gold prices in some currencies such as the South African rand have fallen significantly from peaks earlier this year, when prices in U.S. dollars surged to record highs. Gold prices in rand have fallen as much as about 30% from the year's peaks and increases in prices in other currencies have been more moderate compared to gold prices in U.S. dollars.

"For it to be a sustained, justifiable bull rally, we should be seeing gold going up in every currency," Walker said. "It's just about the dollar. Investments in gold are not just those investing in dollars ... a point indicating this is not a genuine bull rally." Scrap volumes exceeded total fabrication demand in the first quarter of this year, another worrying sign as jewellery demand performed extremely poorly in the first half of the year.

India, the world's largest consumer of bullion, holds the key to the outlook for demand and how high and sustained gold prices will be in the next 6-18 months, he said." We are starting to see stresses and strains in what consumers are willing to spend. The volume argument is starting to move against gold," Walker said."  Continued...