By Jon Nadler
The Dubai-based financial sandstorm that roiled the markets late last week showed some signs of dissipating as the new trading week got underway. While the Dubai finance minister indicated that the emirate will not guarantee anything when it comes to local banks, such banks appeared to receive verbal support from Abu Dhabi. The UAE's stepping up to the plate to support institutions that have exposure to what was to be the ultimate amalgam of Disneyworld/Las Vegas ultimately led to a bounce in emerging market stocks and a resumption of the trend in the dollar and commodities.

As Monday's markets got underway, the US dollar had broken back to under the 75 mark on the trade-weighted index and had slipped to the 1.50 level against the euro as well. Oil prices did not manage to recoup much of their Friday losses, but equity markets appeared promising in the wake of a 264-point gain in the Nikkei overnight, and judging by a bounce in the emerging market indices.

Gold' scary $60 Friday range gave way to a more moderate pattern to Monday morning's initial price action. The yellow metal appeared to manage to hold support at the $1168 trend line and while uncertainty persisted in the marketplace even as the imminent threat of Dubai default appeared to recede, traders were back at work to deal with pressing matters such as the December futures contracts' expiration.

New York spot dealings opened with mild losses in gold, which was quoted at $1171.40 bid, down by $5.30 the troy ounce. The 'risk' (to the shorts) of a V-recovery in the metal remains there, with further attempts to clear the $1200 psychological hurdle about as certain as the prospect that someone, somewhere, will lose some (hefty) sums in the emerging Dubai debacle.

Gold remained under mild selling pressure (the Kitco Gold Index reveals that about $8.50 of today's $6.40 loss as of 8:46 NY time was due to predominant selling of the metal, and that the US dollar's 0.12 loss on the index mitigated only about $2.10 of such a loss - in other words, gold would be down by more than $10 if the dollar were unchanged on the day) even as the dollar fell slightly.

Silver spot prices traded down by 7 cents at Monday's market opening, quoted at $18.18 per ounce. Platinum fell $1.50 to $1435.00 and Palladium declined $3 to $359.00 as the new trading day got underway. GM may decide this week on the fate of its Saab unit. According to automotive industry watchers, such a fate may involve euthanasia as opposed to a rebirth of any kind. Just the reality in the ever-shifting automotive landscape, where strictly the fittest survive. Some, even then, only based on taxpayer-flavoured life-support.

The Friday dip in gold, on the other hand, revealed a couple of other, also hard to ignore, realities. One is that a highly speculative (and significantly overbought) condition in the marketplace can, and does, on occasion - result in stop-loss selling that cascades as only so many dominoes that have been set up in a wonderfully intricate pattern. The other thing that came to light in the action we witnessed late last week, is that when panic hits -real panic- the 'safe-haven' quest among the panicked, reverts back...to the dollar. Yes, the "debt-ridden, soon-to-be-dead, good-for-nothing but T.P." US dollar was being bought, hand-over-fist, on Friday.

Gold and oil, two of the most liquid assets available under such circumstances, were being let go of, on the other hand. Perversely, perhaps, ever so briefly, perhaps, but still the case. Go figure. In some ways, the Friday roller-coaster underscored that which prompted John Neff (who managed Vanguard Group’s Windsor Fund for three decades), to offer this take on the precious metal when queried by Bloomberg: “It’s not an investment, it’s an emotional experience.”

Daily Finance observed -pointing to conditions in place prior to Friday's Gold market narrative- that: " [recently] investors have debated how much of the gains are the result of fundamentals as opposed to speculation. The conventional wisdom holds that rising prices are the market's verdict on the Federal Reserve's decision to pump massive amounts of cash into the financial markets.

The gains [in gold] may be part of a self-feeding cycle, with desperate fund managers under the gun -- chasing assets that seem to be rising -- to show performance as the year ends. And despite perceptions of safety, the recent gold rally has also coincided with the purchase of riskier assets like stocks and junk bonds. Previously, gold tended to move in the opposite direction to those risky assets.

More than any hedge on inflation, the current run in gold seems to riding "a rush with liquidity," veteran market analyst Dennis Gartman told DailyFinance in a recent interview. That is, as cash goes searching for higher returns, gold is attracting a lot of that liquidity along with stocks and other rising assets. The problem for investors, of course, is knowing how to time the end of the party. With no underlying cash flow, gold is notoriously difficult to put a price on.

Some value-conscious investors like Warren Buffett have steered clear of the metal, partially, as a result. And when gold price reversals do come, they tend to be violent. Commodities often take the staircase up and the elevator down, the old saw goes. While Friday's move may merely have been a few stories down, it should serve as a wake-up call to overconfident investors."

Something else that has showed some signs of overconfidence - at least as far as spec fund book-talk is concerned- during the gold rally in place since September 1st, is the perception that mine production of gold is somehow headed into oblivion. You know, the 'peak' argument that was in heavy rotation, and being trotted out every time a market player talked about $200 oil being just around the corner, last year. No one will seriously debate that production problems persist in South Africa, or that Indonesia produced less than had been anticipated for 2008 )a glitch that could be resolved in 2009).

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