The view from the banks’ is equally bearish: Deutsche Bank sees gold falling 13 per cent this year to average $861 in 2008 and $750 next year. UBS has meanwhile lowered its 2009 forecast for gold from $825 per ounce to $700 saying:

The revised UBS commodity price outlook reflects an extended recessionary scenario with base metal prices in both 2009/2010 that are mostly below the marginal industry costs and current spot prices,” the investment bank said in a report. “If such a recessionary scenario were to unfold, we believe that almost all North American mining companies could experience challenges to liquidity and/or business continuity.

Even as prices rise slightly today on a weaker dollar, the technical view from ScotiaMocatta indicates $700 should be the next key support target:

And yet demand for physical coins is looking resilient. According to Fortis, the US Mint on October 7th had to cease production of certain smaller editions of American Eagle gold coins because of the unprecedented demand 1 oz issues. Furthermore, if measured in euros, gold’s fix on October 8th actually set an all-time high.

In some currencies badly affected by the financial crisis and decline in commodity prices, such as the Australian dollar, gold's rise has been even more dramatic, trading around A$911/oz on 10th September, it hit A$1,400/oz on 10th October, more than 50% higher.

The highs were not to last, however, leading some to see the retracement as a signal the worst of the financial crisis may be over. But Fortis warns this is unlikely as the price of gold in dollar-terms was already in decline during the heart of the crisis. Pointing to another factor for the counter-trend reaction Fortis says:

One possibility is a large sale by another institution, such as a central bank, that needed dollars. Sales from the Central Bank Gold Agreement signatories began the new year (from 27th September) briskly, with sales of 7.8t in the first week and 7.6t in the second week,

But even this theory has its holes. Firstly sales by the third week began to contract to just 2t, and secondly, as Fortis suggests, it would be hard to identify a central bank with enough gold and insufficient foreign exchange reserves to make a gold sale necessary.

More likely, the bank says, gold has begun to lose its safe-haven status, succumbing to the wider collapse in commodity prices through the unwinding of long commodity/short-dollar positions. One other factor worth considering though is the growing view that deflationary rather than inflationary forces may be about to grip the global economy. Barron’s writes:

While analysts say that changes in fiscal and monetary policy by many nations should stave off negative growth, the financial crisis and sputtering global economy, combined with the losses in equities and commodities, have many thinking of the D-word. Could it be the reason gold hasn’t revisited its March all-time high, $1,014.60 an ounce, despite the worrisome economy? On Friday, December contract gold on Nymex' Comex settled at $718.20 an ounce, down 1.657% on the week. In a deflationary environment holding gold suddenly makes a lot less sense."

What does make sense, is to hang on to that core insurance position - just like money guru Dennis Gartman is doing - as one never knows what the world may wake up to the next morning. As he notes, it only takes a few weeks for sentiment to shift dramatically - and it works both ways.

Thus far, the only thing certain about tomorrow morning's world, is that Americans will be visiting the voting booths in numbers not seen since the 1920's. Now there is a change worth noting. A giant stirs.

Jon Nadler is Senior Analyst, Kitco Bullion Dealers Montreal

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