This from Sovereign Society:

In the past few months, millions of investors have taken trillions in equity out of the markets, stashing it either on the sidelines or in negative-yielding US treasury notes.

And honestly can you blame them?

Real estate and equity prices have crashed and it’s almost impossible to know when they’re going to recover. Fixed-income investments are growing riskier by the day due to the global credit crisis and the projected spike in bankruptcy rates.

But here’s the reality: The U.S. government is printing money so fast, that cash is not even a safe bet anymore. That makes gold the safe bet in these rather stormy economic times.

Investors who purchased gold lately have been disappointed because the price of gold has not responded to the crisis as expected. Just think about it: If we had told you a year ago that this financial crisis was going to be so severe, would you have bet on gold falling by 30%?

Anatomy of a Disappointment

My guess is that very few of you would answer “no.” We have spoken with many confused investors lately, who don’t understand why gold is not responding positively to the current crisis. As you can imagine, this only adds to their confusion of the global markets.

Once again, it’s important to understand what moves the price of an asset short-term and what is driving that same price in the long-term. The long-term outlook for gold is still very attractive. We simply don’t have a growing supply to match the rising demand for gold.

The massive infusion of liquidity is ultimately going to lead to a massive spike in capital flows, and an upward pressure on inflation. This should also support the price of gold longer-term. Also, the weakening U.S. dollar in recent years drove gold prices higher. And the current temporary dollar recovery is also having a negative impact on the gold price.

However, at the moment, the short-term impact of various factors is out-weighting the positive long-term fundamentals.

Behind the Scenes in the Gold Markets

The reason gold has not performed well in the last couple of months is because institutional investors are dumping their gold holdings. These institutional investors need liquidity fast, so they’re selling gold. This actually shows how bad the current crisis is for many. Gold is now one of very few assets that can be easily liquidated to generate cash.

And the creativity of the financial industry has resulted in the development of a lot of commodity-linked investment funds. Typically funds buy gold as one of the hard and soft assets in their commodity-backed baskets.

These funds have all been facing a massive amount of redemptions lately. That means fund managers are forced to sell all commodity baskets they own… including their positions in gold. They could not differentiate between oil, agricultural commodities, metals and precious metals due to the nature of these investment baskets. This just adds more selling pressure on gold.

The temporary recovery of the U.S. Dollar has also kept prices rather low, but the U.S. Dollar recovery is driven by short-term money flows. We at Alpine find it hard to believe that the U.S. Dollar will continue to gain ground.

While we have seen the price of gold falling, a physical shortage of gold has developed. Go to any bank here in Switzerland and tell them you would like to buy a large amount of physical gold, either as gold bars or coins. Most of them will tell you that you have to wait a couple of days or even weeks because they are running out of inventory.

This is because more investors are distinguishing between “paper gold” exposure like investment funds and physical gold that they can touch and store in a vault. The problem is that many investment products are directly linked to the credit risk of the product issuer. This was not a big concern a year ago, but it certainly matters today – as we’ve seen so many troubled banks collapse under the credit crisis.

So if you plan to invest in gold certificates or funds, be sure your investment is physically backed by gold. Also check to ensure your investment is easily tradable, and backed by a counterparty with low credit risk.

These are uncertain times and could remain so for quite some time to come. Eventually, we believe that the market is going to focus more on the longer-term outlook for gold again and the short-term selling pressure is going to subside. This should drive the price of gold upwards towards US$1,000/ounce, possibly even higher.

We predict that ultimately, gold will shine again and that time could come sooner rather than later.

PS. Still not convinced? Here’s an excellent video from INO.com that uses technical analysis to show why the recent break above $800 an ounce could trigger the next big leg to the upside for gold prices.

Source: Why Gold Isn’t Shining (Yet…)

Demand for physical gold is soaring so much that it is almost impossible to get hold of right now. And gold production is lower than in 2000. Andrew says all this means it will soon be gold’s time to shine…

More from Investor’s Daily Edge:

Gold dropped from $915 to $859 on Friday. That’s not supposed to happen while the market is crashing. What’s going on?

It’s not that gold has lost its luster. But institutional investors were forced to sell gold on Friday to meet margin calls.

If equity and hard assets continue to lose value anywhere near the rate of last week, margin liquidation will continue. And gold could go down even more.

But make no mistake about it. With the market crashing and dozens of governments printing money like there’s no tomorrow, investors want to be in gold.

Before the sell-off on Friday, the price of gold was up more than 20 percent following Lehman’s collapse.

The demand for physical gold this month has surged to what one trader calls “unprecedented” levels. The US Mint has doubled its gold-coin production but it hasn’t been enough.

Gold dealers have had to turn away customers wanting to buy coins and bars.

But it’s the physical demand (for jewelry) that ultimately decides the price of gold. Jewelry demand accounts for 60 percent of total gold demand and it’s down so far this year.

Will it pick up? The world’s biggest gold consumer is India and Diwali – the festival of lights –begins October 28th. Gold sales usually surge with the approach of this festival.

Then there’s this: Gold production today is lower than it was in 2000.

Gold is rarer than ever. The markets are going to hell. It’s gold’s time.

Source: Has Gold Lost its Luster?

David Galland says profit taking by institutional investors has ‘trampled’ metal prices. But the deepening crisis on Wall Street, geopolitical tensions and a traditional September bounce could send gold soaring back towards $1,000 an ounce. David says this could “happen literally almost overnight.”

Here’s a no-brainer long-term investment strategy to stick to: buy and hold resources now.

This from The Daily Reckoning:

As we take a longer view on the precious metals here at Casey Research, I’m not much for commenting on current market gyrations or the various sub-themes that regularly emerge in the blogs.

First and foremost, as to the purported discrepancy between the price of gold on commodities exchanges and that of physical gold, in my view, any real discrepancy would be jumped on by the arbitragers so fast, it might even break the land-sound barrier.

As for the shortage of gold and silver bullion products, we would attribute this to a couple of factors. The first is that there has been some poor planning on the part of the mints. Secondly, the poor planning is likely due to a failure to appreciate how many people are coming to the conclusion that it is better to own at least some precious metals, instead of holding only the unbacked paper of governments.

As for gold’s recent steep fall in the face of the clear signs of physical demand, it seems clear that this was largely caused by gold traders taking profits. At every step up in this bull market, the precious metals have been stuck, for months at a time even, in trading ranges… the bottom of which evokes buying and the top of which triggers selling.

It is always worth keeping in mind that the defining feature of commodities exchanges is the leverage the instruments that trade on these exchanges offer. Consequently, the traders who call those exchanges home are able to marshal considerable juice in their quest for a new Lexus with 16-way driver seat features and custom leather interior.

The salient point is that while those of us who believe in the values offered by gold and silver like to think of them as “substantial” markets, when it comes to futures markets, they are like a gnat on the tail of an elephant. To make the point, consider that the cash value of foreign-currency contracts traded globally each 24-hour period is on the order of $3.2 trillion. By comparison, over the same 24-hour period, on average, $26 billion worth of gold trades hands. For silver, the number is even smaller, just $4.5 billion.

All of which is to say that (a) these are markets that can be “pushed around” by the traders, and (b) when a large number of traders shift into “take profits” mode, the price of the metals can be trampled.

The long and short of it is that range trading will go on for awhile, until something occurs in the psychology of the market that shifts the majority into the long side… at which point the upper end of the trend is decisively broken and the range is reset to a higher level. It is my contention that the top of the range for gold is now $1,000, and we could see it continue to test that level, then fall back, for some time. But really, who can say? It could happen literally almost overnight.

Shifting to a somewhat nearer-term perspective, however, it is worth looking at the chart from Seasons of Gold, the archived article from the April 2006 edition of the International Speculator.

While the chart hasn’t been updated lately, the data used is so long-term – 30 years – that updating it wouldn’t have changed anything by any noticeable amount.

Viewing the chart, it doesn’t take a lot of imagination to assemble a scenario whereby the continued strong investment demand for physical gold meets the traditional strength of the Indian wedding season buying that contributes so much to the historical pick-up in gold prices in September.

Toss in the effective nationalization of Freddie Mac (NYSE:FRE) and Fannie Mae (NYSE:FNM), putting the U.S. taxpayer as the guarantor of last resort on fully half of the mortgages in the nation…and mix in some of the ripe geopolitical apples now falling from tall trees, or the imminent realization that oil isn’t going back to $50 or that the inflation phenomenon is not temporary, and we could see a big bump in the gold price over the next couple of months.

Time to go long in the futures market? Well, on that topic, all I can say is, tread carefully…and use as little margin as possible just now.

That’s because, as wild as things have been in pretty much all the markets, we haven’t seen anything yet. If there is one thing you can take to the bank, it is that, in the months just ahead, the volatility of virtually all markets is going to go ballistic. For the attentive trader, that can mean big, and repeated, opportunities for profit. But for the casual trader, high volatility can lead to quick loss making.

Sticking to a longer-term perspective – buying and holding and, if resources allow, buying more on the dips – is the way to go.

Source: Whither Gold?