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…)

Platinum pushed as high as $2230 in Hong Kong, but sank through to New York, then traded sideways to end at $2164/oz., down $37. Overnight, platinum has been flat.

While silver was lower to the mid-point of the London session, it rallied from there, making its way nearly back to the break-even point, and closing at $17.96/oz., down just 2 cents. Overnight, silver has been trending higher.
(Click here for charts)

As might have been expected, there was profit-taking in the precious metals yesterday after their recent runup.

But the damage wasn’t large, especially considering that the usual market movers, oil and the dollar, both went against them, with the former backing off and the latter staging a modest rally.

In fact, some analysts were making the case that both the dollar’s rise and gold’s fall were technical in nature.

Technician Zachary Oxman, of Wisdom Financial, believes that, “Until we cross and close above the $940 level, we’ll remain range-bound between $900 and $940.”

Nick Ruggiero, a trader at Eagle Futures Inc. in New York, noted gold’s recent link to oil and said, “You’ve got to be cautious because when you do get a big sell-off in oil, all commodities are going to get hit hard.”

And how much does the paper gold market influence the metal’s price? Plenty, contends Jim Sinclair of jsmineset.com.

“It would be bullish to shut down the US market for gold,” Sinclair writes, “because then you would have a thin market with a positive Euro bent on gold and a more positive global market would be created.

“No access for major traders will be denied, that you can be sure of. I would love to see US trading stopped in paper gold. That would be good for $150 on the upside after less than 24 hours. The poor COT would not be able to create the influence on the global market they do with the aid of the US paper market cabal.”

Source: Gold Corrects, Following Oil