In spite of the almost $5 dip in prices, gold clamored back to almost even, and futures remain near 7-month highs.  Action in the US dollar was tepid, and equities attempted a break out to the high side but a lack of enthusiasm dampened the effort. 

The fuel that ignited the fire under gold bugs this week seems to have been the re-emphasis from President Bush that the US is involved in a costly war that could take many years to win.  All this was previously known, but to have it underscored again was enough to cause the US dollar to suffer a severe setback, providing extra incentive spook gold nervously higher.

After reaching new contract highs on Tuesday, equities stalled on economic data that reveals sluggish performance from some in the tech sector.  Also, private consumer sentiment indices, such as in Investor's Business Daily, showed consumer optimism fading.  The memories of 9/11 and the continuing war are taking center stage at the moment, and as much as Americans are optimistic, a solemn tone overshadowing the markets was to be expected.

Gold traders saw the weakening dollar and questionable economic data as another variable to support a gold rally.  Is the broader equity market perhaps overbought at the moment, with valuations in many sectors near 1999 levels? Anecdotal evidence such as online trading volume perking up and many Wall St. analysts recommending buying high valuation stocks a la the late 90’s, suggests too many investors are foolishly seeking revenge from the bloodbath they endured starting in mid 2000. 

Perhaps the giant bond sell off this year was the catalyst behind gold’s acceleration?  With bond prices collapsing so dramatically there is chatter about Asia, our biggest Treasury investor, scaling back their Treasury purchases.  If they cease to finance our debt, who will pick up the baton?  Gold bugs view all of this and more, as variables that will eventually break the back of the US economy.  For instance, if the deficit spirals out of control and cannot be financed by foreigners as before, then what?  Faith in our markets and currency would be undermined, rates would move up, inflation could set in, commodities would appreciate, home values would drop, more jobs might be lost, political will to fight the war on terror would wane, and perhaps stocks would fall off the cliff, all of which would give cop>< for gold prices to head higher.  Geopolitical conflicts are also providing economic pessimists additional ammo to fuel their bearish prognostications, which would once again give credence to gold moving up further.