Earlier in the week, both the DJIA and the S&P 500 closed more than 20% off of their record highs from Oct-07, confirming a bear market for stocks in the eyes of some analysts. Stocks were in fact the worst performing asset class year on year through Jun in the 2008 USAGOLD Survey of Investments.

Both of the major stock indexes are trading well below all of the important long-term moving averages. Further confirmation that the trend for equities is now bearish.

The DJIA has retraced more than 38.2% of the entire rally from 7181.47 (Oct-02 low) to 14,279.96 (Oct-07 peak), which is also a rather negative technical signal. Near-term tests below 11,000 are likely and would bring the next important Fibonacci/chart level at 10,730.72/10,658.34 into focus.

The S&P 500 has also retraced more than 38.2% of its entire rally from 768.63 (Oct-02 low) to 1576.09 (Oct-07 high). A challenge of the 2006 lows at 1224.54/1219.29 is now anticipated. If this level gives way as well, focus will shift to Fibonacci/chart support at the 1172.36/1168.20 level.

The financial sector is expected to continue to weigh on equities as the pig (subprime/credit crisis) continues to work its way through the python (global financial markets). Despite massive injections of liquidity by the Fed over the past eight months, loans and investment in the US banking sector are contracting at the fastest pace since the Fed began reporting weekly data in 1973.

Sure, the Fed is now likely to extend their liquidity facilities into 2009 in an effort to support the banks, but at what cost? The banks have been swapping an increasingly dubious lot of assets for US treasuries and then hoarding that liquidity to shore up their own balance sheets.

Nonetheless, further writedowns are in the offing and we have heard repeated warnings about regional banks. The regionals are experiencing greater difficulty in raising much needed capital. Systemic risks are on the rise along with odds of at least a regional bank default.

The fact that all the additional dollars in the system are getting soaked up by bad loans -- or expectations of loan defaults -- means that liquidity isn't filtering down to the American consumer. This does not bode well for the US economy, for which consumers are the primary driver. Translate that into, 'this does not bode well for the stock market.'

Lack of liquidity has also driven of the cost of borrowing in the troubled housing market as well. Higher mortgage rates are effectively destroying demand in a sector that is essentially the lynchpin for the current economic crisis and can ill afford any further decline in demand.

Government sponsored mortgage lenders Fannie Mae and Freddie Mac have been highlighted this week as the latest phase of the liquidity crisis plays out. "Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer," said former president of the St. Louis Federal Reserve William Poole. Could a government bailout be in the offing? Hold on to your wallets!

Meanwhile adjustable rate mortgages continue to ratchet higher, driving more properties into foreclosure. RealtyTrac reported today that foreclosures were up 53% in June over the same period last year. A startling 1 out of every 501 households in the US in now in some stage of foreclosure.

This is pretty compelling evidence that the Fed is unlikely to raise interest rates any time soon, despite the implications for inflation. Fed funds are likely to stay at 2.0% for the remainder of this year. That fact along with expectations that the Fed will continue to pump liquidity into the banking system and you have a recipe for further losses in the dollar.

Dollar losses have played an important role in driving up the cost of energy, food and -- as a result of pass-through effects -- just about everything else. Look for this trend to continue as well.

Given the rather bleak outlook for the stock and housing markets, a vulnerable dollar and expectations that inflation will be on the rise for some time to come, now is the time to diversify and preserve your wealth. Physical gold offers a convenient, liquid and non-correlated hedge that is not simultaneously someone else's liability.

The latest surge in gold prices brings important resistance at 954.70/960.88 back into focus. A breach of this level would favor renewed tests above $1,000 and ultimately a resumption of the long-term uptrend.

Gold Market Movers:

US home foreclosures surge 53% in Jun y/y.

US initial jobless claims for the week ended 05-Jul -58k to 346k. Holiday and auto sector retooling distortion cited.

BoE holds steady on rates at 5.00% in line with expectations.

UK Halifax house price index for June -2.0% m/m.

Mounting sense of crisis over Iran

U.S. foreclosures rose 53% in June, bank seizures almost triple

Fannie, Freddie 'insolvent' after losses, Poole says

Investors brace for more US earnings gloom

S&P 500 falls into a bear market

Commodities bull run will last another 10 years, says Investec

Inflation, oil, Iran: What year is it?