Oct 20 a.m. (USAGOLD) -- Gold continues to straddle the $800 level, weighed by persistent deleveraging of commodity positions as concerns grow about a protracted recession. At the same time, we continue to see strong safe-haven demand for physical gold amid an increasingly tight supply situation.

Paper prices of gold remain suppressed as a result of ongoing broad-based deleveraging. In addition, flows out of equities into money market funds have served to bolster the dollar, which in turn has weighed on gold. Softer oil prices have also limited the upside in the yellow metal.

The physical market is compensating for the disconnect with the paper market with ever-higher premiums. At some point something is going to have to give. Since paper gold should be based at least to some degree on the basic supply and demand dynamics of the physicals they represent, it seems more likely that paper is going to have to play catch-up.

The realities of the physical market suggest that gold should be trading at least $100 higher. More realistically, a price somewhere north of $1,000 per ounce is needed to clear the market. Such a price would probably free up supplies to a large degree. At the current price, holders of physical gold are simply not selling.

Fed funds futures for Oct are fully priced for another 25bp rate cut and odds are running about 50/50 that another half-point cut is in the offing. A 50bp rate cut would lower Fed funds to just 1.0%, the post-9/11 lows from 2003/2004 and arguably the source of the recent crisis.

I'm doing a little Fall landscaping at my house. As I was digging a hole for a new tree last week I was reminded of of the adage: If you want to get out of a hole, the first rule is to stop digging. The Fed, in conjunction with Treasury, seem to think the solution is to dig faster.

The federal deficit recently surpassed the $1,000 billion mark. Many are projecting a deficit greater than $2,000 billion as a result of all the various bailouts and liquidity schemes. The burdens of a huge deficit, along with the significant inflation that is likely to result from central banks attempting to reflate the global economy is reason enough to own physical gold as a hedge.

Add to that the fact that considerable systemic risks persist, despite all of the recent efforts to stabilize credit markets and the banking system. Many also believe that the dollar will never regain its status as the world's reserve currency. This could make it considerably more difficult to finance our debt, at a time when there is substantially more debt to finance, which is likely to weigh considerably on the greenback over the long-term.

I heard Mitt Romney, former Governor of Massachusetts and Republican presidential candidate, and co-founder of Bain Capital on the radio last week discussing the financial crisis. He said the following:

"There is blame to go all around. The excesses on Wall Street, packaging together garbage and selling it as good product was an enormous mistake on the part of Wall Street. And the rating agencies that approved the stuff and gave it great ratings. It was also a mistake of the regulators in Washington to look at banks that were filling up with this kind of garbage and considering it gold."

Since all of us taxpayers here in the United States are now the proud owners of what Mr. Romney so eloquently described as "garbage," don't you think it's high time to diversify against those new holdings that have been forced upon us with what he implied was the antithesis? Gold.

Gold Market Movers:

US leading indicators for Sep +0.3%, above market expectations, versus revised -0.9% in Aug.

Canada wholesale trade for Aug -1.5%

Libor rates tumble

US faces worst recession in 26 years

Iceland to announce $6bn IMF-led rescue package

ECB's Nowotny sees global 'tri-polar' currency system evolving

Crude oil rises a second day as OPEC prepares to cut production