Oct 23 a.m. (USAGOLD) -- Gold has probed below the $700 level for the first time in more than a year, weighed by ongoing commodity deleveraging and flight to the dollar. A weak rupee has also made gold more expensive in India, tempering jewelry demand.

Global investors seem to have adopted a "sell everything" mentality. The mass exodus from commodity funds and commodity ETFs, which attracted huge numbers of investors in recent years due to impressive returns, is driving the price of all commodities lower. Including gold.

Most commodity funds and ETFs allocate across a broad spectrum of commodities, including energy, food, industrial metals and of course precious metals. The specter of a protracted global recession, along with a housing market that is at a complete standstill has resulted in substantial demand-kill for many of these commodities.

When the sell orders roll in for these funds, managers are forced to adjust their allocations in all of the various components. Once again, that includes gold.

In an interesting turn of events, many who are selling out of these types of funds -- technically selling paper gold -- are immediately turning around and attempting to buy physical gold. Of course what they are finding is that physical gold is increasingly hard to get and that premiums continue to move ever higher.

The dollar continues to benefit from this broad-based deleveraging as investors exiting riskier asset classes pile into cash. Redemptions from even money market funds, normally considered extremely safe, have been very heavy after several funds 'broke the buck' last month.

The Fed moved yesterday to shore up this sector of the market with yet another liquidity facility. They are providing $540 bln in liquidity to buy short-term debt from money market mutual funds in the hopes of relieving the redemption crunch.

The dollar has gained considerable ground in recent months, bolstered by the movement into cash and flows from other countries whose economies are in even worse shape. The question becomes; is this dollar rally sustainable?

Arguably all the liquidity that has been injected into the banking system this year must have a substantial debasing affect on the dollar. Many investors that have moved into cash seeking shelter from the current financial storm are undoubtedly going to be reevaluating those positions in time.

At that point, they are likely to realize the vulnerability of their wealth sitting in cash. Similarly, 'safe' instruments that are paying a negative yield in real terms are not going to seem very attractive once the initial wave of risk aversion subsides. That is the time when physical gold will once again shine as the safest of safe-haven assets.

We continue to see extraordinary demand for physical gold at these prices. When the masses once again begin looking to physical gold as a means to preserve wealth and protect against the inevitable inflationary spiral, the tight supply situation is likely to be further exacerbated. I encourage you to move ahead of that next wave of demand.