“Very few people like the communist color red, in a democratic world. this applies to the financial markets as well which hates red.” February 27, 2007 was repeated last week, albeit for different reasons. “Once bitten twice shy. Three bitten how many times shy! for the gold investor.” Gold’s three failed attempts to break $700.00 in 2007 followed by fall. The fall was like a bullet hitting a gas balloon. I must admit gold and silver have disappointed this week. One whiff of adverse news and they fell like a pack of cards. Despite solid foundation, they fell. This will only dent the investor confidence till $700.00 is not breached. Silver has been trading in wider $1250-$1350 range for the past three weeks. Fundamentally, the most bullish metal which continues to find sellers at higher levels. What caused the fall in gold and silver? Gains in the US dollar: The US dollar was highly oversold. The US dollar Index briefly fell below 80.0 to 79.87 before closing at 80.81. Technical correction in the US dollar index was bound to happen sooner than later. Momentum lost out of gas for US dollar bears and technical traders took the charge for the greenback. I would call the US dollar’s gains a mere pullback this week and nothing else. Gold and silver fell in line with the gains in the US dollar. Euro, cable, loonie and the Australian dollar had all reached multi year high against the US dollar in July. The correction was in the offing. Sell on global equities: The Standard & Poor's 500 and Dow Jones industrial average ended trading on Friday at the week's lowest levels, mark the worst one-week percentage drop for the S&P 500 in nearly five years and the gloomiest on the Dow in five months. The Leveraged Buy Out (LBO) and Collateral Debt Obligation (CDO) scare resulted in companies postponing their debt issues and sell the in equities. The LBO and CDO’s spreading into Australia and Japan resulted in investors exiting stocks markets. Global stock markets have had a bumper year so far in 2007. Last weeks sell off was nothing but a mere correction. Investors took the excuse of risk aversion, problems in US housing markets and corporate debt markets for the sell off. The lesson from CDO and LDO’s is that every risk taking investment will not give positive returns. Risk appetite of investors over the past two years have reached historical levels, because each time they took a risk, it resulted in higher returns and the chain began. May be now, retail investors will not get carried away by need for greed and erode their capital. My experience shows that retail investor loose more money in a falling market than they make money in a rising market. Rise in bond prices: Scared investors parked their funds in treasuries which resulted rise in bond prices. In our view treasury prices could correct anytime and are forming a short term top. Investors did not diversify into gold as gold is a non yielding asset. (This is just an excerpt from the weekly report. Please mail me a request to receive a copy of the same.) Gold and silver are not out of the woods. Friday’s close till set the tone for whole of August. Better to use a combination a bull spreads and bear spreads to hedge the risk. Gold December future is the longest with four months left for expiry. We expect greater participation in gold december future by retail investors over the next few weeks. The carnage in global stocks should end soon and there should be consolidation phase soon. | 
