ODD THINGS were happening to the price of Volkswagen - the world's third-largest auto-maker - long before it leapt 187% higher inside two days at the end of October. For a brief moment, and amid the worst-ever stock market rout in history, VW became the planet's most highly-valued corporation bar none at the end of October.

Yet it was already worth more than all other European and US car-makers combined. And VW's stock hadn't fallen but risen during 2008 to date - an odd move for the "people's car" marque.

Like everyone else, after all, VW is facing a global recession. Its peers, in contrast, have either collapsed or drifted lower, led by the 90% rout in GM shares. So betting that VW would also fall in due course thus looked a safe bet. So safe, in fact, you might wonder why wealthy investors and large institutions would bother paying a hedge fund to take that bet for them.

Maybe it's the "prime broker" access to exotic markets offshore...enabling bearish US investors to profit even after short-selling in GM and Ford was banned this September. Or perhaps it's the uniform that draws in the punters - you know, the bepoke lounge suit, open-necked cashmerello shirt, thickly fudged hair and (for extra "bite me!" pizazz) a pair of kooky nerd glasses.

Because it surely can't be the fees...starting, or so legend has it, at 2% flat plus 20% of any gains you might make. And legend might be all that remains of the bubble in hedge funds by the time the global meltdown in finance is finished.

We'll get round to that in Part II. Because back in VW's stock, fresh madness showed up in mid-September, starting with a series of short, sharp jerks higher. VW's stock doubled in price - and doubled on wildly erratic volume - even as Chinese car sales were reported one-tenth lower for August. SUV sales in the US sank by one-half from the same time last year.

Oh sure, the price of VW then fell (and fell hard), but only back to a two-month low of €200. And then, for all those hedge funds waiting to make a killing when reality bit, came the gotterdämmerung in Frankfurt's Xetra Dax market...

Monday, 27th Oct., saw an Arctic chill blow freezing winds and even snow down into Western Europe. It also saw luxury car-marque Porsche exercise options to buy almost 40% of VW's shares.

That not only caught bearish hedge funds napping. It also took Porsche's holding to a massive 74.1% of all shares in issue. And so with the Germany state of Saxony holding a further twenty per cent (the car maker's main operations are based there), the VW bears were left scrambling to buy back their shorts.

The pool of stock available outside Porsche and Saxony's investment, however, is now less than half the size needed. Oh...bother!

"I have hedge fund managers literally in tears on the phone," said one London broker to the financial press. The host of BBC's Today program couldn't stifle his mirth. Even the Financial Times - an essential prop for any "wild cat" hedge fund setting up shop amid the last decade's bubble in credit and leverage - got in a dig:

"Porsche used to be the emblem of a go-go City trader. Now it has become one," guffawed the Lex column before the true craziness broke. "Fast cars and fast money make a terrible combination."

Hedge funds get stuffed? What a hoot! Never mind that your retirement plan, perhaps, lies amongst the casualties. UK pension funds raised their allocation to these go-go managers by more than 60% in 2007. The Japan Pension Fund Association raised its allocation to hedge funds six times over in the year to July '08.

But what's not to love about the headline "Hedge funds lose (over-priced) shirt"...? "About 13% of VW's shares were lent out for short-selling, the highest proportion among large German companies," explains the FT. The free float of shares not held by Porsche or Saxony, on the other hand, stands at just 5.8%. Hence the rush to buy stock to cover those shorts. Hence Tuesday's spike to €1005 per share...precisely five times Friday's low...in the "greatest short squeeze in history" as one analyst called it.

For a 5% or merely 2% flat-fee per year, you might at least expect your hedge-fund manager to look askance at VW's odd behavior going into October's record jump. Porsche already held 35% of the stock; Saxony clearly plans to stick with its 20.1% for time immemorial. What's more, Germany's classically European regulations meant Porsche was known to have options...but didn't have to declare their size.

Plainly something odd was happening...something only the foolhardy or idiotic would want to meddle with. So step forward the German investment regulator, Bafin, who now finds the VW trade already jammed tight with fools and idiots.

More than 100 hedge funds are reckoned to have applied their brains to this "no brainer" bet, says the FT - funds including big names like Greenlight Capital, Glenview Capital, Marshall Wace, Tiger Asia, Perry Capital and Highside Capital according to the Wall Street Journal, plus one of the UK's longest-standing hedge funds, Odey Asset Management...as well as the world's most expensive manager, SAC Capital.

SAC doesn't waste time charging not 2-and-20 (as the more standard charge of 2% flat plus 20% of gains is known), but a massive 5-and-50. Or so legend has it. Again, legend might soon be all that remains.

Roughly put, VW's short squeeze may have cost the bears high €30 billon ($38bn). It "will leave no winners" as one loser puts it. And the great deleveraging ain't finished yet out there in Mayfair and Connecticut...out where the "wild cats" howled all through the greatest bubble in credit yet seen.

Adrian Ash
for The Daily Reckoning Australia

• Mainstream Financial Press is Finally Catching on to Hedge Funds
• $4.1 Billion in Investor Funds Have Been Frozen Overnight
• First Drop in Consumer Spending in Decades
• Inflation: Enemy Number Two
• Short Selling Ban May Kick Off Market Liquidation

SO the SPOT GOLD PRICE sank in October, dropping right back to 13-month lows at $683 an ounce.

After failing to breach $930, this collapse marked the third step lower from March's all-time high of $1,032. And from a technical perspective, the Gold Chart looks horrible - recording lower lows and lower highs for the last six months and more.

Right? Well, fact is, the action has actually been greatly muted if we allow for the shocking volatility in gold's No.1 competitor for "safe haven" funds, the almighty US Dollar.

You see, like so much else, the market action just described only sets Gold in terms of the greenback (against which it has still tripled since July 1999).

Versus pretty much every other world currency, in contrast, gold in fact enjoyed a banner month this October - delivering gut-wrenching volatility plus new record highs - starting right here in London, home to the world's $60 billion-a-day trade in wholesale Gold Bullion Bars (a.k.a. the "spot market").

Mid-month, gold also leapt to new record highs for Australian, Canadian, Danish, Estonian, Hong Kong, Hungarian, Icelandic, New Zealand, Norwegian, South African, South Korean, Swedish, Turkish and Russian investors.

Oh, and the 350 million souls in the Eurozone. Plus the 1.1 billion people of India.

Prices of gold have of course slipped back - and sharply - against all major currencies since reaching €685 an ounce for European investors and savers on Oct. 10th. (That marked a near-tripling from the low of Jan. 2000.) In the spot market, gold's now trading almost 13% lower as the month-end draws near.

And notable by its absence from the rogues' gallery of fast-sinking currency zones listed above is the Chinese Yuan, as well. More spectacularly, the world-destroying Japanese Yen has squashed the prices of gold since turning sharply higher against everything - real estate, global equities, emerging-market debt, even the Tokyo Nikkei - in mid-July.

But if we really are witnessing a global currency crisis led by the destructive reversal of the Yen Carry Trade (and it certainly looks like it from inside a wallet of Sterling or Ne Zealand Dollars, let alone Forints or Krona), then just what kind of fight is gold putting up as the apparent "ultimate" safe-guard against currency shocks?

Regular visitors to this site may recall a chart we offered in August this year, a chart showing the Prices of gold in terms of the world's top 10 currencies by economic output. It's not perfect; the GDP weightings for 2008 will need revising, perhaps, when this year's full-year data becomes available early next year.

But as a measure of truly globalized gold price, it both softens the US Dollar's long slide of 2002-2008 on the currency markets, as well as tempering this month's intemperate highs in gold bullion vs. the Aussie, Loonie, HK Dollar, Forint, Kiwi, Krone, Rand, Won, Lira, Ruble, Euro, Pound Sterling, Rupee and various Kronas.

You can't help but spot the volatility - otherwise known as "My gold just crapped out!"

The way "quant jocks" figure the violence in asset prices, in fact, the daily volatility in this global gold price has more than doubled since August to a three-decade record.

You might also note, however, that gold really has risen sharply against all major world currencies so far this decade, not just the US Dollar. And no one should imagine it will be an easy ride - whether up or down - from here.

There's too much at stake when you try to measure that $60 billion daily turnover in physical gold against the $3.2 trillion daily turnover in official government currencies.

Adrian Ash
for The Daily Reckoning Australia

• The Aussie Dollar as a Measure of Global Risk Appetite
• Why Choose Gold When Real Interest Rates Sink?
• The Price of Oil Explained by ‘Astrology’
• Today’s Current Gold Price
• Posco’s Production Cuts May Be Bad for Australian Iron Ore

SO HANK PAULSON, Ben Bernanke and George W.Bush got their wish. The US Dollar is now the world's strongest currency.

Aw...shoot!

"I believe that a strong Dollar is in our nation's interest," claimed Henry Paulson in his first speech as US Treasury secretary, made at Columbia University two years ago...

It's a phrase he then parroted time and again, repeating the formula first dreamt up by Robert Rubin 13 years earlier.

The plan then (and ever since) was to fob off foreign complainers back when Bill Clinton faced a federal deficit worth nearly 5% of the US economy. Now Paulson's banking bail-out charade will sit atop a government deficit already equal to more than 7% of this year's GDP.

Small wonder, then, that the "strong Dollar" has vanished from official speeches and comment. But the damned thing keeps turning up everywhere else.

Paulson repeated Bob Rubin's phrase so often from late 2006 to mid-July this year, even Ben Bernanke got on the train in May '08. Come June, and the Fed chairman raised the rhetoric again, dedicating himself to "ensuring that the Dollar remains a strong and stable currency."

Real US interest rates, however - which deduct Consumer Price inflation from the Fed's own target rate - were then sinking to pay savers their worst negative return since 1980.

Hell, satire this sharp even saw George W.Bush get with the program, telling Fox News last November that "if people would look at the strength of our economy, they'd realize why...you know...I believe that the Dollar will be stronger."

The president said it again - no word of a lie! - at a White House press conference in Feb. 2008 ("We believe in a strong Dollar policy") and in March, he said it to CNBC too, adding that "Our policy has not changed.

"We're for a strong Dollar."

Whether or not the Three Stooges ever meant it, their joke of a currency is now out-stronging the Yen - itself nearly 30% stronger since summer 2008, thanks to $6 trillion in wealth all trying to get home at once, squeezing its way through the forex markets as Japanese savers panic out of their Euros, Pounds, Reals and Zlotys.

Versus the Hungarian Forint - formerly a great destination for Japanese cash fleeing 0% interest at home - the Yen has gained nearly one-half in the last 12 weeks alone. It's added 5% since Wednesday, despite an emergency rate-hike by the Magyar Nemzeti central bank.

Why? Because not even a 300-basis point hike to 11.5% can stop hot money escaping when it runs for the exits. For that, you need exchange controls and guns.

Hiking UK interest rates from 10% to 15% inside one day failed to stop the British Pound collapsing in Sept. 1992;
Two years later, not even a yield of 40% on Mexican bonds could attract foreign cash into D.F.'s coffers;
In 1997 the Korean Won lost half its forex value despite 30% interest rates;
During 1932, the Federal Reserve hiked US interest rates to stem the outflow of gold reserves, but US citizens responded by simply hoarding gold for themselves for fear of a devalued Dollar. (They got it, too - but not before F.D.R. banned private gold ownership in 1934.)
Back to the future, and Hungary's domestic economy stands fit to collapse thanks to this new run on hot money. "Foreign currency loans made up 62% of all household debt at the end of the second quarter," reports Bloomberg, "up from 33% three years earlier."

Now all that money wants out - forcing the IMF in - as Budapest's bubble goes bang. The International Monetary Fund is awful busy already, struggling to keep Iceland, Serbia, Ukraine, Pakistan and Belarus afloat as today's strong Yen (and the yet-stronger Dollar) reverse the last five years and more of easy loans, easy terms.

Of course, the IMF - that lender of last resort to lenders of last resort - exists to avoid repeating the mass currency crises of the Great Depression. So just like Ben Bernanke's four-decade study of the US depression, the world's about to find out if the central banks' central bank is up to the task.

The Dollar's put on 30% vs. the Mexican Peso since the summer; it's gained one-third from its floor versus even sensible things like the Canadian Loonie and Aussie Dollar. Together with the continued shutdown in credit, the pace and breadth of this bounce is quite literally destroying the global economy. Industrial production is collapsing in the US, Germany and Japan; the failure rate for small UK businesses has risen seven times over since summer '07. And the strong Dollar is also destroying everyone's pension as well, just as surely as the banking collapse devoured mom 'n' pop savers during the '30s depression.

Germany's stock-holders are down 44% so far in 2008. The Bovespa in Sao Paolo has been cut in half since mid-June. Moscow's stock market plunged by one-fifth on Oct. 6th. The Nikkei index in Tokyo stocks has dropped one-third of its value in the last month alone.

State-side, the Pension Benefit Guaranty Corp. has watched more than $3 billion of its $63bn portfolio evaporate as Wall Street sinks. All told, America's 500 top stocks have cost investors 31% of their money since the Dollar turned higher in mid-July.

Yet "a strong Dollar is in our nation's interests. It is in the interests of the global economy," claimed George W.Bush as climbed aboard Air Force One this June. He was just as wrong there as he was on Saddam's deadly arsenal, and with similarly disastrous results. But he then repeated this line to a journalist as he flew to Slovenia for a US-European summit.

"We want the Dollar to strengthen. Relative evaluations of economies will lead to that Dollar strengthening."

Read that again, and ask - as nobody did when the joke was still funny - How could a strong Dollar possibly be in the best interests of the US or global economies if it comes thanks to anything other than a reduction in America's trade and budget deficits? What good can a strong Dollar do if it appears instead thanks to a run on over-geared investment worldwide?

The Decider himself knew this as early as Nov. 2004 - back when the Euro was worth only a little less than it is today. "The best way to affect those who watch the Dollar's value is to make a commitment to deal with our short-term and long-term deficits," the president said to reporters attending the 21-nation Apec conference in Chile that year.

And what a commitment he's made since then!

Adrian Ash
for The Daily Reckoning Australia

• Fannie and Freddie in a Free Market Economy
• The Aussie Dollar as a Measure of Global Risk Appetite
• George Bush Speech Sounded Like an Edition of the Daily Reckoning
• Exodus In Waiting
• Australian Dollar Set to Grow for the Remainder of 2008

YOU MIGHT LIKE to know, if you put store by such things, that the US stock market just sank to a 14-year low against gold.

With the Dow Jones index dipping below 9,000 last week, the price of gold held near $850 an ounce - at least until last Thursday's AM Gold Fix in London. (It's since lost $100; more in a moment.)

So the Dow/Gold Ratio - which simply divides the one by the other, thus pricing the Dow Jones Industrial Average in ounces of gold - fell to a little above ten, making the 30 stocks of the DJIA cheaper in Gold Bullion terms than at any time since January 1995.

Y'know, like the Tech Stock Bubble and Reflation Rally were merely a dream Alan Greenspan had after eating wild mushrooms and blue cheese right before bedtime.

The Dow has sunk back below 9,000 again today (Weds 22nd), while gold has lost 11% of its value in US Dollars since hitting that new 14-year high in terms of investment assets last week.

So in the big scheme of things, where the big money is made, does this price - which took 22 years to recover last time it slipped beneath its 80-year average (marked in red on our chart; the Dow priced in gold stayed sub-par for 25 years after the 1929 crash) - now mean US stocks offer a bargain?

"Things have just gotten a bit silly," reckons Chris Orndorff, co-manager of $50 billion in assets at Payden & Rygel Investment Management in L.A. "We are very, very close to a bottom in equities."

Plenty of other smart, successful and battle-hardened investors think so, as well. But these wise old men all believe US stocks are a bargain for other reasons entirely outside of the Dow/Gold Ratio.

Jeremy Grantham, for instance - chairman of the $120bn GMO funds - points to the mantra "stocks for the long run" used by all financial advisors, good and bad.

"The early purchases will be painful," Grantham's quoted by Reuters. "But if you could slice in and do some buying before and after the low, seven years from now you will not regret it."

The granddaddy of home-spun investment wisdom - Warren Buffett himself - thinks that, because the vast majority of investors are trying to quit stocks, you should "Buy American. I Am" as he titled his New York Times piece last Friday.

"A simple rule dictates my buying," said the Sage of Omaha, like he was fishing for a "Boo-Ya!" from the Berkshire Hathaway crowd: "Be fearful when others are greedy and be greedy when others are fearful. Most certainly, fear is now widespread."

It would be churlish to argue with these giants of stock-market success. So step forward the churls here at BullionVault, ready to mix you a snowball of Devil's Advocaat with a maraschino cherry on top...

#1. Fear & Greed

The Dow/Gold Ratio's most fearsome decline came between Apr. 1971 and Dec. '74. Inside those 44 months, the Dow lost seven-eighths of its gold value.

During that period, of course, the Gold Price was cut free from the US Treasury's official price of $35 an ounce. US stocks, in contrast, lost one-third of their Dollar price as earnings collapsed in the face of the first global oil crisis.

Fear replaced greed almost entirely on Wall Street, giving brave investors a fantastic chance to buy cheap at the bottom. But for longer-term wealth protection, it proved something of a false start. The Dow might have sunk from almost 25 ounces of gold to just 3.5 ounces. It might then have doubled its gold-bullion value inside 22 months. But the US stock market then sank again - and sank sharply - down to barely one ounce of gold by the start of 1980.

That marked the bottom...just as Ronald Reagan picked out new drapes at the White House.

#2. "But the Dow Doesn't Represent US Business Today..."

Very true, and nor does the Nasdaq - despite what you may have heard (or believed) at the top of the tech-stock bull market in March 2000.

Turning then to the S&P 500 - that broad-based index of US stocks - America Inc. rose 32-fold against gold between its record low of Feb. 1980 and the big top hit in summer 2000. The S&P index has since dropped three-quarters of that peak value in gold.

Quite where that ratio's headed is unclear today; both gold and Wall Street keep selling lower as the deflation in credit destroys Leverage & Debt in all financial markets. But the outlook for corporate earnings - let alone investment flows - is ugly. Very.

"It's always darkest before it's pitch black," said Eric Upin, a partner at Sequoia Capital - the venture capitalist group which launched Apple, Oracle and YouTube - at a recent "all-hands meeting" attended by some 100 corporate bosses.

"Survival of this storm means drastic measures must be taken now," he went on, "so you will have the opportunity to capitalize on this down turn in the future."

Upin used to run Stanford University's $26-billion endowment fund, so you've got to wonder where he'd put that money today - if anywhere - outside of Treasury bonds. Sequoia's presentation (available here) is worth reviewing if you had any doubts that capital expenditure and corporate growth are being slashed.

It points to a "tremendous amount of capacity build up" worldwide (slide 17), with fixed investment rising above 22% of global GDP since late 2005. Last year's earning forecasts for the S&P constituents, Sequoia notes, have come in some 18% over-optimistic. And at the worst of the early '90s and 2001 recession, that 12-month disappointment reached above 25%.

But what if recession slips into depression - the very thing Ben Bernanke was hired at the Fed to prevent?

#3. The Value of Stocks vs. the Value of Money

Amid such an historic collapse in the Dollar-price of all assets, studying history to inform your thinking seems at least wise. So let's check what happened to stocks priced-in-gold the last time America sank into deflation.

As credit evaporated (check) and the stock-market sank (check), millions of savers were wiped out (check) while commercial banks failed (a half-check for Lehmans). The only thing to go up was the value of money (check once again, as commodities slump alongside non-US currencies, and retailers run out of exclamation marks to add to their "Sale!" signs).

Back in the early Thirties, however, gold was in fact money, rather than another class of investment entirely. So the Dow's 89% loss was matched exactly by the drop in Dow/Gold. So were its gains when the market picked up, doubled the Dow, in spring '33.

But then President Roosevelt stepped in, banning private gold ownership and slashing the Dollar's gold value. For those US investors who clung onto their gold (say, by owning it offshore, safe from the Treasury's $10,000 fine or threat of imprisonment), Roosevelt's move instantly knocked the Dow/Gold Ratio lower, undoing 12 months of stock market gains and making the Dow 40% cheaper for gold owners wanting to switch into shares at rock-bottom prices.

Might the next US president now do the same for stock prices-in-gold when he takes office on Jan. 20th? Won't Ben Bernanke be standing ready to help the Dow find its floor...by destroying the Dollar (again) to stop it from rising?

Adrian Ash
for The Daily Reckoning Australia

• 40 Years of Inflation, 80 Years of Dow/Gold
• Why Choose Gold When Real Interest Rates Sink?
• Price of Silver Climbing to All Time High of US $1,012
• IMF Gold Up For Sale to Pay the Bills
• All the World’s Stock Exchanges are Now Officially in Bear Markets

"After one of the worst days of trading on the Irish stock market, Ireland's Government granted a sweeping unlimited guarantee on all bank deposits at its six main banks for the next two years," reports The Times here in London.

"Brian Lenihan, Ireland's finance minister, said he had taken the unprecedented action, which starts immediately, to maintain financial stability after Irish banks' shares collapsed."

Think of this €400 billion insurance ($560bn) as a "competitive re-capitalization", more akin than you might guess to those "competitive devaluations" that swept the world when global finance last suffered a Great Depression during the early 1930s.

Back then, national governments fought to squash the exchange-rate value of their own citizen's money, bidding to grab export share and revive their home manufacturing.

Today, and not quite in contrast, national governments are fighting to squish the risk of collapse amongst their domestic savings and loans – the industry that now matters most – by pumping money into local banks and guaranteeing the security of cash savers.

The competitive bit? It comes in the cross-border flows that tax-funded bail-outs invite.

"The Irish pledge to underwrite the country's banking system triggered a flood of cash from British businesses to Irish banks," a senior Irish stockbroker told The Irish Times in Dublin on Wednesday.

"A spokeswoman for the [UK] Post Office – where savings products are backed by the Bank of Ireland – said there had been an increase in customers since the Irish government's announcement" that it now guarantees all €400 billion ($560bn) of Ireland's bank deposits, reports the BBC.

Smart move, you'll agree. Monday saw the Irish Stock Exchange drop a massive 12.7% of its value in the market's worst ever one-session plunge. Since guaranteed by the Taoiseach, the capital value of Anglo Irish Bank sank by almost one-half. But then, in poured the savings...and up went the ISEQ, jumping by 8% the next day.

"We just want the Irish government to look quite closely at the arrangements they are putting in place to make sure they comply with EU competition law," said a British government spokesman on Wednesday. He picked his words as carefully as any man should before throwing stones inside his own glass-house.

The UK administration was the first to leap in and seize a failed bank when this global crisis first hit in September last year. Saving Northern Rock from itself, finance minister and Westminster-village idiot Alistair Darling also guaranteed the cash savings of every man, woman and child in the nation during what he laughably called the then "current instability in the financial markets."

Not that the British nation has a great deal on deposit, of course. As BullionVault has noted before, private-sector debts now outweigh the sum total of all cash, bank savings and short-term near-money bonds in the UK economy (the M4 money supply) by a massive 43%. All too literally, the UK Cannot Pay What It Owes; there simply aren't enough pounds in the world, neither as paper or photons.

But no matter; because in the new global race to bail out biggest and better, government-backed banks provide just the security which frightened cash savers need. Hence the headlines in London.

"Banks protest at Northern Rock's unfair advantage," reported the Evening Standard in February. "Northern Rock rivals complain of unfair competition," said The Times one month later. Now "Northern Rock cuts mortgage rates as rivals go up," reports the Daily Mail. But why ever not? Cheap mortgages have been government policy since the Tech Stock Crash on both sides of the Anglo-Atlantic. Higher home-ownership rates became a target and tenet of faith just as much in Whitehall as it did in the White House.

And with interbank lending once again ground to a halt – but with the full weight of tax-payers' funds stood behind them – what's to stop Fannie, Freddie, Northern Rock and all the other government-owned lenders from dominating their markets...pumping out tax-funded loans at politically-friendly rates of interest?

Never mind the preferred stock owners in Asia and Arabia, now cursing their part in the $200 billion cash raising somehow pulled off by the world's major banks between July 2007 and June '08. Citigroup alone managed to raise $41.7bn amid the frenzy of rights issues, so-called "hybrid" debt (it comes with equity-like rights and thus losses), and sovereign wealth fund injections. Its stock lost two-thirds of its value in the year to mid-summer.

But even after selling $130bn of its assets over that time, Lehmans Bros still collapsed eight weeks later, taking a big chunk of the $8bn in fresh capital it also raised from investors with it. Once bitten, and no doubt needing to re-capitalize financial firms closer to home, all that Korean, Japanese and petro-fund money will now steer clear of Western banking investments for as long as it takes bankruptcy, bail-outs and state nationalization to stop trumping risk capital.

In the absence of new financing, then, let's apply this week's Irish Sea cash-flows to the very big picture. For isn't that movement of depositors' cash the best Hank Paulson can hope for with his $700 billion bail-out of Wall Street...assuring foreign capital that it's safe to return to the States, if only as cash-on-deposit rather than equity, because Uncle Sam is underwriting the banks? Doesn't that risk setting the whole world alight with Irish-style promises, all chasing the same depositors' funds?

"Everyone knows that a policy of bailouts will increase their number," as former St.Louis Fed president William Poole said in a speech of late 2006. Calamity Poole, however, was only thinking this moral hazard applied inside the domestic United States.

"Every [US] company, financial or otherwise, knows that if it gets into trouble it is at least worth a major effort to attempt to secure a bailout because there is always a significant probability of success," he explained, as if looking ahead (without seeing) to the $25bn bail-out of Chrysler, Ford and GM.

The race to rescue, however, has spread far beyond Detroit. Competitive bail-outs are now a globalized game, with tax-payers and savers both set to keep paying.

Adrian Ash
The Daily Reckoning Australia

• Bailout Rejected by the House
• 40 Years of Inflation, 80 Years of Dow/Gold
• Citigroup, America’s Northern Rock
• If Bridgewater is Right, the Whole Financial Sector Will be Guttered
• Zimbabwe’s Opposition Party Decided that Voting Wasn’t Worth Dying for

Their initial stake, as a 2002 research paper noted, increased five times over. Now that's real money!

But roll forward ten years, and the total return on the S&P 500 was actually negative for the decade ending on 30th June 2008.

Yes, you read that right. For the 10 years to last Monday, the S&P index delivered less than zero. That's even after accounting for dividends (good) as well as inflation (bad).

US equity buyers just suffered a "Decade of No Returns" in short. Looking back to the late Nineties from the late Noughties, it barely seems possible.

The S&P enjoyed two strong bull markets during that time. The first added nearly 50% in the 18 months following July '98; the second delivered more than 87% in the five years to Sept. '07. All told, the S&P rose in 69 months out of 120 - and yet anyone holding the 500 stocks included in Standard & Poor's index just wound up with a total return of sweet fanny adams.

Whatever happened to holding stocks for the long term?

"[The Noughties] are well on the way to being the worst decade for stocks since 1930-40, back when things were really messy," says the Wall Street Journal. It cites a note from Richard Bernstein, chief investment strategist at Merrill Lynch, who spotted this Decade of No Returns last week.

Even "the somewhat more-bullish Tobias Levkovitch, chief US strategist at Citigroup, pointed out recently that the S&P 500 returned just 1.66% from 2000-2007," the Journal goes on.

"He notes that all of the returns so far this decade have come from dividends; price return is slightly negative."

Dividends remain crucial to stock-market investing, in short. Ever more crucial, in fact...and perhaps more crucial still than either Bernstein or Levkovitch dare guess.

It should little surprise us. But while US equity investors saw the S&P's valuation rise more than four times over during the 1990s, its 500 constituent stocks didn't actually pay out four times as much in dividends each year.

Indeed, the capital gains enjoyed by Nasdaq and S&P owners between Jan. 1990 and the end of 1999 came at the cost of decent yields offered to new stock-market buyers. That decade saw dividend yields on the S&P fall in half, according to data from Robert Shiller at Harvard University - down from 3.3% to below 1.15% per year.

Any wonder the derriere eventually fell out of the "Long Boom" at the start of this decade? By way of comparison (and as marked on BullionVault's chart above) the long-run historic average sits nearer 4.3%.

That's the long-run average running back 120 years and starting in January of 1888.

The equity bull market of the 1990s, in other words, stands out as something of an aberration...an "outlier" event as dramatic in its own way as the stock-market wipe-out of the 1930s. But while the Great Depression took stock prices so low, dividend yields shot up towards 14% per year, the vanishing yields of the 1990s needed the bear market of 2000-2003 to set things right.

Only, of course, it didn't. Yields slumped and stayed slumped as the Tech Crash drowned financial, industrial and retail stocks in its wake. S&P dividends fell lower right alongside stock prices. Even at the low of Oct. 2002, the dividend yield offered by America's 500 biggest corporations remained well below 2.0%.

Fast forward to mid-2008, and the gap between what you might now earn in dividends and what investors have traditionally expected remains very nearly as wide as it was throughout the 1990s. The upshot? Unless things really are different this time, and investors are willing to buy stocks that pay less than half the rate of inflation - and less even than US Treasury bonds! - then the current bear market might be expected to roll on for a while longer yet.

Why? Because to push this decade's dividend-yield back towards the long-run historic average, the annual pay-out from S&P stocks would need to reach a staggering and never before witnessed 19% - and stay there - for the next 18 months.

Short of market-wide "earning surprise", you can guess what that would mean for stock prices, currently offering a little over 2.1% per year in dividend yield.

Either investors had better hope and pray earnings rise sharply...or inflation in their cost of living goes negative...before stocks look a good income-paying asset class once again.

If not, they're likely to continue swapping stocks for other investments until the return offered by equities gets somewhere near to its historic average - more than twice the current level today.

Adrian Ash
for The Daily Reckoning Australia

• Lehman’s Turn to be Rescued
• Bear Market to Last at Least Five Years
• After the Bailout of Wall Street, Everybody Wants Cash
• 40 Years of Inflation, 80 Years of Dow/Gold
• Consumer Price Inflation has Spooked Investors Everywhere

Less money would mean lower prices - the very opposite of what the world calls "inflation". And if cash becomes scarce as the gushers runs dry, so too will the hope of watching your investments rise.

"The markets are telling us to prepare for hard times, and a global spate of the worst deflation to be seen in generations," warns Richard Russell, author of the Dow Theory Letter since 1958, pointing to August's 20% fall in crude oil and gold.

"Brazil's Market Price Index recorded 0.12% deflation in August's preview," reports the Gazeta Mercantil, right on cue, "against 1.79% inflation a month before. The Wholesale Price Index decelerated to - 0.44% from 2.28%"

"The growth of [US] credit is slowing sharply," chips in Gabriel Stein, writing from London for Lombard Street Research. "The cause of weaker broad money growth is not difficult to find."

Based on Stein's guess-work (the chart shows official Fed data; you'll see why analysts must guess in a moment), he pegs the change in US money supply at "a $50 billion plunge" in July - "the biggest monthly drop since data began in 1959," as Barron's reports.

"One month does not make a trend," as the magazine says. And never mind either that month-on-month volatility in the US money-supply (as measured by the broad MZM aggregate of cash, bank deposits and finance- house money funds) now sits right on its four-decade average. "Lombard Street Research calculates the three-month growth rate [in money supply] is just 2.1%, well below the six-month rate of 6.3% and the 12- month rate of 11.5%.

"All of which" - apparently - "show broad money growth decelerating rapidly."

Thus the bubble in debt that blew up in summer '07 is now clearly contracting and shrinking fast. Even the TV news could tell you why.

• Real estate prices are sinking because no one can raise a mortgage. US applications are down 34% from last summer. UK approvals stand at record lows.
• Stock prices are falling because brokers are cutting back margin, forcing investors to either stump up more cash or exit their trades at a loss;
• Commodities and non-US currencies are sliding together, thanks to those hedge funds that just kept shorting the Dollar meeting stony- faced silence when they ask for fresh funds from their investment-bank lenders.

Hence the 7% bounce in the Dollar, previously down by one-third from 2002, inside a month. Cash becomes king when cash becomes scarce, and the Dollar's still cash when all's said and done.

Thus today's "Big Two" ex-Dollar assets - crude oil and Euros - pulled down base metals and food-stuffs on the world markets, along with the great anti-Dollar of gold. So-called "large speculators" cut or quit their leveraged trades so fast, in fact, one-in-five long positions in gold futures vanished in the week-ending 12th August.

Little wonder. Morgan Stanley and Goldman Sachs will only extend new credit to hedge funds (i.e. let them place new leveraged bets) if their own corporate bonds are rising in value. Or so rumor has it.

If Goldman's bonds rise, allowing it to issue new debt at favorable rates, then it extends fresh credit to its hedge-fund clients, according to the Wall Street Journal. But should Goldman's bonds fall, capping its own flow of finance from the capital markets, then the highly-geared hedge funds must meet margin or quit. Preferably both.

"If our firm is in trouble, we would rather fund ourselves than fund hedge funds," whispers one broker to the WSJ. And thus, with less credit granted to drive financial trades higher, the bull market in everything - from stocks and bonds to gold as well as the 21st century's new "financialised" assets of crude oil and housing - can only turn down.

Trouble is, anyone hoping to second-guess the coming deflation in the United States - and therefore in the rest of the world - has to contend with the Fed first.

It stopped reporting (if not counting) America's key money supply figures way back in March 2006. Data-junkies like Gabriel Stein at Lombard and John Williams at ShadowStats can try to plug that gap if they choose, but the official line is to ignore their math. And then in August last year, the Fed began slashing interest rates so low, so fast, the key Fed funds rate now sits 3.6% below the year-on-year rate of Consumer Price increases.

Sub-zero rates of return do not make for a bull run in cash. So if money itself becomes the only worthwhile asset to hold - as Richard Russell contends, even as cash-in-the-bank loses 3.6? of its value per year - then truly we're all freakin' doomed, along with the law of gravity and all logic.

When it stopped reporting the broad "M3 aggregate" used pretty much everywhere else in the world, the Fed claimed the data did not "convey any additional information about economic activity that is not already embodied in M2 [another, but narrower, measure of money] and has not played a role in monetary policy process for many years."

The European Central Bank (ECB) still found M3 useful, however, publishing month-on-month updates for the 15-nation Eurozone of 350 million souls. There are more Euro-notes in circulation today than there are US bills. You can see the surge and bounce in new short-term corporate debt issues - outside the financial sector - above.

The Bank of England here in London, meantime - home to the world's fifth-largest economy - is sweeter still, obliging us data-geeks with the still-broader M4 measure of money.

It also provides very telling M4 lending statistics each month. Any sign of deflation here...?

Most crucially for anyone trying to track the supply of money worldwide - even within the Western half only - the latest figures from the Bank of England say borrowing is growing most quickly, if violently, among the lead villains in what Richard Russell, Lombard Street Research and the ever-gloomy Ambrose Evans-Pritchard of London's Daily Telegraph all see as a deflationary slump.

"Have we reached the moment when gold bugs must start questioning their deepest assumptions?" asks The Telegraph's man. "Have they bought too deeply into the 'Dollar-collapse/M3 monetary bubble' tale, ignoring all the other moving parts in the complex global system? Nobody wants to be left holding the bag all the way down to the bottom of the slide, long after the hedge funds have sold out."

Yet hedge funds, stock brokers, forex dealers and "other financial corporations" have - in the last six months - gone from taking 26% of all new private lending in the UK to swallowing almost one-half. The switch comes as the growth in total new debt jumped to more than a quarter of GDP for the period. These highly-geared financial players borrowed almost $41 billion between them in June (some $75bn) - more than they borrowed in all of 2006.

Who can say where this fresh financial debt is going right now? It's certainly not pumping up gold, oil, the Euro, real-estate bonds or collateralised debt markets just yet. But monetary inflation is clearly pushing ahead Down Under as well - and also thanks to the financial sector again - even as the Sydney and Melbourne housing bubbles implode. The supply of "broad money" in Australia (meaning notes, coins, private-sector bank deposits and non-deposited borrowing) grew by 17% in the year to June. Australian banks, meantime, raised A$67 billion in new bonds during the first six months of '08.

"That's well above the average $32 billion [in Aussie Dollars] raised in the same period in 2005 to 2007," noted Guy Debelle, the Reserve Bank of Australia's assistant governor for financial markets, at a financial summit in Sydney last month.

Could the hedge funds of Connecticut and Manhattan really be sitting this out? London, Frankfurt and Sydney are filling their boots - to what end, as yet unknown - in a fresh surge of financial gearing. So the shooting match between inflation and deflation remains far from finished today.

Which 'flation will win - inflation and soaring prices...or deflation and a collapse in all things but cash? Richard Russell remarked way back in 2004 that a battle between inflation and deflation then lay ahead. Looks like they're both re-arming today.

Private investors fearing collateral damage might want to take cover. Gold bought near $800 an ounce might just provide some kind or armor.

Adrian Ash
for The Daily Reckoning Australia

• Broad Money Supply Declines by $50B in US, Fire Up the Printing Presses
• From the Gold Pan… Inflation, Deflation and Precious Metals
• The Battle Between the Forces of Inflation and Deflation Wages On
• Deflation is on the March
• One Year Treasury Bills to be Reissued by Bush Administration

"It's getting increasingly evident that this is a once-in-a-century type of phenomenon," he told the ever-fragrant Maria Bartiromo in an interview with CNBC this week, "not the standard type of liquidity crisis that we have seen in the past.

"It's verging on the issue of solvency."

To gauge the true scale of this crisis, Greenspan went on, just consider the fact that it took sovereign credit to stabilize first the UK and then US financial systems. When Northern Rock went belly-up last Sept. and then Bear Stearns blew up this spring, Treasury bonds had to be lent out like adjustable-rate home loans circa 2006, covering short- term black holes with government debt.

Without these loans of government bonds, the banks simply wouldn't lend to each other. They needed securitized tax payments to gain the credibility needed for raising new funds in the market. Short of offering government debt to put up as collateral, they found the cost of borrowing money - when they found any money to borrow - simply too high to bear.

"It's still very evident from [inter-bank lending] spreads that we have not gotten closure yet," Dr.Greenspan continued, pointing to the ongoing premium charged for loans backed by anything other than sovereign credit. So to fix the problem - or at least tease it out for months if not years - clearly the world needs more government bonds for the big banks to borrow and put up against cash loans in the market.

"It's essentially, fundamentally the price of homes in the United States which are determining...the ultimate collateral of mortgage- backed bonds, pretty much around the world."

Looking ahead, he concluded that "we're still nowhere near the bottom of the home-price thing" - the word "thing" standing in for "crash...collapse...crisis...deflation" and all the other phenomena Greenspan must still believe can never apply to real-estate prices.

As key contractor, if not the architect, of today's pan-global banking crisis, he chose to keep US interest rates way below the rate of inflation - making debt pay and savings a suck of real value - for three years straight starting in August 2002.

That period marked the first run of sub-zero returns paid-to-cash since the inflationary '70s, back when loose money worldwide led to a bubble in prices that needed 20% interest rates to revive the world's faith in the Dollar.

The start of this decade also saw the gold price- dormant-to-dead ever since the US took that strong medicine at the start of the '80s - double inside five years.

"First warning," as Marc Faber wrote in his Gloom, Boom & Doom Report of Sept. '07, of trouble ahead.

"Ultra-expansionary US monetary policies with artificially low interest rates led to bubbles all over the world and in every imaginable asset class. The price of Gold more than doubled in nominal terms and against the Dow Jones Industrial Average."

So why didn't gold take a dive when Greenspan's successor - Ben Bernanke - tip-toed his way back to 4% real rates of interest in late 2006...? Because early gold buyers never believed the Fed would succeed in keeping rates there. With housing now a political issue - and home ownership a god-given right for even the flakiest debtors - the first sign of trouble would cause a collapse in real rates, destroying the value of money in the hope of achieving "Reflation Part II".

Hey, it worked after the Tech Stock bubble blew up. Why not again? And faced with a much greater crisis, or so Ben Bernanke believes, he's managed to out-Greenspan the Maestro...pushing real US interest rates way down to minus 3% and worse.

Take gold as a marker of stress, and the true extent of today's crisis becomes clearer still. Bear Stearns' fire-sale to J.P.Morgan in mid- March - which required an open-ended loan of $29 billion from the Federal Reserve - saw gold jump to $1,032 per ounce. We think it's signal that Alan Greenspan ignores it.

"Central banks, of necessity, determine what the money supply is," as he told Congress in a 1999 hearing. "If you are on a gold standard or other mechanism in which the central banks do not have discretion, then the system works automatically.

"The reason there is [now] very little support for the gold standard is the consequences of those types of market adjustments are not considered to be appropriate in the 20th and 21st century. I am one of the rare people who have still some nostalgic view about the old gold standard, as you know, but I must tell you, I am in a very small minority among my colleagues on that issue."

Today, almost a decade later, the Federal Reserve and its peers across the world are trying to prevent the money supply from shrinking again. That was the fear amid the "Deflation Scare" of 2002, which caused the Fed to ordain sub-zero rates, creating not only the bubble in housing but also the collapse of true money values against oil, food and pretty much all raw materials.

The world's nostalgia for gold, in response, has seen it treble in price vs. the Dollar and more than double against the Euro, Yen and British Pound. But the cheerleader for cheap money when running the Fed, Alan Greenspan points instead to government bonds when gauging the size of today's crisis. A true policy wonk, Greenspan thinks only of political bail-outs to protect the system, rather than considering how private investors might choose to protect themselves and their wealth.

Heaven knows they won't get any help from Bernanke's repeat of the Maestro's "reflationary" error.

Adrian Ash
for The Daily Reckoning Australia

• A Gold Standard, Without Gold
• U.S. Fed Now Accepts Credit Card Debt as Collateral
• Alan Greenspan Bears Blame for Intensity of Financial Crisis
• RBA Buys $780 Million in Residential Mortgage-Backed Securities
• U.S. Fed Leaves Rates Unchanged, Morons

You're only tied in for three years. An early exit will return 130% of your initial investment.

And yes - it really does sound just too good to be true.

"Citigroup said these products should be for sophisticated investors only. But the municipalities were definitely not sophisticated investors..."

So says Eystein Kleven of the Financial Supervisory Authority in Norway, speaking this week to The Guardian newspaper. He's investigating the collapse of public funds in Narvik, a small town of 18,000 people some 140 miles north of the Arctic Circle.

"Terra Securities misled them," Kleven goes on. The municipality lost $35 million on high-risk US mortgage-backed investments. Seven other small Norwegian towns were also hit, apparently.

Why? Terra got busy selling Citigroup-issued derivatives to profit- hungry public investors. But it failed to explain that if their market price fell below 55% of face value, the products would be forcibly redeemed, leaving small towns like Narvik with an instant loss of 45 cents in the dollar or more.

Which is just what happened last summer, of course. Yet Narvik opted to pump fresh funds into these products, hoping they'd come back in due course. So now the same dumb investment has made the town's fund managers look stupid twice.

"Terra Securities did not disclose this mechanism to the municipalities," says Kleven in mitigation. "We are not sure whether the broker understood the mechanism himself." But so what? A lack of understanding should never get in the way of making an investment. Or so you'd guess from the professional market.

According to a survey released this week by The Economist and KPMG:

• One-in-five asset managers worldwide lacks the staff needed to understand their more complex investments;
• One-in-four hedge funds admits the same;
• All told, one-in-three institutions now holding collateralized debt or structured products has "no in-house expertise" in understanding them.
• Just 42% of fund managers reckon they can quantify their true exposure to complex investments.

Interviewing more than 330 professionals in 57 countries worldwide - and with one-third of respondents based in the United States - Beyond the Credit Crisis also found that the blow-up in credit and debt derivatives has directly dented returns at 60% of investment funds. And as a result, a huge 70% of institutional investors now want to cut their exposure to derivatives and "other complex financial products".

Yet of those managers running $10bn-plus, three-in-four say their use of such instruments is growing regardless!

Of course, "Derivatives don't kill people; people kill people," as Frank Partnoy quotes a fellow Morgan Stanley salesman from the early '90s in his classic book F.I.A.S.C.O. Yet even now, more than 15 years after Orange County blew up, people wielding derivatives continue to "go postal" every so often.

Just take a look at the carnage amongst under-informed, over-reaching investment funds.

"Staff skill sets have struggled to keep up with the growing sophistication of the industry," says Tom Brown, head of KPMG's investment management division in Europe. "These firms cannot afford to continue flying blind." Flying blind worked up to summer '07; it's also much cheaper than training or hiring qualified staff. Quicker, too. Time is money when structured products with hidden clauses are waiting to get triggered.

But "if the fund management industry is to retain the trust of investors," reckons the KPMG-Economist survey, "it would seem imperative for it to both develop the necessary skills and then offer these skills to investors."

If only! Investors right down to the retail level are going need all the same "necessary skills" they can get. Because trigger-happy derivatives are heading your way, and they've got a big fat marketing budget - plus the entire financial media - queued up right behind them.

"Groups are continuing to flood the market with structured products as investors seek safety from volatile markets," reports IFAonline here in the UK, a website aimed at financial advisors. Originally offering zero downside - so-called capital protection - structured products on stocks, bonds and property now come with such juicy options as:

• "10 times the upside in the index with a cap at 70%..."
• "positive returns even if the index falls by 35%..."
• "100% of any growth between 65% of the initial reading and the closing level..."
• "one-for-one downside with no guarantees or protection but an uncapped geared return of 170% of growth..."
• "the greater of 0.24 times initial capital or 0.75 times the growth of the index..."

Got that? Whatever you used to think investing should taste like, it no longer needs to just come in vanilla. Starbucks' menu of frappuccino flavorings has got nothing on Wall Street, La Defense and the City of London.

Which brings us back to multiplying Asia's stock market gains by 230%, courtesy of Morgan Stanley UK. There's no fee for investing in the bank's new Asia ex-Japan Protected Growth Plan 5. (We guess here at BullionVault that means there are already four in issue.) And with the exception of a transfer charge of £100 plus VAT (approx. $230), "all other charges are taken into account in setting the terms offered," says the brochure.

Nor could you ask for better timing. The Hang Seng in Hong Kong - one half of Morgan Stanley's basket in this plan (which then only runs to Taiwan in offering "Asia ex-Japan") - just suffered its worst month since, umm...well, since February in fact. Losing 10% of its value during the worst June in 19 years, the Hang Seng just put in its worst half-year since 2001.

That will go towards cutting your purchase price by one-fifth from New Year's '08. And seeing how the Hang Seng has still doubled inside five years, it's only heading one way long term, you might guess.

But if that were the case, why on earth would Morgan Stanley want to offer you 230% of the next six years' of growth?

"The Early Exit Basket Level is the official closing level of the Basket on 1st September 2011," explains the brochure. If this level is 30% or more above the initial starting level of Sept. '08, then the Early Exit will be triggered and "you will be able to elect to receive an amount equal to 130% of your Initial Investment."

Bully for you! Thirty per cent up in three years, regardless of any extra gains above that level which Asia stocks might deliver. Nor did you get any capital protection in between. And if you now neglect to quit the scheme, then 30% is all you'll get after the following three years as well.

Your growth is protected, in short, but not your capital and certainly not your upside exposure if the Early Exit is triggered. So the last thing investors in Morgan Stanley's new Asia ex-Japan Protected Growth Plan 5 actually want is a quick bounce in Asian stocks. To get a shot at making 230% of Asia's gains to 2014 instead, they'll actually need sub-30% gains between now and 2011. Which might be just what they get, of course. We have nothing against Morgan Stanley's new offer, nor the terms on which it's made. But we are getting a head-ache trying to figure out why anyone might buy this structured product.

Like all structured investment offers, it's clearly built from a fistful of complex derivative contracts which Morgan Stanley has bought. (At least, we hope Morgans have laid off their risk with derivatives contracts...) Squeezing the new retail market for structured products ever tighter, Morgans have even raised that six- year gearing from the 200% recently offered in ex-Asia Growth Plan 4.

More gearing for you equals more risk for somebody, somewhere...and the brochure from Morgan Stanley UK is bold enough to re-state the facts more than once.

"Your money will be invested in securities issued by financial institutions with a credit rating, at the time of publication of this brochure, of A+ or better by Standard & Poor's...In the event of these financial institutions going into liquidation or failing to comply with the terms of the securities, you may not receive the anticipated returns on your investment and you may lose all or part of the money you originally invested.

"The Plan is not a guaranteed investment," in short, which is just as it should be. Nothing is certain, least of all in investment. But you'd do well to acknowledge your counter-party and trigger risks next time you find 230% gearing attractive. Either that, or put a little of your wealth into something simple, stupid and brutally blunt.

Buying Gold doesn't offer to pay three times Fed funds minus your sister-in-law's birthday divided by the number you first thought of. But Gold owned outright is at least sure to sit free of counterparty and trigger risk. And that's got to be worth buying as banks fight to bamboozle investors with a new raft of complex derivatives...even as the last derivatives bubble continues to blow up.

Adrian Ash
for The Daily Reckoning Australia

• Hiding Level Three Assets Won’t Solve the Problem
• Hell, Meet Handbasket, Part I
• Alan Greenspan Bears Blame for Intensity of Financial Crisis
• Level 3 Assets Growing in All Five U.S. Investment Banks
• Inflation: Enemy Number Two

Big institutional players in the New York futures market slashed their bullish betting on Gold in the week to June 10th. Data from the CFTC – the US regulator – shows a net reduction of 11% in the long gold positions held by what it calls "large speculators".

And this "reduction in the gross longs maybe a further sign that gold is losing its attraction," reckon analysts at the Swiss banking and wealth management giant.

But less pressure from large investment funds could alternatively signal more loss of froth from the gold market since it shot 54% higher in the seven months to mid-March.

Topping out at a new all-time record above $1,032 per ounce – just as the Federal Reserve lent $29 billion to support J.P.Morgan's fire-sale purchase of Bear Stearns – the Gold Price has gone on to drop 15% of its value against the Dollar.

Versus the Euro and British Pound, the loss has been just as dramatic. And looking at the technical action on its charts, "any meaningful bounce from the 200-day moving average could bring back a lot of money into gold," the UBS comment goes on.

That's what "happened last year," it adds.

The 200-day moving average, as the name says, measures the average price of an asset over the last two hundred days. It's called "moving" because, as time rolls ever onwards, so too does the average – used by chart-loving technical analysts to see what the deeper, underlying trend is up to.

And why 200 days? Because that's roughly the number of trading days during one year. So the chart here, therefore, shows both the daily Gold Price as well as its 12-month trend. And you can see how the 200-day average has indeed acted as "strong support" during the bull market so far.

Well, kinda. Most of the time.

Nine times since Gold quit its 20-year bear market in 2001, the price has either bounced off or moved sharply higher through its 200-day average. The following surge – lasting an average of 21 weeks – delivered a 28% gain before the price of gold tipped lower again, back towards that ever rising up-trend.

The leap starting in late Sept. last year was the most spectacular, as UBS notes. By the top of 17 March 2008, the Gold Price moved some 54% higher. Might that happen again now?

Two points to note if you're chasing the bull market in gold for short-term gains to shoot out the lights:

1. Summer Lull – as the chart shows, Gold typically moves flat to lower during the middle four months of the year. And even as the global banking crisis hit in August 2007, a hugely bullish event for Gold's Safe Haven Appeal, it still took another six weeks before gold started to vault higher;
2. Pre-Empting the Bounce – prior to last year's jump – sparked by the US Federal Reserve slashing the cost of borrowing below the rate of consumer-price inflation – the Gold Price had dipped below its 200-day average seven times during this bull market so far.

Buy Gold now, in other words, and a keen market timer might well have to endure a further drop first, even if the apparent magic of the 200-day average does come good once again.

But with the 200-day moving average now just above the $850 level, longer-term investors who've been considering a purchase – but were put off the huge volatility of 2008 to date – might want to stop waiting around. Precisely because larger investors are sitting it out, and precisely because technical analysts like the UBS team are pointing to a possible dip before advising you buy.

You see, that price of $850 marked the bottom of gold's fast & furious sell-off in March. It was also the previous bull market's top, hit just as Soviet tanks rolled into Afghanistan on 21 Jan. 1980. So a return to prices below that level might actually signal a longer term drop. If the price is to push higher from here instead, a drop below $850 might be a long time in coming.

Hanging on for another pullback from today's current Gold Price and so trying to nick a little extra off your investment outlay might prove expensive, in short. If you're looking to take a position in Gold for longer-term or deeper fundamental reasons, the kind of low-profile flat action we're seeing this June could offer your best chance to get in.

Just ask anyone who tried to wait for a pullback once the last surge in Gold Prices had started in Sept. '07.

Adrian Ash

The Daily Reckoning Australia

• CRB Index Correction Likely to Go Further
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