Gold ends August ahead, but profit taking evident

In the Lead: “Turkish Delights“

Precious metals opened mixed on this, the last trading day of a truly stormy (in all regards) month. The first ten days of market action saw the Dow plunge and erase its 2011 gains and gold shoot up from $1620 to $1760 while the next ten sessions offered a rebound in the equity market that unfolded in concert with a yet stronger push in gold to new peaks above $1,900 the ounce.

And then, if that had not been enough, things got really wild. Bond yields fell off the map, the Swiss franc shot through the roof, and volatility indices scaled new heights. And we have not even gotten to cover the S&P and the damage its pronouncement inflicted in various places. Some say the effects would have been milder had the US in fact defaulted altogether.

Eventually, the Dow regained some more of its previously lost ground and clawed back to the break-even point for the year while the yellow metal went into a free-fall of a magnitude not seen since…who can remember? By the time Irene showed up on the horizon, the trading crowd in lower Manhattan was distressed enough to not give her too much in the way of attention. As per some participants we sounded out in New York, the end of this particular month and the upcoming long weekend cannot come soon enough…

Spot gold started the midweek trading session off with a drop of $12.40 per ounce; a decline that soon turned into a $25 give-back of Tuesday’s $50 gains. Gold’s continuing volatility in and around these levels in prices continues to be an unnerving factor for small retail investors. Some market observers have begun advocating the taking of (at least) some profits on the heels of a near 50% gain over the past year.

In the wake of last week’s sizeable declines, and ensuing unsettling and choppy behavior, not only has the talk of gold being in a potential bubble resurfaced, but some of the metal’s long-standing safe-haven attributes have come into question. Bubble-hunting is a difficult sport, however. Bring a pellet gun.

For example, Yale University’s Prof. Robert Shiller argues that bubbles are born when (most) people buy into the “next great thing” and “they accept that this [insert your favorite here] is a game-changing asset (like housing and the Internet) that cannot fail. The Internet and the media are singled out by Prof. Shiller as integral drivers of such recent feeding frenzies:

“If you watch cable television, it would certainly appear that gold is in a bubble. Commercials abound for buying gold. Commentators on CNBC talk about gold hitting $2,400 an ounce, which would be a genuine record (the previous high of $850 in 1980 would be about $2,300 today, adjusted for inflation). In fairness, other CNBC commentators have said this is foolish and that gold prices are too high. Still, the marketing of gold to the masses is an ominous sign.” Gold ATMs, anyone?

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