The swift sell-off in gold surprised many, as it seemed a foregone conclusion that this gold game was so easy. "Oh yeah, $2,000 gold and beyond is slam dunk — no brainer — don't you know. The U.S. dollar is going into the tank," seemed the sentiment till last week's reality intervened.

What happened? And will gold continue to slide? Let's just take a little retrospective and see if the odds are the top is in on gold.

Let me be clear, though, I don't know if a top is in place. But I want to show you a few charts that suggest this selloff is part and parcel due to the need for liquidity and an indication the currency everyone loves to hate has probably put in a multi-year bottom.

Let's start with the Gold/Silver Ratio vs. Dow Jones Industrial Average (DJIA) Weekly. Now, this isn't a gigantic sample size I grant you. But I think it carries some logic and gives us some insight about the relationship between gold and other risk assets — measured by the DJIA.

As you can see in the chart below, there is a tendency for the gold/silver ratio and DJIA to confirm troughs and peaks:

The correlation of these peaks and troughs in gold and DJIA in the past have represented multi-year moves based on these confirmations. My theory is that silver being more of an industrial metal tends to ebb and flow more closely with risk assets i.e. stocks, thus why this ratio moves in the manner it does.

And what is interesting too, is that the last two peaks in stocks have preceded a break in gold prices by five months. You can see it in the chart below comparing Gold and the Dow Jones Industrial Average Weekly.

We've heard a lot of talk about hedge fund managers liquidating gold positions. It makes sense given that risk assets, stocks and commodities, have been hammered.

When fund managers get margin calls on the bad side of a portfolio, they meet that call by raising cash from the winning side of their portfolio ... in this case that would be gold.

If this is true, and stocks and other risk assets, continue to fall based on the decline in global growth and liquidity, gold should follow stocks lower. And the much vaunted safe-haven appeal of gold could be history.

Was the end of QE2 the bell ringing at the top? The following chart of the Dow Jones Industrial Average Weekly can help answer that.

And the Commodities Index Weekly (CRB) chart looks to be turning over, too.

So if you think global liquidity is in trouble, where is the best place to hide, besides short-term U.S. paper?

I would say the U.S. dollar is looking like it can be a safe haven now. Below is a repeat of the dollar chart I shared last week.

And just like I said then:

"This indicates a real and sustainable move into the dollar. It might be a flight to safety and/or liquidity ... take your pick. And it could eventually turn into something much more this time around."

I have one more question for anyone who believed the dollar was heading into never-never land: Why didn't the U.S. dollar index sink miserably to an all-time-new-low as gold blew off to a new high?

The market will soon share the truth. Stay tuned, but if you own a bunch of gold and are heavily short the U.S. dollar, I think it pays to be careful here.

Source: http://www.moneyandmarkets.com

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