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Friday, February 18, 2011 gold commentary for Feb 18, 2011.

Gold continued its climb on Friday, floating on the back of a mass speculative hysteria in stocks and commodities fueled by the Feds massive injection of cash into the system. Silver continues to lead gold, a sign the current rally may still have legs. The Fed continues to purchase treasuries from primary dealers who in turn invest (read: gamble) the proceeds into risk assets. Funds follow along, betting that the game should last until QE2 is set to expire in June.

The question now is at what point do market pros start to unwind speculative longs in advance of the Fed's June end date? Do they wait until May - or does smart money start to pull out well in advance?

Given the shaky nature of the recovery, the persistent - perhaps structural - unemployment, and the fact that retail investors are largely out of this market, if a couple of big players begin to unwind positions, it could easily set off a lemming-like stampede back out of speculative positions and into the illusory safety of cash.

Any pullback of this nature, no matter how swift and deep, should be looked at as a Godsend to both bullion buyers and traders alike. Because, when the Fed sees the effect of their easing off the cash pump, they'll be revving up the printing presses for QE3. If Bernanke's clear about anything it's that there won't be another serious round of deleveraging on his watch if he can possibly avoid it.

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