Spot gold prices fell to touch $638.50 just ahead of lunchtime in New York on Wednesday.

But after falling 0.7% from Tuesday, gold then bounced as US stocks turned higher, recording a higher low from the drop seen at the start of March and outperforming European and Asian equities.

Indeed, the technical picture for gold remains very bullish, says renowned analyst Julian Phillips (click here to read his report...).

The FTSE100 index of UK stocks, on the other hand, stood 2.6% lower by the London close, right at the 6,000 mark – its worst performance since May last year.

Broad European stock indices closed at a three-and-half month low, driven by grim news from the subprime lenders in the US financial markets - which only looks set to grow worse (get a full diagnosis here...).

In Tokyo, the Nikkei 225 dropped 2.9% as export companies such as Honda and Toyota lost 3.5% of their value.

Shanghai suffered its sharpest drop since March 1st, losing 1.6% on average. Taiwanese, Singapore and South Korean electronics firms were also hit hard.

"A slowdown in demand in the [US] housing market," as one Taipei fund manager put it to Bloomberg, "will mean a drop in consumption for electronics and appliances that go into houses."

So far, however, gold has failed to live up to its billing as a way of diversifying investment risk.

"The reputation of being a safe haven has not come to the rescue," said Dresdner Kleinwort in a research note today.

But did gold ever act as a "safe haven"? Click here for the facts...

"Those who played gold on margin now have to liquidate their long positions," said Ng Cheng Thye, head of precious metals at Standard Bank Asia, earlier today.

"Gold is now testing crucial support at $636-$640."

Fundamentally, however, the current sell-off may hit strong buying demand from industrial users.

"Private investors in [Tokyo's] Tocom may be getting out of the market," noted Yukuji Sonoda, precious metals analyst at Daiichi Commodities, today.

"But this is a good time for jewelry and auto catalyst makers to buy."

Longer-term, the outlook for gold in 2007 continues to improve.

Gold mining output is slowing, dropping to a 13-year low in Australia and an 85-year low in South Africa, formerly the world's largest supplier.

Central bank gold sales are also slowing.

Gold sales by Europe's official sector under the terms of the Washington Agreement last week shrank to levels seen in early autumn.

On Tuesday, the Bundesbank said it will not increase its gold sales in 2007 – currently pegged at a mere 8 tonnes. No firm decision has yet been made about 2008.

Russia's central bank, in the meantime, is growing its gold purchases.

The World Gold Council said Tuesday that Moscow's official gold holdings rose 2.2% to 402.8 tonnes in the 3 months to March. That keeps the metal's proportion in Russia's foreign exchange reserves constant.

Other central banks outside the Western world are also growing their gold reserves. South Africa recently bought 20 tonnes for its government reserves, for example.

For the full picture – plus more on the longer-term fundamentals supporting the bull market in gold – click here and read on...