The Gold Market continued to plunge early Wednesday, bouncing off a one-week low of $792.50 as the Asian session ended – more than $43 per ounce below Monday's two-week top.

After the first hour of London trade, the spot Gold Price stood nearly 7% below the 27-year high of $845 hit on Nov. 7th. The sell-off following that attempt on gold's all-time peak – recorded back in Jan. 1980 at $850 – was both sharper and more severe than this week's drop so far.

But for now, the only short-term certainty in the Gold Market is strong volatility.

"Energy prices are lower and gold-selling [has been] induced by the volatility created when traders roll over contracts in the futures market," reckons William Kwan, a gold dealer with Phillip Futures in Singapore.

Crude oil today sank below $94 per barrel, its third losing session on the run, after Saudi Arabia claimed overnight that it will have 2.8 million barrels per day of spare capacity by next week. Friday this week will mark the last day that gold futures & options traders can close their December contracts for cash settlement.

The slump in Gold Prices came alongside but ended sooner than a strong bounce in the US Dollar, driven by bad news on inflation for European bond investors.

Eurozone money-supply growth shot to 12.3% year-on-year in October – a near three-decade high – the European Central Bank said this morning. Analysts surveyed by Thomson Financial News had expected an 11.5% rise.

"Solid anchoring of inflation expectations is all the more important in a period of turbulences associated with this market correction," as Jean-Claude Trichet, president of the European Central Bank, said in a speech on Monday this week.

But the financial turbulence that had pushed investors into government bonds failed to outweigh the growing evidence of consumer-price inflation now hitting Western Europe, led by massive inflation in the supply of money.

The rate of return offered by fixed-income bonds moves in the opposite direction to bond prices, and two-year German bund yields had already risen 4 basis points on Tuesday, after the Federal Statistics Office said that consumer-price inflation in the world's third-largest economy will rise 3.0% in Nov..

That's the highest rate of price increases since Feb. 1994.

Today's money-supply news pushed European government-bond prices sharply lower again – and "a sense of impending inflation is currently influencing German consumers," confirmed the closely-watched German GfK confidence report this morning.

"The positive factors currently evident, such as the sustained improvement on the job market and rising incomes, seem unable to prevent the evaporation of optimism."

The GfK's latest reading of German consumer confidence has now fallen to an 8-month low. The Munich-based Ifo research group said yesterday that confidence amongst German business leaders has dropped to a two-year low.

Today's rush out of Euro-denominated bonds spilled over into the currency market, pushing the Euro itself sharply lower this morning. Down more than one cent vs. the US Dollar inside two hours, the single currency hit a one-week low beneath $1.4730.

Gold Priced in Euros bounced off €537.50 per ounce – some €25 off Monday's opening in Frankfurt – before regaining 0.6% by late morning.

For British investors wanting to Buy Gold Today, the price slid back to £384.50, more than 5% off Monday's new all-time record vs. the Pound Sterling of £404.50 per ounce.

The US Dollar also gained 0.8% against the Japanese Yen this morning, while US Treasury bonds recovered from a sharp sell-off of their own – blamed on "profit-taking" by traders – that hit on Tuesday.

Two-year yields rose 18 points yesterday as money moved out of bonds into US stocks. But Treasury prices rose again this morning as European bonds continued to sell off. Asian and European equity markets were little changed.

"The trend for lower yields is so strong," said one Japanese fund manager to Bloomberg overnight. "I'm buying Treasury bonds because the US economy is slowing."

Today is expected to bring fresh evidence of the looming recession, with Mortgage Applications data for last week followed by Durable Goods Orders and Existing Home Sales numbers for Oct.

But if inflation is rising fast in Europe, squeezing investors out of fixed-income bonds despite a slowing economy, what inflationary horrors await US Treasury bond holders?

The US Dollar has lost one-tenth of its value vs. the Euro in the last 14 weeks. It has dropped more than one-fifth of its value in terms of gold, even after this week's Gold Market setback so far.

If government bonds get wiped out by inflation, where might investors take refuge? To get the full story on Gold, Bonds, Stocks & Inflation, click through and download this exclusive Gold Report now.

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