With only one losing session in the last five, gold posted one of its strongest weeks in recent memory, gaining 3.4% and positioning itself for a possible assault on the April highs just under $700. Gold's strong performance is especially impressive in light of the fact that the gains came as the major U.S. equity markets posted large weekly declines. (DJIA -2.09%, S&P 500 -2.66%, Nasdaq -2.51%, NYSE -2.59%, Russell 2000 -3.64%)

As I wrote last week, "Although gold may be feeling the pressure now, it takes a real stretch of the imagination, in my opinion, to assert that gold will continue to tumble if global equity markets extend their losses. It brings up the old paper assets versus hard assets argument. Although the 'flight to quality' so far has been to the bond market, those debt issues can get 'pricey' in a hurry and eventually, the dollars fleeing a weakening stock market are expected to find their way into traditional safe havens and gold typically heads that list."

This "de-linking" or "de-coupling" of gold from the stock markets is important in the sense that in recent weeks gold and the other precious metals had been grouped with equity-based and debt-based asset classes in the wave of "risk aversion" sentiment that had swept the financial markets. The developing "credit crunch," which was examined in this space last week, is seen as the root cause of the concerns and is likely to perpetuate some additional "risk aversion selling" in stocks and debt instruments. In my opinion, it is encouraging to see gold get divorced from these paper assets and regain some of its "hard asset" pedigree.

The near-term technical profile of gold is also encouraging as prices have climbed back to near recent highs, but this time around the mid-range and steadily rising oscillators look to be supportive of additional gains; gold's previous visit to this area was accompanied by oscillators that were nearly exhausted of upside momentum. I expect the bulls to press their case next week, especially if the dollar continues to slide. The key battle, in my opinion, is looming nearby at the $689 level. A break of that high could trigger even more short-covering than we saw this week and create an opportunity to challenge the critical $700 an ounce area.

If resistance at $689 proves to be formidable and prices soften up, support is projected in the $665 area; clients should consider a visit to that area as a buying spot; otherwise, hold your existing positions...