WSJ's marketbeat blog reports that retail investors bug out for gold, while funds pull back:

(emphasis mine)

November 19, 2008, 3:37 pm
Retail Investors Bug Out for Gold, While Funds Pull Back
Posted by David Gaffen

Simon Constable reports:

Demand for gold coins and bars from retail investors more than doubled during the third quarter, as financial-market turmoil prompted a flight to safety, according to new data released from the World Gold Council Wednesday.



Gold is often viewed as a safe-haven investment during times of political or financial uncertainty. Small investors snapped up 232 tons of the metal during the period vs. only 105 tons in the same period a year earlier.

Meanwhile, inferred investment actually saw an outflow of 297 tons. This category includes short-term speculative flows. The massive availability of liquidity and high leverage turned traditionally safe-haven investments into bubbles of their own, such as gold, which ramped up to more than $1000 an ounce earlier in the year despite only mild threats of inflation.

With the unwind of that leverage, gold investment declined rapidly, and retail investors have come into the breach, after a period of time where major markets, such as India, saw run-of-the-mill gold purchasers sell their gold holdings.

Overall gold demand was up 18% for the quarter compared to estimates for the same period a year earlier. The big question is this: Have the small investors turned up late to the party as usual, while the big guns unload their positions? Or do Mom & Pop know something large investors don’t?

The price of an ounce of gold has retreated to around $762 an ounce recently from its all-time high of about $1030, reached March 17 when J.P. Morgan Chase took over beleaguered investment bank Bear Stearns.

My reaction: Hedge funds are being forced to sell their COMEX gold holdings because of margin and redemption calls. Meanwhile, retail investors are buying up large quatity of physical gold causing shortages. This is setting the COMEX up for a process called backwardation: where demand for physical gold forces up the price of paper gold in the futures market. The surge in gold prices due to backwardation is likely to cause defaults on COMEX, which would decouple gold's spot price from the COMEX gold market and further fueling the rush into gold.

For more on backwardation and the coming short squeeze in the gold COMEX market, see 'GOLD TO BREAK TO UPSIDE, DOLLAR TO COLLAPSE'.