Gold Bruised But Bullish

August 26, 2011

By John Dobosz, Forbes Staff

Gold has taken two days of body blows but the bull still breathes.  After peaking briefly above $1,900 per ounce on Monday and Tuesday, the price of gold on Wednesday accelerated its slide that began the day before.

Spot gold closed down 4.3% at $1754  per ounce in New York Wednesday evening, while gold for December delivery on Comex fell 5.5%.

In the past two months, gold had gained a steamy 30% before dropping 8% in the last two days.  The move drags the gold price below its 10-day moving average on the highest volume in nearly a year, reversing the spectacular upward momentum since July 1.

Despite the damage to the near-term trend, gold bulls can take heart that the two-day sell-off only brings the price down to where it was a week ago.  At $1754, gold is $127 above its 50-day average of $1628.

Over the past year, gold has made several visits to rest at its 50-day average before blasting off to a new high.  Twice earlier this year, in January and again in May, gold spent two months consolidating gains while building steam for two-month rallies of 20% and 30%.

Ahead of a speech in Jackson Hole in which Ben Bernanke may unveil new monetary tools that the Federal Reserve will use in its effort to boost the stalled U.S. economy, you might expect for gold to rally in anticipation of new plans for dollar devaluation, not fall 8% in two days.

Well, the gold market does expect the Fed to toss the buck under the bus, explaining the explosive move higher for gold that began exactly on June 30, the day that Bernanke’s QE2 came to a close.  It might even have anticipated some kind of devaluation in Europe, where the ECD may need to eventually monetize some of the bad PIIGS loans.

Perhaps gold also senses that Ben’s efforts to keep borrowing rates low for the next two years may actually spark rates higher because of the stimulative effect it will have on the economy.  Higher interest tend to do to gold what silver bullets do to werewolves. The yield on the 10-year Treasury note jumped back up to 2.26% today after going below 2% just last week.  Wouldn’t those yields go down if Bernanke was going to start buying a bunch of Treasury paper? Ben perhaps has nothing more that’s really interesting to say.  He said a lot two weeks ago in the Fed statement promising to keep rates low until mid-2013.  That should be enough to nurse the recovery.  If it turns out he didn’t bring his magic wand and monetary pixie dust to Wyoming, stocks could take a hit initially, but thanks to Ben’s previous gift of a pledge for low rates, they should do just fine.

Click on today’s Market Blaster video for more, including a possible double-bottom in the SPY, and a run-through of beaten down sectors and stocks that look good if the rally holds.