Gold Price Slides Back Near $1,800

The gold price dipped Monday morning, trading lower by $13.50 at $1,814 per ounce.  Volatility in the price of gold has surged in recent days.  After hitting yet another all-time high early last week, the gold price posted its first weekly loss since mid-June.

The spot price of gold climbed to a fresh record of $1,913.60 per ounce on Aug 23, but plunged over $200 to as low as $1,704 just two days later on heavy profit-taking and broad-based liquidation in the precious metals.  However, on Friday the gold price rebounded significantly, gaining $52.00, to close the week lower by just 1.3% at $1,827.67 per ounce.

Silver experienced significant swings alongside the gold price, sliding from over $44 to near $38, before bouncing back above $40 per ounce.  In total, gold’s sister precious metal tumbled 4.7%.  Silver moved lower Monday morning, sliding $0.30 to $41.05.  Despite the sell-off in the prices of gold and silver, on a year-to-date basis they have appreciated by 28.6% and 32.2%, respectively.

Gold equities not only outperformed the gold price last week, but finished in positive territory.  The AMEX Gold Bugs Index (HUI), a basket of the world’s largest gold producers, rallied 2.7%.  Newmont Mining (NEM), the largest U.S.-based gold miner, climbed 3.5% on the week.  Other notable advancers included Agnico-Eagle Mines (AEM) and Kinross Gold (KGC), with gains of 4.7% and 5.0%, respectively.  Gold mining stocks hovered near unchanged early Monday.

The most noteworthy economic development of the past week was Ben Bernanke’s speech from Jackson Hole, Wyoming on Friday.  Given the weakness in financial markets and economic data in recent months, speculation had arisen that the Fed Chairman would discuss the potential for a third round of quantitative easing (QE3).  Despite the fact that Bernanke made no mention of QE3, the price of gold rallied following the Fed Chairman’s comments.

Goldman Sachs’ chief U.S. economist, Jan Hatzius, characterized Bernanke’s speech as “anti-climactic” and offering “little guidance on the near-term policy outlook.”  However, “Bernanke’s remarks contained a short passage on the prospect for additional monetary stimulus.  He reiterated that the committee ‘has a range of tools’, and that it discussed the costs and benefits of those options at the August FOMC meeting.”

Hatzius noted that by the Fed extending the next FOMC meeting in September from one to two days, it “makes easing at this meeting a bit more likely than before.”  He forecasted that “We continue to think that further easing via manipulation of the Fed’s balance sheet —either through expansion or restructuring of the average duration of holdings—is likely by early 2012.”

Although the Goldman economist did not discuss the impact of further Fed easing and/or QE3 on the financial markets, the implications for the gold price are quite clear.  Additional rounds of money printing by the U.S. central bank are likely to lead to greater investment demand for the one form of currency that is no individual’s debt and cannot be debased with the click of a mouse.

Despite the long-term positive macro-economic backdrop, corrections in gold prices can be swift and violent.  Last week’s decline in gold may have ushered in a period of choppy price action as the yellow metal registered its first significant decline, over 10% from top to bottom, since early 2010.