Gold corrects, finally

Gold has been in a bull market now for nearly 10 years and has seen extremely impressively moves, taking the precious metal from below $300 per ounce in early 2001 to a high of $1366 today. But there may not have been a better or easier time to be long gold than during its current run-up from the July 28 low of $1155, as gold experienced none of those vexing stop initiating pullbacks.

That changed today as gold is more than $35 off of its high. The first culprit would appear to be news that the European Central Bank (ECB) and the Bank of England (BOE) are keeping their rate steady at 1% and 0.5% respectively. While there was no widespread anticipation of a change in policy, that may have changed once the Bank of Japan decided to buy assets. The move in gold, and subsequent rebound in the dollar, seemed to correspond with the announcement. CMC Markets Chief Market Strategist Ashraf Laidi sees no correlation and attributes the move to a long overdue correction coming appropriately just before tomorrow’s employment report.

Justin Shea, president of Qualitative Capital Management, believes it is related to anticipation of QE2 (a second round of quantitative easing by the Federal Reserve). Shea points out that a lot of market participants have assumed the Fed would come in to buy Treasuries again (QE2) based on its decision to reinvest some of its previous stimulus. The Fed’s decision to not lighten its balance book just yet is not the same thing as them going out and proactively buying Treasuries, though some have assumed that was the case.

Shea says that recent positive economic news and the ECB and BOE decisions not to follow Japan’s lead were an indication that there may be no QE2, something that may have already been worked in to the price of gold and dollar weakness.

Regardless it makes sense that there would be some pullback in such as dramatic move prior to the all important employment report tomorrow.

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