At the risk of being accused of having 20/20 hindsight, gold looks set to stage a recovery of sorts... and indeed has begun to do so. A sharp decline from a high of $1,918 to a low of $1,702 is typically met with a 50% retracement – this being so and tradition being upheld, gold should recover to $1,810 either today or early next week. Currently gold is trading at $1,785 so it has completed part of its journey.
That said, Jackson Hole is taking truly epic proportions in some analysts minds as an occasion for Fed Head Bernanke to put forward his broad plans for debt reduction while maintaining growth; in particular the market's ear will especially be tuned to those possible words "QE3" as this will be the anniversary of the mention of QE2 just a year ago. A further easing would be controversial – not least amongst US politicians – and gold would likely benefit as investors’ minds turn to the possibility of severe inflation a short way down the track. In the absence of anything especially pointed we would expect gold to ease its way forwards to $1,810 before settling in for a well earned rest.
It is interesting to note that during the recent sharps sell off in gold, the VIX index ("fear index") held resolutely close to the 40 level - (it has had only six episodes above 40 in the last 30 years) which suggest that market tension remains high and that gold's sale may have been a one-off from a possible "official" source. In other words, the story pre-selloff remains unchanged. For that reason we remain modestly bullish.
With much of the speculative heat now taken out of gold, it should move more sensibly on a gentle trend higher. With ultra-low interest rates a given (?) until 2013, gold has the benefit of that additional layer of protection - meanwhile as the recent CPI and Employment data has shown, the market will remain hair trigger sensitive to inflation and jobless claims data for the balance of 2011.
In other areas, physical gold supplies in the form of small bars and coins are at unprecedentedly low levels - demand amongst retail clients has been especially buoyant and some refiners have suggested stock will not be available for at least six weeks. Some take the view that a market must be topping out when the little guy gets in - anyone watching Newsnight yesterday evening (about mob rule in Manchester during the recent riots) while be wary of such a thing - the little guy is sometimes empowered with quite unpredictable and dramatic effect.