Gold Price Recaptures $1,850 Level

GOLD PRICE NEWS – The gold price rallied $32.25 to $1,850 per ounce Thursday, continuing its recent string of outsized moves.  After falling $57 yesterday and briefly slipping under $1,800, the price of gold steadied ahead of a key speech later today from Fed Chairman Ben Bernanke where he will address the state of the economy.  Several investment strategists have suggested that Bernanke may telegraph his intention to announce additional monetary accommodation at the September 20-21 Federal Open Market Committee meeting.

Gold prices held firm this morning following the announcement from the European Central Bank (ECB) that interest rates were left unchanged at 1.5%.  President Jean-Claude Trichet will hold a press conference at 2:30pm eastern time today.  Trichet, who has repeatedly stated his inclination to pursue “strong vigilance” with respect to inflation, is expected to offer a more dovish outlook on price pressures in the euro zone.

On Wednesday, the gold price plunged amid hopes that European policymakers were making strides to stem the tide of the sovereign debt crisis.  The spot price of gold tumbled $57.43, or 3.1%, to $1,817.78 per ounce.  The SPDR Gold Trust (GLD), the world’s most liquid gold price proxy, dropped $5.82 to $177.08 per share.  COMEX gold futures – which on Tuesday reached a new all-time high of $1,923.70 – fell to as low as $1,793.80 per ounce.

Despite yesterday’s gold price sell-off, gold equities displayed significant resiliency.  The AMEX Gold Bugs Index (HUI), a composite of the world’s largest gold companies, initially fell as much as 3.3% alongside the price of gold.  However, the HUI recovered its entire decline and finished higher by 0.3% at 623.81.  Relative to the gold price, this marked the HUI’s largest single-day outperformance in 2011.  Two of the sector’s top performers were Barrick Gold (ABX) and Agnico-Eagle Mines (AEM), which climbed 1.7% and 1.1%, respectively.  Gold mining stocks moved higher Thursday morning in concert with stronger gold prices.

Wednesday’s weakness in the gold price was fueled by a decision from Germany’s Federal Constitutional Court in favor of the nation’s ability to provide financial assistance to other euro zone nations by way of the European Financial Stability Fund (EFSF).  The court did note, however, that its decision should not be interpreted as a “blank check” provision.

Financial markets across Europe cheered the German court’s decision, as it will allow euro zone officials to expand the scope of their bailout programs.  Carsten Brzeski, an economist at ING, commented that the ruling “should bring some relief to financial markets as a total chaos scenario has been avoided, but it should not lead to euphoria…The ruling confirms our view that the German piecemeal approach on the debt crisis is not likely to change but eventually the German parliament will vote in favor of a second Greek bailout package and the beefed-up EFSF.”

Equity markets in the U.S. surged higher as well, with the Dow Jones Industrial Average (DJIA) rallying 275.56 points, or 2.5%, to 11,414.86.  Following the release of the latest Fed Beige Book, the broader markets extended their gains and the gold price remained firmly in negative territory.  The Beige Book – which provides a recap of economic activity across the U.S. – revealed that the pace of the economic recovery continued to slow in recent months.

In light of the recent batch of disappointing economic data, Chicago Fed President Charles Evans reiterated his case for additional stimulus on Wednesday.  At an economics event in London, Evans contended that “Given how truly badly we are doing in meeting our employment mandate, I argue that the Fed should seriously consider actions that would add very significant amounts of policy accommodation.”

Although Evans later acknowledged that providing “significant amounts” of monetary stimulus could temporarily cause inflation to rise above the Fed’s long-term goal of 2.0%, he asserted that “I do not see our 2% goal as a cap on inflation.  Rather, it is a goal for the average rate of inflation over some period of time.”

Evans’ dovish comments will likely add to the drama that is building ahead of this month’s Fed meeting.  The gold price reacted quite favorably in August to the Fed’s pledge to hold short rates near zero through mid-2013, and in recent weeks speculation has risen that Bernanke and the FOMC will soon expand their suite of accommodative monetary policies.  In such a scenario, the price of gold is likely to remain well supported.