The gold price, closing at $1,130.72 per ounce, traded sideways for the second day in a row, as the U.S. dollar and the price of gold consolidated their respective diverging price patterns. Gold mining stocks, as measured by the Market Vectors Gold Mining ETF (GDX), finished marginally lower at $48.74 - selling off for the fifth time in the past six trading sessions. Canada’s S&P/TSX Global Gold Index fell 0.5%to 350.73. Equity markets rallied for the second day in a row, as the S&P 500 index rose 6.4 points to 1,102.35. Meanwhile, commodities were mostly lower on the day, highlighted by the price of oil, which weakened by $0.19 to $70.48 per barrel - closing lower for the seventh consecutive trading day.

Commenting on the recent sharp decline in the price of gold over the past week, Dennis Gartman of the Gartman Letter, stated that the “current correction, serious though it might seem, really has been rather modest when viewed in the light of the bull market that has been extant for several years and which really got a head of steam beginning in mid-August.” Mr. Gartman went on to say that he could see the gold price falling to the $1,025 - $1,065 per ounce range, but that the yellow metal will remain in its long term bull market trend.

In macroeconomic news, the dollar traded flat in spite of a weak Treasury auction. The 30-year government bond auction went off at a yield of 4.52%, considerably higher than market expectations. Rick Santelli, CNBC financial commentator, gave the auction “an F.” The yield curve steepened to record levels - as the 30-year bond reached its highest yield ever relative to the 2-year note. The steep yield curve has been a boon for banks and other financial institutions as liquidity has been ample throughout the system.

While short term yields have continued to attract strong demand due to the relative safety and liquidity of U.S. government bonds, longer term yields have risen considerably from their record low levels of late 2008. Investors have grown increasingly concerned with the tremendous amount of government debt that the Treasury has been selling in order to fund the record deficits utilized in part to combat the credit crisis. Several high-profile investors, such as Julian Robertson and Marc Faber, have publicly stated that they are betting on a considerable rise in long term interest rates because of the inflation risks that exist as a result of the government’s easy monetary and fiscal policies.

Over the past several months, the Federal Reserve has reiterated that the risks of inflation over the intermediate term remain subdued and that “considerable challenges” still face the economy. This view has formed the basis for policymakers continued efforts to increase liquidity into the financial system. Today’s Treasury auction highlights one of the unintended consequences of such policies - namely higher interest rates to compensate creditors for the currency debasement of the dollar. If longer term interest rates continue to rise at an accelerated pace, the Federal Reserve may be forced to adapt a more hawkish stance. Accordingly, tighter monetary policy would provide a severe impediment for the gold sector, as rising interest rates would lead to a strengthening of the dollar and an accompanying decline in the dollar-denominated price of gold and gold mining stocks. However, as it stands now, there are very little signs of a retreat from the current policy stance of Chairman Bernanke’s Federal Reserve - a fact that keeps the macro-economic fundamentals on the side of the gold bulls.