The gold price advanced $2.40 to $1,067.55 as the price of gold and gold mining stocks reversed course after a $65 gold price decline over the past two days. The gold price, after falling over $20 this morning, rallied into the afternoon and finished the day in positive territory. Gold mining stocks, as measured by the Market Vectors Gold Mining ETF (GDX), followed the gold price higher and finished up by $2.17, or 5.4%, to $42.41 - its largest one-day percentage gain since November 2, 2009. The strong performance of the GDX was led by gains in Canadian-based Barrick Gold (ABX) and Goldcorp (GG) - the two largest components of the GDX and the world’s two largest gold producers - of 5.4% and 6.9%, respectively.

Despite yesterday’s 4% plunge in the gold price - its largest single-day decline since December 2008 - the price of gold closed the week lower by just $14.42, or 1.33%. Given the powerful rally in the U.S. dollar, which as measured by the U.S. Dollar Index (DXY) rose to its highest level since July 9, 2009 at 80.68, the price of gold has held up relatively well. Thus far in 2010, the price of gold is lower by a mere 2.5% and is over $140 higher than it was the last time the Dollar Index was at its current level. Whether today’s reversal in the gold price and the shares of gold mining producers was the end of the current correction remains an open question. But gold bulls look to have regained the upper hand as gold stocks rallied strongly on heavy volume in the last hour of trading.

Heading into next week, the calendar for economic data is relatively light. Investors and traders will be looking for clues as to whether today’s reversal in the gold price and gold mining stocks is sustainable. Sovereign debt issues will remain front and center and it remains to be seen whether a bailout plan for the Greece will materialize in spite of European Central Bank (ECB) officials stating that an emergency meeting will not be held this weekend. Concerns over sovereign debt have plagued the global equity markets in recent weeks and the general liquidation pressure has spilled over into the gold sector. However, the longer-term implications of the shift in leverage from the private sector to the public sector have bullish implications for the gold price.

As the balance sheets of nations such as Greece, the United Kingdom, Japan, the U.S. - and many more - deteriorate in an effort to stimulate economic growth, pressure on currencies can be expected to increase. Gold has become more relevant to the global financial system since the onset of the credit crisis, exemplified by nations such as India and China announcing greater allocations to gold bullion as part of their foreign exchange reserves. This trend looks set to continue, and notwithstanding shorter-term price oscillations, sovereign debt issues will likely provide a tailwind to gold for many years to come.