A gold selloff that saw the gold price tumble $50 to $1,060 per ounce in mid-day trading was fueled by a U.S. dollar rally and concerns over sovereign debt in Europe that led to severe selling in securities tied to the gold price, such as gold stocks and gold ETFs. Gold futures suffered their worst single-day performance since December 1, 2008, while the U.S. Dollar Index (DXY) flirted with the psychologically important 80 level for the first time since July 2009. Sovereign debt issues throughout Europe sent the euro currency to 1.375 against the dollar, the lowest level in eight months.

From its November 26, 2009 low near 74.20, the U.S. Dollar Index has rallied 7.78% - a very significant move for a currency index, especially over the course of roughly ten weeks. At the same time, gold futures have now dropped roughly 13% from their all-time high near $1,227 per ounce reached on December 3, 2009. Along with the gold price, gold stocks have undergone considerable declines, with the Market Vectors Gold Mining ETF (GDX) falling 27.5% from its early December high to its current level of $40.16 per share. Investors in gold stocks have over the past two months had to bear the brunt of the leverage to the price of gold and gold futures that gold stocks provide.

With the decline to $1,060 per ounce, gold reached its lowest level since November 2, 2009 as the U.S. dollar carry-trade has continued to unwind. The primary catalyst for the dollar unwind and subsequent gold weakness has been renewed deflationary fears across several nations in Europe - including Greece, Spain, Portugal, as well as many smaller Eastern European nations. Sovereign debt and rising deficit concerns throughout these countries have even led some market participants to question the sustainability of the euro currency.

These concerns over the euro have fueled increased demand for U.S. dollars, because even though the dollar faces numerous issues of its own, it is still the world’s reserve currency and supports the largest economy in the world. As for the gold price, its high correlation with the euro since the onset of the financial crisis has taken it lower as of late, as investors and traders are forced to indiscriminately sell dollar-denominated asset classes to raise cash. While these fears of deflation provide a meaningful headwind to gold futures in the shorter-term, central banks across the globe - including the Federal Reserve, Bank of England and European Central Bank, among others - have continued to fight deflation by printing money to attempt to liquify the financial system. As such, when using history as a guide, the longer-term consequences of broad-based currency debasement are quite serious, and should continue to support the one form of money that cannot be printed at will - gold.