Corrections in gold prices can be swift and violent

The gold price dipped Tuesday morning, trading lower by $18.78 at $1,793 per ounce. Volatility in the price of gold has surged in recent days. After hitting yet another all-time high early last week, the gold price posted its first weekly loss since mid-June.

Goldman Sachs’ chief U.S. economist, Jan Hatzius, characterized Bernanke’s speech as “anti-climactic” and offering “little guidance on the near-term policy outlook.” However, “Bernanke’s remarks contained a short passage on the prospect for additional monetary stimulus. He reiterated that the committee ‘has a range of tools’, and that it discussed the costs and benefits of those options at the August FOMC meeting.”

Hatzius noted that by the Fed extending the next FOMC meeting in September from one to two days, it “makes easing at this meeting a bit more likely than before.” He forecasted that “We continue to think that further easing via manipulation of the Fed’s balance sheet —either through expansion or restructuring of the average duration of holdings—is likely by early 2012.”

Although the Goldman economist did not discuss the impact of further Fed easing and/or QE3 on the financial markets, the implications for the gold price are quite clear. Additional rounds of money printing by the U.S. central bank are likely to lead to greater investment demand for the one form of currency that is no individual’s debt and cannot be debased with the click of a mouse.

Despite the long-term positive macro-economic backdrop, corrections in gold prices can be swift and violent. Last week’s decline in gold may have ushered in a period of choppy price action as the yellow metal registered its first significant decline, over 10% from top to bottom, since early 2010.