Here are two reasons why the gold market, and indeed the entire commodity sector, got stuffed last week.
First off, the Counterfeiter in Chief (Ben Bernanke) managed to disappoint the gold market by deciding to sterilize the bond purchases made on the long end of the yield curve. By offsetting the purchases of short-term Treasuries with sales of shorter duration notes, Bernanke will not increase the supply of money or dilute the currency to a greater extent than he already has in performing operation twist. But make no mistake, the global economy is faltering and QE III isn't far off. However, the gold market was expecting the Fed to do more in the way of easing during this two-day meeting-like ceasing to pay interest on excess reserves. Therefore, in the short term, there will be selling pressure on all commodities.
Number two, and this is conjecture on my part at this juncture, I believe sovereign states in Europe that are flirting with insolvency have resorted to dumping gold in the open market. When under duress these countries are forced to dump what they can. And there just isn't any asset that has performed better in the last dozen years than gold and commodities. But the good news here is that gold is moving from a very few weak hands to a diffused group of strong ownership. That will be beneficial for gold prices in the long run and this recent selloff should be a welcomed opportunity for investors to accumulate a more substantial position.
The bottom line is that all government solutions to a debt crisis in any form is monetization. The ECB will end up recapitalizing European banks. The shell game over in Europe is about moving insolvent sovereign debt onto a different balance sheet. That solves nothing. Haircuts will be massive and money printing will make up the difference. That's why gold's retreat will be temporary.