I’ve focused a fair amount of attention on gold in the past fortnight, as it first approached, then hammered through, support around $1180. The effort to break that level and manage some followthrough had left gold quite oversold. Last night we saw a strong response from the market confirming this, with gold rallying around 3%, closing just under previous support.

The proximate excuse for the rally was a minor miss on the non-farm payrolls release, coming in at 214k vs expectations of 235k, down from 256k last month. The unemployment rate ticked down to 5.8% from 5.9% last month. It wasn’t a bad report all in all, although average hourly earnings missed again, reminding us of the absence of wage pressures or inflationary pressures in general.

Equities held up fairly well, as did the USD, which pulled back from its recent (stretched) highs, but did not fall out of bed by any means.

Gold’s rally was therefore largely on its own back. A widely-held view says we’re in the final stage of the bear market for precious metals, with buying opportunities likely to present themselves soon. Short Side of Long has a good piece making the case today.

It’s fair to say that on most indicators precious metals were looking too heavily beaten down. This didn’t phase me a great deal, as I was looking for those indicators to get truly extreme (with gold approaching $1000) before the bounce. You can never be sure about the market’s psychology until after the fact though, and last night was instructive: good buying interest, coupled with skittish short-covering.

So was that the bottom? Can we discount the possibility that gold will test $1000 as has been my stated target?

Firstly, there’s the short-term question of whether gold has further to sell-off on the back of its technical breakdown. Secondly, there is the broader issue of whether we are actually in the final stage of the bear market. Is a sustained reversal in direction approaching in a matter of months not years? Or are we looking at long, multi-year bear market ahead of us?

On the first point, last night’s rally was the first sign of solid buying interest we’ve seen in over a fortnight, and a positive for gold. It’s failure to close above $1180 suggests a lack of conviction however, and my inclination is to read last night as a short-covering relief rally, with more falls to come. Nevertheless, it would take some cojones and disciplined risk management to opening new shorts at this point.

The second question is much deeper and relates to the performance of the USD over the next few years. The performance of the USD in turn depends on relative macroeconomic trends in major economies (or more accurately, the reactions of various central banks to those macro trends). I’ve written about my thoughts on the dollar in the last post, but I’ll return with a more detailed look at its historical relationship with gold when I’ve got a bit more time.