The gold market is in the midst of a correction, potentially artificially triggered by central bank intervention in support of the dollar. There has been any number of market rumors and clues over the past several months suggestive of government intervention. However, the surreptitious nature of this likely intervention makes it difficult to prove.

The latest rumors suggest that the US Exchange Stabilization Fund, utilized by the Treasury for intervention purposes has been drawdown by as much as €10 bln in recent weeks. If this were ultimately confirmed, it would be a clear indication that the US was indeed directly involved in the dollar's rebound.

Often times when central banks seek to change the course of a currency, they make those desires clearly known. The constant threat of a central bank stepping into the market makes traders hesitant to take an opposing position. As existing opposing positions get liquidated, the central banks achieve their desired result.

Back in my days on the S&P FX desk I would periodically get reports from my market contacts that some central bank was "checking rates." This usually generated a market reaction, and was occasionally a precursor to actual intervention.

The banks that 'leaked' information about central bank action in the FX market unquestionably had permission to do so. Banks get paid based on the volume of FX flows they handle. No bank doing business with a central bank would jeopardize that relationship by leaking information without their consent.

By the same token, if a central bank wants to keep their activity in the FX market covert, it's pretty easy for them to do so. This leaves the rest of the market guessing as to why for instance the dollar is rallying so strongly despite a very bleak economic outlook, easy and expansionary monetary policy and a financial crisis potentially greater in scope than the one the led to the Great Depression.

The recent intervention of the Bank of Korea in support of the won is a good example of a fairly transparent intervention. The goal of the BoK was readily apparent; they were attempting to curb inflation and improve their current-account. To do so, they made an effort to halt, or at least slow, the slide of the won.

Possible intervention by other central banks in support of the dollar certainly isn't helping out the BoK in its efforts to underpin the won. South Korea may simply be getting thrown under the bus in an effort to avert a global economic meltdown.

On the other hand the BoK may have been aware of intervention from other quarters to prop up the ailing greenback. Their intervention could be a calculated move to offset the negative impact of dollar intervention on the won. To the BoK's credit, they have also raised interest rates, a monetary policy move that the US is unlikely to make anytime soon.

As Mike Kosares astutely pointed out in a recent post on the USAGOLD Discussion Forum: "...keep in mind that none of the disturbing trends which provoked the nearly six year bull market in gold have been altered or turned around. In fact, they are worse now than they ever were and they promise to get worse still with the economy going into a tailspin and the toil and trouble in the financial industry running unabated."

Perhaps this is exactly why intervention to support the dollar is necessary. Mike reminds us in his post of something that he wrote back in May: "Market interventions rarely work. In the end, they tend to create more problems than they solve. This intervention, like most of its predecessors, is likely to be viewed down the road as containing more short-term bluster than long-term substance. Once the pressure is released, which inevitably will be the case, the gold and euro markets are likely to move rapidly and forcefully in the direction opposite the control."

The opportunity to buy physical gold in the low $800s could very well end up being the bargain of the year. Physical interest continues to be very strong from both India and the Middle East. With no central bank sales in the offing that we are aware of, and both mine production and forward sales falling, there could be a delivery squeeze in the making.

Gold Market Movers:

US treasury budget at 14:00 EDT. Projections show the budget deficit widening in July to as much as $100 bln, from $36.2 bln a year ago.

US trade deficit for Jun narrowed to $56.8 bln, below expectations, versus a revised deficit of $59.2 bln in May.

Canada trade surplus for Jun widens to -$102 bln.

UK CPI for Jul 4.4% y/y, above market expectations.

Russians shell Gori despite claims Georgian conflict is over

US has few options in Russia-Georgia conflict

JPMorgan loses $1.5 billion since July on debt prices

UBS unveils shake-up as losses widen