Wow. Just when it appeared gold was “off to see the wizard..” and was headed for $1,000 an ounce it is now trading for under $800 an ounce. The 20% drop has happened in just six weeks. On July 1, gold was going for $940. This morning, gold was trading at $795. There is support for gold at $770-ish, but a break below $770 could take the precious metal down to $750.

Meanwhile, oil is down 25% from its high of $147 a barrel as it is going for $111. I had mentioned the $110 level as a battle line but I’m in the camp of oil going back to $120 before it tests the $100 level.

Then there is the dollar. In dollar has hit a six-month high versus the euro as the currency was down 0.7% to $1.47. The dollar has gained 5% this month and continues to rally as inflation will restrict the Fed’s ability to cut rates. The weaker growth in Europe has started to hit the euro hard and it could get worse before it gets better for the euro.

A firmer dollar typically pressures gold which is often seen as an alternative investment or safe haven to the U.S. currency. A stronger dollar also makes dollar-priced commodities more expensive for holders of other currencies. They work hand-in-hand and it’s good to know these things. When the market was tanking in early July and oil was rising, we were able to hop into the gold stocks for a quick bullish play on gold. We set stops, made money and got out.

I’m not ready to go long just yet on the gold stocks or call options but there will come a day when we do. Just be patient. Take a look at our gold watch list and see where we were then compared to now. The comparisons are from July 1 and the options are the ones we will watch. Do not take any action, yet.

Barrick Gold (ABX, $32.49, down $1.09), was $46. January 35 calls (ABXAG, $3.10, down $0.60).

Goldcorp (GG, $29.95, down $0.97), was $48. January 32.50 calls (GGAZ, $3.30, down $0.70)

Gold Fields (GFI, $8.83, down $0.26), was $12.70. January 10 calls (GFIAB, $0.88, down $0.17.

Newmont Mining (NEM, $41.92, down $0.98), was $53. January 45 calls (NEMAI, $3.35, down $0.60).

It will be interesting to see if the market can hold its recent rally if oil heads back up. Over the short-term, I still see a firmer dollar and lower oil prices. This means the outlook for gold remains cloudy.

Rick Rouse