Marty

You certainly could be right about a coming multi-month correction, but you seem a lot more confident about it than I think is warranted. I agree with you that gold is very sensitive to the performance of the dollar, and if the dollar strengthens significantly for fundamental reasons or because of a sustained flight to safety, then I also would expect a significant gold price correction. But one big reason the dollar is being sold down is that the market believes (with good reason) that QE 2 is on the way, and unless that turns out to be wrong the dollar should be expected to stay depressed and I wouldn’t expect gold to significantly correct right away.

Of course, other central banks could react with their own brand of additional QE to prevent the US from getting the upper hand in the race to the bottom (such flexibility is a real “benefit” of fiat currencies, eh?), and that could cause the dollar to rise in relative terms. But in “absolute” terms (i.e. its value prior to QE) the dollar would still be worth less, and gold should rise to reflect that (i.e., it shouldn’t be expected to undergo a correction just because the dollar was stronger relative to other major currencies). You can have gold rise against all currencies if all currencies are being cheapened, in which case the gold price should at least partly decouple from the ups and downs of the dollar.

None of this has anything to do with perceived price inflation, and happens without any overt price inflation (although I expect a significant rise in the CPI would add to the demand for gold). This is probably not what many people who think of gold as “just another commodity” that is primarily useful for jewelry and inflation hedging would predict. Ditto for people who think the gold bull market is currently driven largely by momentum traders.

Finally, in a recent newsletter, Bill Fleckenstein commented that an unusually large trade of over 8600 gold contracts worth $1.1 billion had apparently taken place early in London on Sept. 28, all trades occurring within a $12 range. He felt that was very noteworthy because of the market’s response to a very large sale — if the gold market were as crowded as many believe (including his well-connected source), then the first big sale could easily cause a hit of $25 or $30 per ounce and lead to further declines. He (and his source) felt it was indicative that the gold market may be somewhat deeper than many believe.

My point is that, while you may be right that an extended correction is about to occur, there are good reasons to think it might not play out that way in the near term.