First of all, acknowledgement should be made that gold’s climb in the past ten months or so has been spectacular. Even at today’s $657 area, prices are up a solid 50% from last June, when gold was meandering around the $420 level.

But in the intervening months, a surplus of optimism had built up in the gold market, particularly during the price rise of some $200 since the first week in January.

Starting last fall, gold soared for fundamental, technical, and war-scare reasons, not only against the US dollar, but against every world currency imaginable. In the past few weeks, it relentlessly set new 24-year, then 25-year, and finally 26-year highs. It looked like it would never correct.

Of course, when markets get ahead of themselves like that, word starts to go around that ‘this time it’s different.’ An ‘irrational exuberance’ builds up, particularly among new buyers, as higher and higher prices become a commonplace. Witness the fact that recent gold commentary was starting to compare this run to 1979/80’s surge to $850+, and with some justification. In fact, May 12th’s PM London fix, at $725, was only some 15% shy of that all-time trophy number.

But as Leonard Kaplan says (and I suspect he cribbed it from Jesse Livermore, or Jay Gould, or maybe it was Aristotle), “Markets will always act in a manner to inflict pain on the maximum number of participants.” And the growing crowd of gold buyers and mavens had certainly acquired too much mindless complacency for their own good, what with the stuff doing nothing but going up in price for so long.

Such happy-clappy smugness had to come to a bad end, and it did. After the initial tumble during the afternoon of Friday May 12th, all eyes were on this week’s action to see if this wasn’t just another slight head-fake by the gold market, or was it finally the signal of a genuine change in direction.

This week, of course, brought a series of cascading price drops, and mean Mr. Market has doled out a whipping in spades. By this afternoon’s close (down some twenty-three American dollars on the day) the question was answered fairly succinctly – for now, the gold party is over.

So are further corrections within this gold bull market likely in the near future? Any answer at this point beyond “Who knows?” would be premature.

Is there any reason at this point to question the gold bull market itself? Of course not. In fact, this past week’s 10% correction simply takes us back to price levels of three weeks ago.

But in fact it was a dramatic and convincing stop to recent gold market momentum. It may even foretell a long, grinding market this summer, one that will give aid and comfort to market mavens, commentators, and cheerleaders for the dollar who feel that inflation fears are overblown, and that gold is a ‘flash in the pan.’.

Two points come to mind:

First, gold is in its 5th year of a bull run, one that came within $25 of being a 3-bagger just last week.

Secondly, the dollar still lacks any meaningful adult supervision.

So the question is:

How likely is it, in this world as presently constituted, that we are about to see a dollar rally of sufficient strength and duration to knock gold off its post?