Looking at the two charts for today, you can clearly see that the XAU is now deep into its potential support range. The hour of decision is at hand. Will the XAU do an aggressive price action bounce off of this 6 year support line? If it does, and it does so SOON, it would in my opinion be a potentially very bullish scenario. It would also potentially create the 'spike head' of a reverse head and shoulders pattern as I indicate in the first chart.

The 6 year support line is not made of steel but rather soft wood. My point is that there is a price range of support which the XAU is feeling for right now. The gold contract itself could very well be at or very near the end of its short term decline indicated by today's powerful intraday reversal (on the accelerating inflation news) and close at the top of the price bar. On a very short term basis this showed good demand and possible hints that the gold price wants to build a small basing out trading range here for a move back to the top of the expanding triangle. That would support the case of the XAU being near its final low here. Expanding triangles can be bullish patterns. It is not the most ideal pattern you want to see, but still has potential for bullish implications. A bullish resolution would bring price right back up to the horizontal supply line of 430. A bullish break of that level would confirm the expanding triangle pattern.

My only fundamental comments are as follows. What if inflation really starts to accelerate from this point forward so that the fed must play catch up? Right now the popular wisdom seems to be that because the fed will be raising rates inflation will be contained and gold will be a less attractive investment. But what if the perception changes to that of the fed not being able to keep up with accelerating inflation? That is a fear based scenario which could support the entire gold market. Crude Oil is still behaving in a way that suggests to me it wants to make a huge breakout. But the crude oil chart also is showing me that it wants go into 'acceleration mode' if a breakout actually occurs. I cannot think of any other commodity that has more inflationary implications than oil. Lastly, what if the June 30th transition in Iraq does not go so smoothly as planned, potentially implying more involvement and cost. All of the above are speculations on my part to try to get a feel for how things will shakeout in the gold market during 2004.

The longer term bullish trendline on the XAU must hold at 70 level. Otherwise in my opinion the entire gold market bull scenario is thrown into doubt and would indicate failure. Will we move to 70? Tough to say. So far we have not had a reverse upside reaction in the XAU to indicate the duration of the decline is behind us. Clearly the XAU is very oversold now. Needless to say, the months of May and June will be critical for the gold scenario in both the XAU and gold price itself.

375 gold was actually an allowable price which I felt comfortable seeing on this correction. I am basing this statement on my super long term charts of the gold price and a scenario I have come up with. The fact is that the resistance line between 370 and 430 gold is long in duration and degree of potential supply. An extended reaction is warranted.

I have to admit that the depth and degree of the decline in gold was a bit of a surprise. I mentioned in a previous letter that the dollar price chart was bothering me for a long time. Probably even for 2 to 3 months. The dollar was so extremely over extended to the downside that it was no longer sustainable. I made the mistake of rationalizing a bouncing dollar as not being excessively devastating to the gold price. This was incorrect. Also the XAU was creating a rising bearish wedge after a sign of weakness. So these two technical points were enough to take a strong bearish stance on gold shorter to intermediate term. But I didn't do it. What is the lesson here? The lesson is, if you see a chart feature that really bothers you for quite some time, don't deny it, take it and accept it and take appropriate action if necessary.

Speaking of denial, there is a key longer term indicator that I keep an eye on for the gold price. I have been watching it carefully. If it gives me a longer term bearish signal for the gold market I will mention it here and explain the potential implications. With the gold market there is the long term and the super long term. The super long term still looks great to me. But it will be important to see that the longer/intermediate term scenario keeps its bullish tendencies. If it does not, then it could imply a longer intermediate corrective process in gold that could last from 1 to 3 years.

Lots to think about for sure. I will be watching for important clues to share.