Federal Reserve Policy (superficially hawkish):

• Tightening trade has limited legs - central bank conviction on inflation is immature and nearby costs too great
• The risk of the bluff is in the economic growth trade largely supported by money / credit expansion (inflation!)
• It's tough to get bearish on the inflation trade unless we're underestimating non-inflationary growth
• Tightening consensus at Fed not apparent - Bernanke still waffling (Reuters writes "Mixed Fed Message")
• Hawkish talk among other bankers may be nothing more than some good old fashioned butt covering!
• Easing speculations anew probably lay awaiting at somewhere around Dow 9750

Other Fundamentals & Noteworthy Facts (structure of gold market sound, global money supply trends bullish):

• Chinese central bank plans marginal removal of accommodation via 0.5% increase in reserve requirements
• Gold supply funnymentals still bullish, and tightening ("resource nationalism" / environmentalism on the rise)
• Second quarter earnings for gold stocks could finally show well, even relative to other sectors
• Asian currency complex could see weakness if speculation over North Korean missile test launch heats up
• July is a seasonally weak month, but August through October is seasonally the strongest period
• According to the COMEX COT's for gold, funds (large speculators) have been liquidating their longs since October, and doubled up on their shorts between January and March (the speculative net long position has hovered between 34 and 37 percent since February, down from the 40-50 percentage range during Q4, 2005) - thus the view that leveraged funds and other players were caught off side in latest slide should be suspect
• Trend in US broad money (MZM) thru May has seen a steady incline over the past year (back up to 4% YOY)
• Year over year rates of change in monetary aggregates for the other G7 central banks continued their generally even more profuse incline thru April (May figures are not in yet) as well with double digit (10-15 percent) growth rates in broad and narrow money by the ECB and BOE; broad money growth in Yen has recovered in the past two months to its fastest year over year clip in seven years (though still much more moderate than the rest) - there is no sign of a genuine global tightening campaign by central banks anywhere, yet, as the press has it

Technicals (burden of proof shifts to gold bulls - intermediate trends broken or at critical inflection point):

• In GOLD, the burden of proof lies with the bulls as cracks in intermediate bullish trends evident
• Bullish intermediate trends in gold are broken in most currencies except USd, Aussie & Rand
• Bearish intermediate trends have asserted themselves in the base metals and silver
• Bullish intermediate trends in most small cap and many of the mid to large cap gold stocks are broken, yielding bearish intermediate trends in some cases (exceptions in the index shares that we track so far include Barrick, Agnico Eagle, Eldorado, Glamis, Randgold, and Meridian; the intermediate trends in Goldcorp, IAMgold, Kinross, and Newmont shares appear neutral with a bearish bias at the moment)
• Short term gold trends are all oversold / bullish Platinum trend intact
• Action in gold prices on the approach and immediate aftermath of FOMC could hold significant implications
• Potentially bearish trends in other METALS and ENERGIES are not bearish for the inflation trade, as they relax Fed's cost-push and demand-pull neo-Keynesian style analysis of the inflation risks
• Five year trend in South African RAND / USd could be breaking down - weakest relevant currency relation
• USd is next weakest CURRENCY on chart - intermediate trends still decidedly bearish vis-à-vis all but Rand
• Next to Gold Stocks, Techs, Healthcare issues, and Homebuilders seeing brunt of decline in STOCK PRICES
• Energy-related, Banks and Utilities joined in latest week
• Trend in energy moot for gold - reversal would let Fed relax, new highs bearish for growth trade / bullish for inflation trade - but decline could cause bearish reversal in CRB, underpin greenback and ease pain in bond pits

Conclusion

Our outlook on Federal Reserve policy (i.e. skepticism) suggests that the correction in gold described by an abandoning of the inflation trade was a mistake. Gold's valuation dynamics (relative to the main inflation reality as well as the other commodities) suggests that it was premature. A correction was inevitable and the hawkish overtones came at just the time that momentum was breaking, causing damage to the bullish intermediate trends. If our outlook and hypothesis is correct, recovery should be relatively fast, beyond the token turbulence surrounding the June 29th FOMC. I believe that the market has overestimated the Fed's resolve but may nevertheless need to see a concrete sign of its absence.

I still think the worst of this correction is behind us but I'm not sure whether we've seen the correction lows yet.

Certainly, at any rate, now is a better time for new comers to jump on board this bull market than it was during March or April. However, my intermediate outlook remains on guard subject to a test of the Fed's resolve, the development and recovery of gold sector trends, and the situation in currencies following the appointment of a new US Treasury Secretary.