After a remarkable run of stock market volatility, it was the gold market's turn this week. And that market was the scene of monstrous carnage, particularly on Wednesday.

Thus, a correction of some consequence has begun. The important questions are, how long will it last and how far does it go?

Behind the skid

First of all, part of the reason for the slide was the increase in margin requirements in Shanghai on Tuesday, and the CME Group followed suit here on Wednesday. (A margin hike is not bearish per se, but a panicked market will view it that way.)

In addition, there were rumors Tuesday night that various PIIGS countries were selling gold to raise collateral for loans.

If you think about that for a second, it doesn't make any sense, because if they have the gold, they can just pledge it as collateral. But when markets get scared and panicky, any sort of nonsense passes as news. (How many times in the past did the gold market sink on hysterical rumors of the IMF or John Paulson selling, or some other "worry"?)

Frankly, I'm surprised that such a rumor had not surfaced until recently. For some time now I have actually been expecting the PIIGS' finance ministers to float trial balloons about trying to bridge a portion of their shortfalls via some form of gold-backed loans. Doing that would not put pressure on the gold market (as no sale would occur), but it would legitimize it. But once a sell-off has begun, folks get jumpy and don't think so clearly.

That jumpiness was on display in a big way this week. After Tuesday's $75 drop, gold rallied as much as $25 that night on the downgrade of Japanese debt by Moody's, only to see those gains evaporate as the metal declined an additional $75. In other words, from Monday night to Wednesday morning gold declined from roughly $1,900 to $1,750, or about 8%.

Gartman SPYs with his little eye

I had been somewhat concerned that, whatever expectations were driving the gold market, they might have gotten too high, as it was not possible to know what gold was discounting in the near term while it romped toward $1,900.

Image: Bill Fleckenstein

Bill Fleckenstein

One thing I am sure of, though, is that Dennis Gartman's point of view is wrong. Both Tuesday and Wednesday he made an enormous point out of the fact that the capitalization of the gold ETF, SPDR Gold Shares (GLD, news)had passed the SPDR S&P 500 (SPY, news). In his words, "This is nonsense; this should not happen."

That one quotation does not quite do justice to how big a deal he made of the comparison. But in any event, quite frankly I don't see what the issue is. There are thousands of stocks, here and worldwide, to choose from, and we need not be alarmed just because the ETF (and not the S&P 500 itself) was eclipsed by the holdings of the gold ETF (which is backed by the one monetary instrument that has stood the test of time).

In fact, I would be willing to bet that before this all over, the market cap of GLD will be some large percentage greater than the SPY. This is a sign of things to come, not a sign of lunacy, as Dennis would have it.

I usually enjoy reading his comments, but sometimes his bombastic tendencies get the better of him. (I am told that on Bubblevision he claimed gold was the "biggest bubble of our time," which is certainly complete rubbish.)

In a column on my website on Sept. 17, 2009, I quoted the words he used to describe the gold market at the time: "terribly, egregiously, preposterously, shockingly overpopulated." Then, too, I thought he was making much out of nothing. That day, gold closed around $1,013 an ounce. A couple of days later it had dropped to around $990, but it was trading at $1,060 a few weeks later. Thus, his subjective analysis meant less than zero, other than for a week or so.

I think the same can be said for all those others who think the market capitalization of GLD passing that of SPY matters. Ditto for those who say gold has had a huge parabolic, bubble-like move. Question: Back in the stock mania, would anyone have noticed if a stock moved from $16 to $19 in a month?

Keeping things in proportion

Nonetheless, the gold correction may certainly continue -- or gold could rally and then correct even more. (Remember, the high-frequency trading computers that push stocks around like mosquitoes also operate in gold.)

The path of the next handful of days is impossible to guess, and unfortunately that is just the nature of the beast. Sometimes market action is such that it seems quite possible to decipher what may happen next, and other times it isn't.