A Turning Point in Gold

Jan.28.11 | About: SPDR Gold (GLD)

On Wednesday, I pondered whether the FOMC inspired rebound in gold was a turning point. Today, I'm happy to erase the question mark.

It's a small change in grammar, a huge change in confidence. What prompted this is not just the rebound today, which is quite impressive in its own right, but more the WSJ report (by way of ZeroHedge) that a tiny hedge fund unwinding its gold futures spread position had caused a crescendo of near-panic selling earlier this week, on top of the correction that started since the beginning of the year.

Here's how it worked: Rumors had been swirling around that a Big Guy was dumping his gold, right on cue of a big drop in gold futures open interest. Blogger Harvey Organ made a succinct observation that the big drop did not directly impact the gold price, and postulated that it may have been due to closing of economically unimportant (net value close to 0) futures spreads. Congratulations on the insightful observation and fantastic call, Mr. Organ.

To summarize, the earlier correction was caused by the combination of hope that recovery was finally, really underway and the Fed would have to raise rates, due to a supposedly more hawkish FOMC and a supposedly more hawkish congress. The hope has been significantly dashed by FOMC statement and economic news of recent days. But then the market was spooked by the sudden and dramatic shrinkage of open interest in gold futures. Now that both the longer-term fundamental wet blanket and the short-term technical dirt have been removed, the gold fire will be rekindled.

And allow me to reiterate one critical point. The oxygen for this gold fire is more than anything else the Fed's fundamentalist Keynesianism doctrine. The dollar can go up or down. The economy can recover, sputter, or go down the drain. But until the Fed learns how not to use its "printing technology," the gold trade will not end.

Disclosure: Author long GLD