Look Out for a Potential Gold Explosion

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"We're getting close to a big inflection point in the yellow metal. . ."

The ETF SPDR Gold Shares (GLD) inhaled another five tonnes of gold yesterday (its second purchase this week), which brings its holdings to just under 1,125 tonnes.

The HGNSI Gold Sentiment Index fell 14 points to 18% as of the close on Wednesday and was unchanged again yesterday. The last time the HGNSI was at 18% was on the early February low in gold (February 5–12). So not only did the ETF inhale more metal yesterday, but sentiment is once again reaching levels that were last seen when most gold bulls were ready to throw in the towel altogether.

I eagerly await today's HGNSI reading, which will no doubt be even lower despite that both gold and gold stocks are higher than their early February nadirs (another positive divergence, along with gold and gold equities' continued divergence since February from their negative correlation to the dollar index).

Incidentally, the Fed's balance sheet data (released after the close yesterday) grew to another new all-time high in the most recent week. Don't worry though; the Fed will shrink that back to pre-2008 levels, which will be the first such shrinkage in history—and at the same time manage to not implode the financial system.

The market might just anticipate the Fed crying "uncle," which has, in fact, occurred before. Recall that gold last anticipated the Fed would announce MBS and Treasury monetization when it began to rally in November of 2008.

In short, I think this week was a pretty important development for gold, because it's rather clear that the same sovereign debt fears weighing on the PIIGS and the UK have now set up camp in the U.S. bond market, as well. Why this hasn't affected the dollar yet, I don't know; but it will affect it eventually as it becomes clear that the Fed will have to print again.

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