Get Set..., GOLD..!

We’re getting close to a big inflection point in the yellow metal, and it’s the next stage of the rolling sovereign debt crisis.

Note that 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.

Also note that 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'm eagerly awaiting today’s HGNSI reading, which will no doubt be even lower despite the fact that both gold and gold stocks are higher than their early February nadirs (which is another positive divergence to note on top of gold and gold equities’ continued divergence since February from their negative correlation to the dollar index).

Or at least, it would be my assumption that the HGNSI might drop again today. Some gold bulls just can’t seem to shake the memories/scars of 2008, even though it's not 2008. It’s 2010, and Treasury bonds (a dollar deflationist's best friend) are in a bear market that began to accelerate to the downside this week as a large buyer clearly stepped away from the market. (If I had to guess, I’d say he probably speaks Mandarin.)

The implications of the bond market’s downside acceleration are pretty clear in my view. It means that the Fed’s much-talked-about “exit” will be postponed yet again, and that the Fed will soon have to start monetizing mortgages and Treasuries again. And when the Fed does cry “uncle,” gold will rally, and the dollar will be smoked (assuming the market doesn’t look ahead for once and anticipate this inevitability).

Incidentally, while I'm thinking about it, note that per the Fed’s balance sheet data that was released just after the close yesterday, the Fed’s balance sheet grew to another new all-time high in the most recent week. Pretty ironic given that Ben Bernanke was just on the Hill last week talking about an “exit.” Don’t you think? Don’t worry though; the Fed is going to shrink that back to where it was pre-2008, which will be the first such shrinkage in history, and at the same time manage to not implode the financial system (wink, wink).

Returning to the idea that the market might just anticipate the Fed crying “uncle,” this has, in fact, occurred before, and I believe it’s reasonable to expect such anticipation by the market again. After all, this isn’t rocket science. Recall that gold last anticipated the Fed would announce MBS and Treasury monetization when it began to rally in November of 2008 -- well before the Fed announced its MBS buying in December and its Treasury buying in March of 2009. So, it’s not like something like this is unheard of.

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

I still tend to think we’re getting close to a big inflection point in gold, and it’s the next stage of the rolling sovereign debt crisis. This time it’s going to hit the US. That's about the most bullish event for gold imaginable, and when the market recognizes it for what it is, gold will explode along with the gold stocks -- probably much like it did back in September of last year.

Whether the dollar gets hit against the euro or not shouldn’t matter, but I’d be lying if I said I find it nearly impossible to believe that the dollar won’t fall against the euro and some of the other major currencies (like the AUD and CAD, where it's already sinking) if the bonds keep tanking like they are. And we all know this will force the Fed’s hand to do more monetizing (probably somewhere around 4.25% in the 10-year, which at our current two-day pace of yield rises will be hit sometime on Monday).