Gold's New Buy Signal

There are two main factors in gold’s latest move higher. Today we’ll unveil them both and look at the best way to play it.

The first factor comes to us from the data-log.

If you aren’t familiar with the 13F form, it’s an SEC document that hedge fund managers submit that discloses their financial holdings (buys and sells) on a quarterly basis.

The most recent batch of 13F documents came out last week — and there was a lot of action for gold watchers.

In short, many big-name hedge funds exited gold positions during Q2, the same time as April’s market drop.

The most notable name was John Paulson who liquidated half of his position the SPDR Gold Trust ETF (GLD.) Sure, dropping 50% of your position is somewhat reasonable if you need to clear up some cash or want to change investment strategies.

But Paulson’s stake of GLD is a head turner…

At the end of the first quarter Paulson’s hedge fund owned nearly 7% of the outstanding shares for the ETF. During the second quarter, amidst gold’s pullback, Paulson’s fund cut half of its position (according to 13F disclosures.) That is, the fund sold over 11 million shares (note: the ETF only has about 300 or so million shares outstanding) — indeed, Paulson’s put a lot of negative pressure on prices!

Paulson also cut his stake in Barrick Gold (ABX). During the first quarter he sold nearly a million shares of Barrick. Also during Q1, he bought a load of call options on Barrick (a leveraged, and less expensive, way to play a rise in share price.) But, in Q2 his fund disclosed that it had subsequently sold all of the options.

Add it all up and Paulson, along with other funds, sold a lot of gold and gold-related shares.

What the heck does this have to do with a recent rise in gold prices, you may ask?

Well, get this…

A lot of investors are now seeing the writing on the wall — said another way, the reason we saw such continued pressure on physical gold and shares during Q2 could be attributed to the massive outflow of hedge funds.

If the outflow is over, then so is the downward pressure on gold — that’s the logic.

So far it seems to be lighting a small fire under the price of gold — as of writing this prices are well above an important pivot point at $1,370.

But hedge fund 13Fs aren’t the only thing giving gold a boost…

The other market factor that’s playing into gold’s favor is a general market “reverse” indicator.

It’s our old friend, the “market down: gold up” relationship.

You see, now that Bernanke has come out and said monetary easing and zero interest rates may not last forever, traders are grasping for any hint at the Fed Chairman’s next move.

Will Bernanke stick to his guns and cut bond purchases and raise rates? Or will he just keep the pedal to the metal and buy bonds at $85B a month?

Although your humble editor thinks the long-term outcome will be the same (lots of money printing and inflation), in the short-term these questions matter for the price of gold.

All eyes are on the market for a hint.

That is, if the market heads lower, there’s more reason for Bernanke to keep easing. More easing? That’s great for gold prices!

If the market heads higher, there’s more reason to taper the easing and raise interest rates — that’ll put a lot of pressure on prices.

So you see, last week’s dip in the general markets — the Dow off 330 points — is turning out to be a buy signal for gold.

And I’ll bet you for the foreseeable future that if general markets rise sharply or drop precipitously, gold will have an equal and opposite reaction.

And remember, through all of this action, the price movement for gold is very important. $1,350 still remains an important technical pivot point. If gold can fight above that level and build support we’re likely in for months of stability and higher prices. However, if prices break to the downside and can’t hold support, we’ll likely be headed back into the pressure cooker we saw in the first half of the year.

A word to the wise: if you haven’t been keeping your finger on the pulse of gold prices, now’s the time to pay attention.

Keep your boots muddy,

Matt Insley
Original article posted on Daily Resource Hunter