Gold continues to flow from the West to the East at a pretty solid pace. 

To view the latest evidence of this fact…

The SPDR fund (GLD-NYSE) holdings have oozed down to just 809 tonnes… and done so while the price of gold has strengthened!

Many Western countries are net exporters of gold in quantities that exceed their total mine production.

Double-click to enlarge this gold chart. 

Gold’s latest rally began from the July 10 area lows of about $1205. The SPDR fund holdings were about 839 tonnes at that time. Gold’s $50 rally over the past two weeks has occurred while the SPDR fund holdings have fallen noticeably.  

The powerful commercial traders that operate on the COMEX follow the physical market meticulously. The SPDR fund is the Western fear trade’s physical market “crown jewel.” Flows into it influenced the gold price substantially during the 2009 – 2011 time frame. Quantitative easing was the fundamental theme in play.   

The fact that gold can rally now while SPDR fund holdings tumble suggests that Chindian love trade buying is overwhelming Western fear trade selling in the price discovery process.

From both a fundamental and technical perspective, this rally is now due for a pause. Technically, an inverse H&S bottom pattern appears to be forming. A pause now in the neckline area at about $1260 would allow the right shoulder of this pattern to form.

Fundamentally, the next Fed meeting is tomorrow and gold tends to trade softly around Fed events. I’ve recommended light profit booking into this rally and I continue to do so.

Double-click to enlarge this important US dollar versus Japanese yen chart.

The dollar has fallen against the yen and fallen against gold since July 10. In the short term, a pause for gold and a rally for the dollar seems imminent.

In the bigger picture, the dollar could begin a “meltdown” phase as gold bursts above the neckline in the $1260 area. A move above $1260 opens the door to a surge towards $1300, which is a bigger profit booking area for gold investors.