What happened to $2,000 gold?

Everybody’s favorite trade of 2011 has run up on the rocks in recent months, taking the SPDR Gold Trust (NYSE:GLD) down 11.5% since the beginning of March. Does this signal an opportunity, or is there more pain ahead?

Unfortunately, much of gold’s fate now rests in the hands of the Federal Reserve. One of the most important reasons for the metal’s decline in recent months is the uncertainty as to whether Ben Bernanke will step up with another round of quantitative easing. In this sense, gold has lost its traditional role as a hedge against inflation and investor panic, and instead has largely become a vehicle for trading expectations regarding Fed policy.

If there is any doubt, one need only look at gold’s swings in response to Bernanke’s Senate testimony on Tuesday.

The other problem with gold right now is that — for the time being — it has lost its role as a safe haven. Risk-off periods tend to be accompanied by a rise in the dollar, which in turn has an adverse impact on gold. Further, U.S. Treasuries clearly are the preferred option for anyone looking to capitalize on rising panic. Gold, for its part, is now underperforming once investors’ appetite for risk diminishes. The result is that while gold had an exceptionally strong negative correlation with the 10-year Treasury yield in 2010 and 2011, that correlation has swung strongly positive so far in 2012.

This is highly unusual. Typically, the years in which gold has tracked the 10-year Treasury yield is when rates are rising: 2005, 2006 and 2009. In all three of these years, Treasury yields rose and GLD followed — rising 17.8%, 22.6% and 23.05, respectively. During 2007, 2010 and 2011, when rates fell, gold rose and therefore exhibited a strong negative correlation. This year, the trend has broken down completely: Rates are falling, yet gold also is falling, and the correlation between the two is high.

This dramatic reversal of a seven-year trend indicates the extent to which sentiment regarding Fed policy, rather than traditional factors, is moving the price of gold.

One hint regarding the future direction of gold likely will come from the charts.

Click to Enlarge GLD is moving toward an important inflection point here: On one hand, it is only 2.9% from its lower support line at $148.50. At the same time, it is 7.1% away from moving above its upper trendline at $163.75. The direction it heads from here likely will go a long way toward telling us if the weakness of the past few months is just a pause in the long-term trend, or if a larger selloff is in store.

While gold remains a long-term hedge against the debasement of fiat currencies, the prudent course for now is to wait until there is a move in either direction before taking any action.

Investors who are looking for a catalyst for such a move need only to look at the calendar: The Fed’s next meeting is July 31-Aug. 1, which is followed by its annual Jackson Hole conference (site of Bernanke’s first discussion of QE1) later in the month. The Fed’s statements regarding QE3 at these two events is likely to be the determining factor in gold’s performance for the rest of this year.

As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.