'Carry Trades' Lift Gold

Updated from 12:37 p.m. EST

Gold edged higher Tuesday as dealers took positions ahead of Wednesday's Federal Reserve interest rate policy announcement.

April-dated bullion contracts added $1.10, to close at $650.10 an ounce on the Comex division of the New York Mercantile Exchange. The PowerShares DB Gold(DGL Quote) fund, which tracks the futures price, was gaining 0.5% recently.

The ETFs that hold the metal -- iShares Comex Gold Trust(IAU Quote) and streetTracks Gold Shares(GLD Quote) -- also were moving ahead, up 0.4% and 0.3% respectively.

In addition to the added speculative positions, at least part of the story involved transactions by currency dealers.

"I've seen evidence that some 'carry trades' in Asia are being unwound, and that's having a spillover into the gold market," says Neal Ryan, director of economic research at New Orleans-based coin dealer Blanchard.

The "carry trade" involves selling short a low-yielding currency, such as the yen, and investing the proceeds in the government securities of a higher-yielding one, like the dollar or euro. The same theory is used for gold carry trades, with unwinds leading speculators to buy back short bullion positions.

One dollar was recently buying 121.635 yen, down from 121.80 yen late Monday, with the modest weakness in the yen perhaps triggering stops placed by carry-traders. The euro was recently worth $1.2959, not much changed from $1.2953 previously.

Turning to the technical analysis perspective, at least one observer sees a setup in the charts for a strong move up.