By Lance Lewis Jul 09, 2010 11:30 am

We learned yesterday that John Paulson’s funds took a fairly big hit in June and saw quite a few redemptions. Now consider that Paulson isn't only the top holder of SPDR Gold Shares (GLD) (which is used as a hedge due to the fact that he also prices his funds in gold), but that he also owns many gold equities as well. In all, gold-related investments make up about 30% of his $33 billion in assets according to 13F filings.

Thus, if the reports of $2 billion or more in redemption requests for Paulson’s funds at the end of June are correct, then the recent plunge in gold and the weakness in gold equities that has occurred (all peculiarly in the face of the dollar’s recent weakness) could certainly, at least in part, be explained by this one hedge fund being forced to liquidate various gold-related investments in order to meet redemption requests.

When we combine this information with the fact that sentiment is extremely bearish in gold at the moment, it’s further evidence of a setup for a rocket-like rally to develop soon in both gold and the gold equities, which is also not so coincidentally what normally follows a “Pre-Print Panic” in the gold complex. Let me explain…

Consider that the Hulbert Gold Newsletter Sentiment Index (HGNSI) collapsed 14.3 points on Wednesday to just 9.2%, or just 9.2 points from indicating most gold timers are actually net short gold. The last time this sentiment index was this low was on August 28, 2009, which was just two business days before gold exploded on September 2 and rallied $200 over the next three months.

Even Market Vane’s bullish consensus has collapsed to 63% after never even sniffing the levels that it normally does at typical intermediate peaks in gold. And by what I suspect is not a coincidence, the last time this particular sentiment indicator was at this level was also August of 2009.

In other words, we may actually surprise a large number of veteran gold bulls that are currently underexposed to the gold complex due to their reliance on seasonal tendencies for gold that are normally a function of the seasonal nature of Indian jewelry demand. However, investment demand is currently the primary driver of the gold market, not Indian demand. Indian demand has actually been weak all year, just as it was last year.

Combine all of that with a weak dollar and a Fed that's going to need to start printing money again soon (see the Washington Post for another not-so-subtle hint from Bambi as to what is coming), and we have all the ingredients for an upside explosion to develop in gold much sooner than most are expecting (including myself).

I hadn’t actually expected any sort of wild upside for gold and gold stocks until after the FOMC in August, where presumably the Fed would indicate that it was returning to more money printing operations, even though my expectation was that gold and gold stocks would likely move higher in anticipation of that Fed announcement.

However, in light of all this new information regarding sentiment and the fact that forced sales by this single hedge fund may have been largely responsible for gold’s recent divot, upside acceleration for gold and gold stocks