Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The price action of the SPDR Gold Shares (GLD) over the last several weeks has been a big concern in the national media and with individual investors’ portfolios. Everyone has been quick to weigh in on their conspiracy theories, predictions and fundamental policies for owning the yellow metal. Some people own gold for its inflationary protection, some own it for its currency qualities, and others own it as a stalwart investment vehicle. However, I always focus on gold more from a technical perspective to take the emotion out of trading and view the investment landscape through a clear lens.
As I look at the chart of GLD over the last 12 months you can see that it peaked in October 2012 and has been on a slow trajectory downward ever since. The high to low over this time frame was -24.36%, which is a bear market in itself. The quick snapback recovery since the April 2013 lows was quickly tempered by a renewed downward slog and we are once again approaching these lows.
The question I would pose is: Will this latest move in GLD create a bullish double bottom from which a renewed up-trend will emerge or will gold pierce through that prior low and give the bears something to tear into?
That question will be answered in time, but my initial inclination is to watch for GLD to bounce off of the $130 area of support. A longer term 3-year chart shows that gold experienced a similar base in this area back in 2010-2011. The real key to watch will be the volume and price action that we experience as we approach these levels. The April low saw a tremendous spike in volume as investors shed their precious metal holdings and stop losses were hit along the way. If gold was to repeat that same spike down on huge volume then I would be very hesitant about its prospects for the remainder of the year.
As I wrote back in April, investors typically flock to gold during times of economic uncertainty as a type of shelter or safe-haven play (similar to Treasury bonds). Despite all of the problems that we are experiencing in the government and political arena, the stock market has shrugged off those concerns and continued to march higher on the back of steady demand for risk assets.
According to Index Universe, GLD has lost nearly $15 billion in assets since the beginning of the year, which is the largest outflows of any ETF in the industry. Another characteristic that gold has working against it right now is that it does not pay a yield, which has been a key theme of investor demand in 2013. Both of these themes are troubling, but one of the advantages of owning gold is that its returns are historically non-correlated with the rest of the equity markets. That can help balance out the returns of other assets in your portfolio under the right conditions.
I am closely watching the price action of GLD as a potential buying opportunity if it can hold these levels and begin a new uptrend. However, I will most likely play the precious metals sector with a small allocation because of the inherent volatility at this point in time. I always recommend that you approach this sector with a risk management philosophy so that you don’t get burned by the type of rapid decline we saw back in April.
Additional disclosure: David Fabian, Fabian Capital Management, and/or its clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.