Gold has been mired in a sideways trading range over the last month. This has frustrated investors that are looking for the yellow metal to either breakout or break down. All of the recent volatility in stocks and bonds has served to whipsaw the price of gold bullion up and down like a cork bobbing in the ocean, but a clear trend is hard to discern. Right now GLD is reminding me of the old saying “two steps forward, one step back”.
It appears that gold has returned as a flight to quality trade over the last month, similar to Treasury bonds. Whenever we see a “risk on” day that sends stocks higher, the price of gold gets pummeled lower, and vice versa. The one month chart below of the SPDR Gold Shares (GLD) vs. the SPDR S&P 500 ETF (SPY) shows a clear picture of this inverse correlation.
As I wrote back in May, the SPDR Gold Shares has made a clear double bottom at the $130 level which is a key line of support on a 3 year chart. It has since made little headway, and the price action is troubling due to the fact that GLD has not been able to eclipse its April high water mark at $142. In order for GLD to regain its momentum, it will need to swiftly capture the 50-day moving average. This would be a bullish technical indicator.
Because the floor is so clearly defined in GLD, there are most likely a large number of stop losses in and around this $130 level. If the price were to breakdown below that point, the trading surge might send this ETF on a quick ride lower. Another troubling statistic is the continued outflows from GLD, as Index Universe reports the fund has now reached more than $16.5 billion in total redemption’s for 2013.
Summer Surge Needed
It appears that the success of GLD this summer will hinge primarily on the outcome of stocks. The summer months can often bring additional volatility as trading volume slows down. With the market already starting to show signs of taking a breather, I would not be surprised to see additional downside in the months ahead. That may put a bid under the price of GLD as a safe haven play.
Long-term investors that are seeking a non-correlated asset class for their portfolio may want to consider an allocation to GLD as a hedge against future inflation prospects. The one thing I would caution against is to not fall in love with the theme of gold protecting your portfolio against all evils. As we have seen over the last several years, the fears of inflation from quantitative easing have been overblown- which is one of the reasons that GLD has fallen out of favor. Another strike against GLD is that it does not pay any income, which makes it less attractive for investors seeking to generate a yield on their portfolio.
If you decide to enter a trade in this position, I would start small with the strategy of averaging into a full sized position over time and using volatility to your advantage. Investors that came late to the GLD trade may want to consider using any bounces to lighten up on their exposure. Right now I am still on the sidelines watching this trade closely for signs of improvement before I dip a toe in the water.
Disclaimer: 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.