In my last article, I asked a question that I believe is one of the most critical issues facing the financial markets today: When Will the Gold Bugs Give In? Most of the responses to that article suggested that those bullish on assets tied to precious metals will not change their positions any time soon. But developments seen last week suggest the tide is turning, and that gold bugs are much closer to "jumping ship" than previously thought. The SPDR Gold Trust ETF (GLD) lost nearly 4% last week alone, and more than 8.5% since I sounded the alarm to sell GLD on October 26.
These are significant moves for such a short period of time, but large sections of the market maintained a bullish perspective on precious metals during this period, absorbing large losses in the process and ignoring the underlying need for cyclical corrections in a broader environment of Dollar strength. Market momentum and bearish valuations are clearly in control at this point but while we could see minor rallies on short-term time frames, the next downside target in GLD rests just below 115 -- a level we could easily test before the end of the year.
Paulson Backtracks: A Sign of Things to Come
One area gold bulls like to cite is the activity of billionaire investors and names closely tied with large positions in precious metals. But last week's about-face from gold's biggest cheerleader, billionaire John Paulson, should only be viewed as a troublesome sign of things to come. At the beginning of last year, Paulson told investors that gold was his "best long-term bet." But now that his PFR Gold fund is showing losses of nearly 65% year-to-date, Paulson has backtracked and told investors that he will adding any more money to his position, letting options roll-off and expire. Paulson has said that he won't be investing more in his fund because it is unclear when inflationary pressures will begin to accelerate.
This reversal echoes changes seen previously with investors like Soros and Loeb (both notably sold-out of their entire positions in GLD). Bloomberg surveys now show that the analyst community is its most bearish on gold since June. So, my initial question this series of articles asked readers to think about when gold bulls would start to back off their original bests and accept the market realities in front of them. Apparently, the answer is now.
Watching the USD
The underlying gold price is now on track to post its first annual drop in 13 years. Such a strong multi-year rally has led many investors to cling to their positions and absorb unnecessary losses in the process. The much needed corrections in precious metals have come largely as a result of activity in inversely-correlated assets -- most importantly, the U.S. dollar. The PowerShares DB US Dollar Index Bullish ETF (UUP) has rallied more than 2% after hitting its October lows, propelled in large part by stronger than expected GDP data for the third quarter and the relative underperformance of the rest of the world's developed economies.
Previously, I wrote that recent "weakness in the U.S. dollar has been propelled by the fact that the market feels the need to reposition itself for continued stimulus after the recent government shutdown. But these fears have yet to be matched by the overall growth performance, especially when we start looking at the macroeconomic situation in Japan, the eurozone, and the U.K." With third quarter GDP in the U.S. coming in well above market expectations at 2.8%, it is becoming clear we must expect further strength in the U.S. dollar, and prolonged weakness in commodities alternatives like gold.
GLD: Chart Perspective
Now that the cyclical top above 130 in GLD has been confirmed, we should continue to expect the break of historical demand levels at 122 to continue to put pressure on GLD. All major levels of Fibonacci support have been invalidated, and the next downside target rests at 114.70. Minor corrective rallies can be expected but the momentum here is clear and GLD will remain under pressure through the final weeks of the year.