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Summary

  • Geopolitical influences creating bull trap for those bullish GLD.
  • Transitory headlines offer no real foundation for sustainably bullish trends.
  • Upside pressure on the Dollar and prospects for rising interest rates create unfavorable environment for GLD.

The potential for rising geopolitical tensions has been a story developing with some consistency over the last few months, helping provide some lift for the precious metals space. The SPDR Gold Trust ETF (NYSEARCA:GLD) is still trading within striking distance of its recent highs so there is clearly the possibility that we will see prices rise to 130 before the end of the summer. The iShares Silver Trust ETF (NYSEARCA:SLV) has participated in the optimism as well, with the silver ETF overcoming the $20 mark and threatening the highs from February.

Assessing Sentiment and Trend

For those that are looking for reasons to buy into the precious metals ETFs, these latest trends probably seem like a breath of fresh air. But when we look at the reasoning for why these moves have occurred, there is much less reason to get excited. Those that have established long positions based on the expectation that geopolitical issues will continue to drive bullish trends in safe haven assets are likely to experience disappointment going forward as the impact of these types of events tends to be highly transitory in nature and generally unable to create trend activity that is sustainably bullish.

This creates some difficulties for investors that might be more traditional in nature. These types of investors focus on stocks in the vast majority of cases. And with the SPDR S&P 500 Trust ETF (NYSEARCA:SPY) showing almost nothing in the way of pullbacks (even at its record highs), it might seem difficult for these investors to find growth opportunities in developed markets. It can become easy to instantly gravitate toward the gold and silver ETFs in these cases -- especially once we start to see continued headlines outlining geopolitical risks in several different regions of the world. But these are also the times where additional prudence is required in order to avoid unnecessary losses. These are losses that could easily be created by the short-term bull trap that is being seen in both GLD and SLV.

Fed, the Dollar, and Rising Rates

Additional reasons to question the rallies in GLD can be seen in the broader macro environment that characterizes activities being conducted at the US central bank. The Federal Reserve has pledged to conclude its quantitative easing programs in October and this has been all but verified by the consistent reductions seen in the Fed's monthly asset purchases. But what is generally missed when this is discussed is the fact that an end to QE really means the beginning of a new rate tightening cycle -- and it is a question of "when" rather than "if."

(click to enlarge)

(Chart Source: TradingEconomics)

As long as macro data remains supportive, there is little reason for the market to start changing its expectations with respect to when the Fed will actually start raising interest rates. This creates a very difficult scenario for those bullish on GLD, as the ETF should continue to have problems gaining traction after the massive declines seen last year. Employment data is the key metric here, and all signs point to sustainable strength in the US labor market. Trends here can be seen in the chart above and monthly job additions should send the base unemployment below 6% in the next few months.

(click to enlarge)

(Chart Source: CornerTrader)

Add to this the broader impact in the US Dollar. An environment of rising interest rates would be favorable for the greenback and bring some much-needed lift back to the PowerShares DB US Dollar Index Bullish ETF (NYSEARCA:UUP) Commodities are priced in Dollars, so any events that are positive for the US currency will likely have the reverse effect on assets like precious metals and energy markets ETFs. This is why we could also start to see some drag on instruments like the United States Oil Fund LP ETF (NYSEARCA:USO) if these trends continue. A more detailed analysis of the likely trajectory in the Dollar can be found at the forex strategy page at ForexMinute.

In all, the latest moves should be viewed as a bull trap for precious metals markets and there is little reason to start establishing significant long positions in GLD. None of these factors have created real changes in the supply and demand dynamics for the space, so avoid the bull trap and look for opportunities in other areas of the market.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: GLD: True Sentiment Shifts Or The Next Bull Trap?