It's been a couple days since gold's (GLD) end-of-February massacre when the shiny metal dropped a triple-digit amount at one point during the day on February 29. Amazingly, on that day, gold went from trading right at its high of the month to plummeting all the way to new lows for the month. Since that time, the metal recovered a little more than one-third of the drop before slowly drifting back down to roughly $1,710 per ounce. Gold was not alone in having a dreadful day on February 29. Silver (SLV) and platinum (PPLT) joined the party as well.
But the importance of gold's decline is a bit different from the other precious metals. Unlike silver and platinum, since the beginning of 2009, gold has been in a very smooth, methodical, easily tradable uptrend. Using GLD as a proxy for gold, since the beginning of the Fed's first round of QE in 2009, the 150-day simple moving average (SMA) was a reference point that was as good as gold. GLD challenged this moving average on many occasions, bumping right up against it no fewer than eight times over the past few years. Each time the 150-day SMA was challenged, it held, and gold continued its advance higher. Last summer, when gold exploded to new all-time highs above $1,900 per ounce, it deviated from the 150-day in a way it hadn't done during the QE-induced bull market in financial assets. When gold corrected, it fell straight down to the 150-day SMA, a line in the sand that held again. But after this, things began to change.
In early November, gold made a lower high as compared to its late summer all-time high. As it began to drift off that lower high, the declines suddenly accelerated, and in mid-December, gold did what it hadn't done since the beginning of QE: it broke its QE uptrend, an uptrend held by the 150-day SMA. The declines took GLD 8.75% below its 150-day before it rebounded strongly in early 2012, back above the all-important moving average.
Fast forward to February 29, the day gold dropped by more than 5%. During the drop, GLD sliced right through the 150-day SMA and kept going down. In the two trading days we've had since, the 150-day has been acting as modest resistance to the price of gold. Keep an eye on this moving average going forward. For any precious metals traders who believe gold will lead the way for silver and platinum, last Wednesday's price action should be concerning. Traders of the gold miners should be concerned as well. The miners, as represented through the Market Vectors Gold Miners ETF (GDX), have underperformed GLD by a significant amount since GDX began trading in 2006. Until proven otherwise, traders should stick with the trend of the miners underperforming gold. If gold goes lower, assume the miners will as well.
One specific example of a popular gold company that long/short traders of gold will want to keep an eye on is Newmont Mining (NEM). Its price action has been dreadful since it reached its bull market highs in early November. It is currently trading below its 10-, 20-, 50-, 100-, 150-, and 200-day simple moving averages and is nearing its low of the year, $57.235, set on January 25. Newmont suddenly became a very popular choice for investors after it announced its gold price-linked dividend policy last September. But, if over the coming days, gold looks like its uptrend of the past three years has finally been broken, the enhanced dividend policy will likely work in reverse, adding the same type of pressure on the downside that it caused on the upside. If Newmont breaks $57.235 and GLD fails to move back above, and hold above, its 150-day SMA, a move to the $50 to $54 region for NEM should be expected.
Based on what I've written so far, you might think I'm bearish on gold. Not so. As a buy-and-hold investor in gold, silver, and platinum, no price movement up or down will change my opinion of the importance of having a precious metals allocation in a portfolio. Precious metals are a store of value, a hedge against fiat money, and have a historical importance that central bank actions of the past few years have only reconfirmed.
I recognize there are various types of gold investors. From traders, to longer-term investors, to the buy it and never worry about it again crowd, there will likely be quite varying opinions about whether the technical indicators mentioned in this article matter. When thinking through the possibility of gold being on the verge of definitively ending its QE uptrend, keep this in mind: it is often argued by investors who are long the precious metals that they must go higher over time given the actions of central banks around the world. I do not disagree. However, it should be noted that because gold is a store of value, when thinking about the definition of "going higher," one cannot simply approach this with traditional thought (going from the lower left to the upper right on a chart). When it comes to gold, "going higher" becomes a relative term. Its nominal value in fiat currency might decline, but it could still "go higher" relative to other financial assets.
For example, right now, the Dow Jones Industrial Average (DIA)-to-gold ratio is roughly 7.5 to 1. Gold could drop to $1,500 per ounce, but as long as the Dow drops below 11,250, then gold, as a store of value, has "gone higher" relative to the Dow. Likewise, the S&P 500 (SPY)-to-gold ratio is currently just about 0.8 to 1. Again, if gold falls to $1,500 per ounce, as long as the S&P 500 falls below 1,200, then gold, as a store of value, has "gone higher" relative to the S&P 500. If you are the type of buy-and-hold investor in the precious metals who looks at the metals as a store of value, then avoid focusing on the nominal value of the metals in fiat currencies. If, however, you are an investor who is using gold because you believe you can make more fiat currency in gold than in other investments, then you should be paying attention to things like the 150-day SMA, support levels, etc.
On a closing note, gold's recent Leap Day massacre, during which it easily sliced through a moving average that has defined its 2009 to 2012 uptrend, might have been the signal that the winds are shifting and the metal's price performance of the past three years will be different going forward. We'll know much more over the coming week or two. If you are the buy-and-hold type of gold investor who doesn't care about the metal's moves in fiat currency, then you will certainly not care about last week's big move down. If, on the other hand, you view gold as an asset to be sold in the future for more fiat currency than you could sell it today, let's hope the Leap Day's price action won't be repeated for at least four more years.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I am long gold, silver, and platinum.
