Over the last several weeks, we have seen the SPDR Gold Trust Shares ETF (NYSEARCA:GLD) decline from 125 down to the 117-118 level, which is where the 50-day moving average is at. While this has brought out the bears and taken the wind out of the sails of the bulls, GLD is still in a slightly bullish position.
Readers will recall in my last article that I noted the MACD on the monthly chart of GLD had turned positive. It had been in negative territory for the last 3 years, so this was a significant event and always signals that a major trend change has occurred. The MACD is still positive even with the recent decline.
I will keep reiterating that we just have to follow the signals and make sure we are paying attention to what they are telling us. The MACD is one. Another is the two key support levels on GLD of 115 and 120. As long as 115 holds, then I would continue to give the edge to the bulls.
Another signal that I'm paying attention to is the action in select gold and silver stocks. Even though GLD has declined, along with the iShares Silver Trust ETF (NYSEARCA:SLV) to an even greater extent, some companies in the sector are holding up very well. This outperformance isn't widespread though, but it's still worth noting as it could be signaling GLD will be moving higher over the coming months, not lower.
As a side note, whether you are bullish or bearish, traders and short-term investors could actually use this outperformance to their advantage as there are some interesting hedging options available. Should the bears be right and GLD declines below 100 over the next few months, gold and silver stocks will tank again. Since these shares haven't given up their recent gains, this could lead to significant declines in these companies over the short term, far greater than other stocks in the sector. If GLD moves higher though, a lot of underperformers would play catch-up. There are many hedging options where money could be made in both scenarios.
A similar scenario occurred in SLV back around January 10-12, as silver stocks exploded but SLV was severely lagging. The gap was widening and it simply wasn't going to last. Something had to give in. Either silver stocks were going to decline or SLV was going to take off.
Now take a look at what occurred over the next 1-2 weeks. You can see that SLV played catch-up over that time, and the gap started to close.
Fortunately, I was able to take advantage of this underperformance of SLV/outperformance of silver stocks. When you get these large divergences in valuations you can make some decent money.
As I have mentioned in a previous article:
GLD's competition for the last few months and years hasn't been the U.S. Dollar, it's been the U.S. stock market and other assets. If you are looking for a reason why GLD is declining then just look at the performance of the U.S. Indices.
Given that the Nasdaq and S&P 500 have broken out to new multi-year highs, with the Dow about to as well, many investors are speculating that this is the beginning of another leg up. This is why GLD has been declining the last few weeks as stocks are back in play once again. But more than likely, this is just a continuation of a topping pattern. The same thing happened to the ^HUI back in 2011, as the index was hitting new highs during the year, but you could see it was really struggling to make much headway after the breakouts.
Unfortunately, what investors are failing to realize is the more the Dow, Nasdaq, and S&P move up, the more likely the Fed will raise rates in a few months. It's a double-edged sword for the markets. Once rates start to increase, then stocks are going to run into a wall. This economy, and the balance sheet of the U.S., simply can't handle higher rates. But the Fed has to at least attempt to move the Fed funds rate off of the floor.
"Never fight the Fed", as the saying goes. We have had some huge percentage gains over the last several years in the stock market. While there could still be some upside in the short term, I don't believe we make substantially higher highs until we go through a bear market first.
So, I still believe that the best way to be positioned over the next few years is to own precious metals and the companies that are involved in this sector.
You have many different opinions on whether a bottom is in on GLD and where it's headed next. Emotions and egos run high. I want investors to keep one thing in mind about all of this. We have had a major bear market in GLD and gold stocks. The declines have been severe and not too many people care about this sector anymore. There are still gold bulls and gold bears, but in total, the number of investors that follow what is going on in the precious metals is paltry. All that is left here are a select few that still report on gold and silver, both from a bearish point of view and a bullish.
But what's interesting about all of this, is it seems that a good portion of bears that remain are only negative for the short term. While they expect gold to decline to $900-$1,100, they are bullish longer term on the precious metal. Why is that? Probably because most people (not just investors) realize that worldwide debt is out of control, and the debasement of currencies around the globe will have profound consequences. Also, as I have pointed out time and time again, the cost to produce gold increases because of inflation, just like it does for any other good that is produced.
Most of the logical bears understand that the gold price does have a floor to it, and the price can't stay below the cost of production for too long or there will be no gold produced. For all of those saying that it doesn't matter because we have so much above ground supply, that line of reasoning simply doesn't make sense as we have a constant fresh demand every year from the jewelry and industrial sectors. It's apples and oranges.
The bottom line is, for the most part the bulls and bears that still follow/invest in this sector are really on the same page as far as long-term expectations. The only thing that differs between the two camps is if we have more to the downside first, before we go significantly higher.
The thing to remember about major bottoms is it all comes down to valuations. There have been so many instances when the valuations of stocks or assets became so ridiculously low that you would think the world was about to end. Timing bottoms is not so much about feel. It's about at what valuation does it make absolutely no sense for a stock or asset to be trading at.
We haven't hit levels like that in GLD yet, although I will say that we did last November in many gold stocks. Is the tail wagging the dog here? Are the gold mining companies leading the way higher?
A lot of money has been made in gold stocks since the early November lows, even taking into account the recent correction. Investors still have to be diligent though, it's important to pay attention to all of the signals that are now flashing green. If they switch to red then re-evaluate. The bears could easily regain control again, given that GLD is so close to that 115 level.
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.