SPDR Gold Trust (NYSEARCA:GLD) and gold are up approximately 12% year to date. Right now, gold is trading around the $1,300 level, which has proven to be a level of major resistance for several months now. So, does gold have what it takes to break through this resistance level and take GLD to new highs?
It appears that there are several technical elements, as well as major fundamental factors, that support a break out for gold and GLD from current levels.
GLD is the largest physically backed gold exchange-traded fund in the world which offers market participants an efficient way to access the gold market. The ETF is an attractive alternative to trading gold futures for many market participants as it can be traded much like a stock on the NYSE Arca exchange instead of having to deal with alternative exchanges and trading requirements pertaining to futures contracts. Furthermore, GLD is an appealing alternative to buying physical gold, as investors get the same exposure to gold, but can buy and sell gold using GLD with great fluidity and do not need to worry about the hassle of dealing with the physical metal.
Since GLD is backed by physical gold and mimics the price movement of spot gold almost exactly, we will use GLD and gold interchangeably during this analysis.
Future FED Policy
The market certainly doesn’t think further rate hikes this year are very likely, and for good reason. The FED may be more cautious regarding further tightening due to a lower inflationary environment. The CPI has been solidly trending bellow 2%, and appears to be headed lower judging by recent disappointing readings of 1.6%, and 1.7%. Other inflationary indicators such as wage growth, and PPI have also begun to trend lower in past months.
Thus, the FED is very unlikely to hike rates any time this year, or perhaps even well into 2018. The CME Group’s FED Watch Tool is currently indicating that the chance of a .25% hike in December is less than 40%. In fact, market participants feel another rate hike is unlikely until the middle of next year. This is extremely bullish for gold as it relieves much of the pressure associated with any near-term fears concerning a rate hike.
Debt Ceiling Debate
Most likely nothing major will come of the debate regarding the debt ceiling issue, as America is not likely to stop paying its debts anytime soon. However, the fiasco that could become of this whole debate is very likely to put some kind of floor beneath the gold markets for now.
Furthermore, this situation has the potential to play an amplified role due to the various fundamental, technical and psychological factors surrounding gold markets right now. Therefore, the potential effects that this upcoming event could have on GLD/gold should not be underestimated.
Ongoing Chaos in Washington
There have been a lot of shakeups in Trump’s White House, and this could create further friction and instability in Washington. Thus far this has not seemed to play an extremely important role in the movement of gold prices recently, however, this may change as the Trump show progresses.
Ultimately, gridlock and instability amongst Congress, the president, his administration and various special interest groups could lead to perpetual instability that may further alarm markets, weaken the dollar, and push more investors towards the yellow metal.
North Korea Fires off Missiles Again
So, what is going to happen with North Korea going forward? It appears no one really knows for certain, but it does seem that military flare-ups are plausible to occur unpredictably at any time in the near future. In fact, Kim Jung Un is once again acting in a very provocative manner - conveying new threats, and conducting internationally forbidden as well as extremely irresponsible missile tests. In fact, a new ballistic missile test was carried out on Saturday, August 26th, 2017.
In addition, it is possible that the Trump administration has nearly blocked itself into a corner at this point, a corner in which a military confrontation with North Korea is a real possibility. Any concerning factors regarding the Korean situation could send gold surging by 5-10% from current levels extremely quickly.
Furthermore, the disastrous flooding that just hit Houston and other strategically important areas in Texas could cause a humanitarian and economic disaster that should further provide support for gold prices.
2 Year Gold Continuous Contract Chart
This gold chart illustrates that gold has been in an upward trend channel since hitting a major low late last year.
Gold has been performing relatively well this year and is up approximately 12% year to date. Furthermore, we can clearly see a bullish cross in which the 50 day goes above and maintains its trend above the 200-day moving average.
Also, the RSI, and CCI do not appear excessively elevated at this time, suggesting the possibility of a consolidation pattern rather than a topping one. This thesis is further supported by the full stochastic, which appears to be gathering upward momentum.
1 Year GLD Chart
The 1 year GLD shows the same bullish uptrend just from a one year perspective and exhibits the same bullish attributes as the gold chart.
There are numerous fundamental as well as technical factors that suggest gold may be headed significantly higher from here once it definitively breaks above the $1,300. There are numerous political, economic, and geopolitical events that could propel gold above the $1,300 within the next few days. In addition, there are ample technical and psychological factors that complement the fundamental ones as well.
Thus, we remain bullish on GLD and gold, as well as the gold mining sector. Some of our favorite names in this sector include iShares Silver Trust (SLV), VanEck Vectors Gold Miners ETF (GDX), VanEck Vectors Junior Gold Miners ETF (GDXJ), and Newmont Mining Corporation (NEM).
Gold price target, end of year: $1,375-$1,400
GLD price target, end of year: $130-$132
It is important to mention that gold markets are very volatile and an unforeseen reversal downward could occur, something that we would look at as another buying opportunity.
This article was written by
Hi, I'm Victor! It all goes back to looking at stock quotes in the old Wall St. Journal when I was a kid. What do these numbers mean, I thought? Fortunately, my uncle was a successful commodities trader on the NYMEX, and I got him to teach me how to invest. I bought my first actual stock in a company when I was 20, and the rest, as they say, is history. Over the years, some of my top investments include Apple, Tesla, Amazon, Netflix, Facebook, Google, Microsoft, Nike, JPMorgan, Bitcoin, and others.
Disclosure: I am/we are long GLD, NEM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: We are long gold mostly through gold futures, and call options in GDXJ