GLD Hits Lows: Are You Surprised?
- GLD is trading at new lows for the year (hitting our forecasts to the tick).
- Is this "deja vu all over again" or is something more widespread at work?
- We have consistently warned investors to stay away from GLD.
- A confluence of bearish macro factors shows that traders should not be surprised at the declines we now see in GLD.
- Do not listen to the pundits telling you "the lows are in."
And... here we go again. The SPDR Gold Trust ETF (NYSEARCA:GLD) is trading at new lows for the year, and there appears to be no end in sight. Weakness has been brought on by broad strength in the U.S. dollar, the prospect of rising interest rates at the Federal Reserve, and diminishing global demand levels for physical metals. In a recent article on GLD, we told precious metals investors that it is not the time to be building exposure in assets tied to the value of precious metals. Those forecasts look to have played out with a high level of accuracy. But the latest developments have only served to strengthen the bearish outlook, and we will maintain a negative stance on GLD as we move into the end of the summer trading period.
If you are currently long GLD, the punishment continues. The commonly-traded precious metals instrument has lost -7.38% on a YTD basis. Since the middle of April, markets have traded straight down with nothing that even resembles an upside corrective retracement. This activity has fallen in line with our prior analysis, which made the bearish forecast we are seeing unfold now:
Pulling out to the weekly chart, we can see several factors which should flash warning signals for those holding established long positions in GLD. On three different occasions, Gold Bulls have failed in their attempts to scale the 130-level. This is significant because 130 marks the 38.2% Fibonacci retracement of the massive decline from 185 (making it the dominant move in defining trader sentiment). Readings in the Commodity Channel Index also remain bearish - and the failure to maintain historical demand levels at 118 suggests a deeper fall back toward 114.60. "
We are now trading at 114.52 at time of writing. There are many investors that deny the potential of technical analysis. But it is very difficult to argue with this level of accuracy. When used properly, chart analysis simply gives a more objective way of looking at market valuation (in and of itself). Nothing more, nothing less.
Of course, technical analysis should never replace fundamental analysis. Likewise, there are very important questions that gold bulls need to be asking themselves in these types of situations. Yogi Berra was famous for describing certain events as "deja vu all over again." Is this what is happening in this utter collapse of GLD? Fundamental trends at the global level suggest that something even more problematic might be impacting markets. These macro trends form the basis of our bearish view on GLD heading into the final parts of the summer trading period.
Perhaps most alarming is the fact that demand for precious metals has dropped to its lowest levels since 2009. Why did this occur? The excessive accumulation of precious metals assets was seen in anticipation of the run-up to the all-time valuation highs for GLD in 2011. But this also occurred while stock markets tanked, and U.S. interest rate levels were falling to historic lows.
This can be visualized using a long-term chart in the SPDR S&P 500 Trust ETF (SPY):
And in long-term U.S. interest rate levels:
Source: Federal Reserve/Trading Economics
In other words, none of this was a coincidence. None of these developments should be coming as much of a surprise to investors. Any "analyst" that is telling you to disregard fundamental analysis in situations like this should be viewed as equally suspect (and their opinions/recommendations should be avoided at all costs).
From a macro perspective, all of this suggests that the Fed probably holds the cards in determining where GLD is likely to travel for the remainder of this year. News events that highlight the potential for an escalating trade war between the U.S. and China have only directed investors toward the U.S. dollar as a safe haven instrument (rather than toward GLD).
There are very important reasons which can explain why this is occurring. Relative to the rest of the developed world, the U.S. economy is showing elevated interest rate levels. We did see a recent interest rate hike from the Bank of England. But the comparative yield spread that exists between the U.S. dollar and the British pound suggests that strength in the greenback is set to continue for quite some time. This is a phenomenon we have explained more fully in an article that asked gold bulls a critical question: Is the U.S. dollar an enemy - or a frenemy?
In any trading position/outlook, it is always critical to consider the other side of the argument. To play Devil's Advocate, it can be said that global inflation levels are rising and that stock markets might be fully-valued with the S&P 500 trading at a P/E ratio of nearly 25.5. If we do see a decline in stock markets, it could force investors to take profits and move into alternative asset classes.
Source: Bureau of Labor Statistics/Trading Economics
Here, GLD would be a likely beneficiary given its current discount relative to the rest of the market. But this is still a big "if" and there is no direct evidence which suggests this type of trend is starting to unfold. Moreover, recent data reports have shown that inflation levels remain subdued as Fed interest rate policy tightens. This is not a confluence of events that should be making anyone exciting about taking advantage of the lower price levels that are currently showing in GLD.
According to the World Gold Council (WGC), the first half of this year is showing the lowest level of demand since 2009 (at 1,959.9 tonnes). In Q2 2018, demand levels dropped by -4% (on an annualized basis) to 964.3 tonnes. Investment demand dropped by -9% and gold-backed ETFs saw a 46% drop in buying activity. Ironically, this occurred as several large investment banks were actually issuing "buy" recommendations on GLD. Demand levels were stronger in Europe (relative to North America) but the dominant direction of these fundamental trends could not have been more clear.
This mass exodus has created a mirror image of the fundamental backdrop which led to the all-time highs that were posted in GLD during the 2011 rallies. The WGC report also shows that central banks are moving out of precious metals on a net basis. The only bright spot for bulls can be found in demand attached to game consoles, vehicles, and smartphones (which hit three-year highs).
Overall, this remains a very weak case from the long side of the equation. As the U.S. economy continues to expand, corporate earnings have been robust, and this should keep investors distracted from the lower valuations currently seen in GLD. With all of this in mind, the outlook remains bearish as long as the dominant macro influences remain intact.
This article was written by
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