GLD: Key Players Are Guiding Markets

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About: SPDR Gold Trust ETF (GLD), Includes: UUP
by: Income Generator
Summary

Since September 2011, the SPDR Gold Trust ETF has dropped by 34.71%.

But GLD is starting to move away from the lower levels of its long-term trading range and potential for changes in U.S. monetary policy could help these emerging trends continue.

Overbought stock markets, declines in corporate earnings expectations, and central bank buying activity are additional factors which could send valuations in the underlying metals prices much higher in 2019.

Recent moves in the U.S. dollar could disrupt bullish forecasts, but most of the bigger picture evidence still supports the outlook for additional rallies in GLD.

In the second half of 2011, the SPDR Gold Trust ETF (GLD) rose to record highs of $185.85 on the back of deeply-rooted economic uncertainties and extreme volatility in global equities markets. Since that time, GLD has dropped by 34.71% while the S&P 500 has generated an amazing recovery and achieved its own record valuations.

But now that U.S. stock benchmarks have overshot their historical averages by a wide margin, there is a much greater chance that these recent trends will begin to reverse. Central bank buying activity and declines in corporate earnings expectations are additional factors which could send valuations in metals prices much higher.

If market prices are able to break upward resistance levels at 127.20, the sequence of lower highs which began in August 2013 will have ended and this may indicate further gains for GLD in 2019.

(Source: Author / TradingView)

On the daily charts, we can see that GLD may be in the process of reversing the downtrend which began toward the middle portions of 2013. What’s most perplexing about this trend change is that it defies traditional market logic which suggests precious metals instruments are destined to fall in cases where global interest rate levels are rising.

In the current tightening cycle, a majority of the Federal Reserve rate hikes were initiated after 2016. But this is also when GLD’s reversal pattern began to develop (as the ETF posted a three-fold series of higher lows during this time period). Recent deviations from the “standard” market responses to Fed policy tightening have been striking, and they may make it more difficult for investors to predict upcoming trend directions in GLD.

If, in fact, we do not see further interest rate hikes in the United States this year, can we expect traditional market behaviors to come back into effect? As a non-yielding asset, GLD tends to benefit from negative shifts in interest rate policy. Philosophical rifts between President Donald Trump and Fed Chair Jerome Powell have been widely publicized, and chief economic adviser Lawrence Kudlow has pressed for a rate cut to 2%.

At this stage, it looks as though the pendulum may be swinging in the dovish direction, and this might be one reason global central banks have started buying precious metals at the fastest rate in almost 50 years.

(Source: Metals Focus / Refinitiv GFMS / World Gold Council)

According to the World Gold Council, global central banks purchased an incredible 715.7 metric tons of gold bullion (with a market value of roughly $29.4 billion) during the 12-month period ending on March 31st. Net purchases for the first quarter also rose to the highest levels in six years, so the changing frame of reference is visible from both the short-term and long-term viewpoints.

Remember, central banks are the financial bodies which have the potential to influence market prices more than any other entity. So, as long as this heightened buying activity amongst official names continues, it will be difficult for bears to contain GLD within its prior downtrend.

Another factor which must be watched in this scenario is the extreme activity in outflows which has been associated with the GLD ETF. Over the last year alone, GLD has been negatively impacted by outflows of $4,987.5 million, which puts the ETF at the bottom end of its category averages. The figures do not look quite as bad over the last three years (with outflows of $2,947.1 million), but the fund can be found at the bottom end of its category averages for this time period, as well.

The disparities between these market outflow figures and the underlying price trends in GLD create another striking element under the current market scenario. If even a small percentage of those exiting investors find a change of heart and put money back into GLD, it is highly likely that the ETF will generate the momentum needed to break out of its current downtrend.

(Source: Author / TradingView)

As the major players seem to be intent on forcing precious metals valuations higher, we must not forget the important influence of the U.S. dollar. Rising interest rates have benefited valuations in the Invesco DB USD Bullish ETF (UUP) and the recent break above $26 targets the January 2017 highs. These sorts of pricing pressures in currency markets may have the potential to disrupt the bullish forecast for GLD. But those gains may be unsustainable if the Fed is able to make a firm commitment and move toward less restrictive interest rate policies.

Most of the buying activity in U.S. dollar assets has been based on relative carry value in the greenback, so there is plenty of room for UUP to fall if the Fed changes its stance. Ultimately, an event like this would likely give investors another reason to buy into instruments like GLD.

Since September 2011, the SPDR Gold Trust has lost a substantial portion of its value (34.71%). But GLD is starting to make a clear move away from the lower levels of its long-term trading range. Potential for changes in U.S. monetary policy could help these emerging trends continue, and central bank buying activity could send valuations in the underlying metals prices much higher in 2019.

Overbought stock markets and declines in corporate earnings expectations are additional factors which could make safe haven assets more attractive, so most of the bigger picture evidence still supports the outlook for additional rallies in the GLD.

Thank you for reading.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.