Gold Could Be Consolidating Before Moving Higher

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Includes: GLD
by: MarketGyrations
Summary

GLD managed to break resistance after six years of trying, but it has lost some steam after a strong move up.

GLD has gone sideways the last two weeks, although it did make some big moves up and down in the meantime.

If GLD does not fall back below what was previously resistance, then what was resistance is now support.

GLD looks to be consolidating and building a base, which is a bullish sign going forward.

After six years of coming up short, gold (GLD) was finally able to escape the trading range that had kept it contained all those years. Several attempts were made, but each time GLD was unable to break and stay above $130. In the end, it turned out that geopolitical tension was the straw that broke the camel's back. GLD got the juice needed to power through.

GLD was quickly able to reach $134 after the initial breakout. However, GLD has since then lost some steam after the strong move up. GLD has spent the last two weeks going sideways, but with some significant moves up and down along the way. In just the first week of July alone, three major events occurred that moved GLD in a big way.

Some investors may see this lack of progress on the part of GLD as a troubling sign and may, therefore, wonder if continuing to hold is warranted. However, the technical and fundamental outlook for gold remains supportive and further gains are very likely for GLD. To explain why a closer look at these two aspects is required.

gld chart

Gold is making big moves up and down

For example, the G-20 meeting between China and the U.S. resulted in a "truce" and the resumption of trade negotiations. GLD did not react well to the news over the weekend, even if the G-20 meeting did not really accomplish anything substantial. Nonetheless, GLD still lost about 2% when the markets resumed trading on July 1.

GLD took another major hit later that week with the release of the jobs report on Friday, July 5. Unlike the previous report the month before, the June jobs report exceeded expectations with 224,000 jobs created. This tempered market expectations regarding monetary policy from the Fed. Some had projected a 50bp cut in interest rates by the Fed at their next meeting in late July, but those projections were revised down to just a 25bp cut after the jobs numbers came out.

As was the case earlier in the week, GLD did not respond well to the possibility that monetary policy in the U.S. may not ease as quickly as previously thought. GLD dropped gain, although the move down was smaller than earlier in the week. The good news for GLD investors is that in both cases, GLD did not break down below $130. It remained above the level that had previously been resistance. Gold futures did come close to testing previous resistance levels, but they bounced off.

Gold did not only have to contend with downward pressure, but it also attempted to move higher. When news broke of President Trump's intention to nominate Judy Shelton as a Fed governor, gold futures jumped to as high as $1,437 in after-hours trading. Unlike most mainstream economists, Judy Shelton stands out in supporting a return to the gold standard, something that the U.S. abandoned back in 1971 under the Nixon administration.

Obviously, gold demand would benefit tremendously if the U.S. were to turn back the clock and link the value of its currency to gold. However, gold settled down after the initial spike when regular trading resumed the day after. Even so, GLD was able to recoup most of the losses it sustained in the aftermath of the G-20 meeting. So, although GLD made some big moves in both directions, GLD has more or less stayed flat.

gld candles chart

GLD's price action gives reason to remain optimistic

The fact that positive economic data and good news on the trade front was not enough to push GLD back into the old trading range is a sign of strength. Retesting old resistance levels after breaking out and then bouncing off is a good sign for gold. It's consistent with old resistance becoming new support after breaking out. GLD had also become overbought after the big move up and letting off some steam and taking a rest is healthy.

GLD going sideways after breaking out may be somewhat frustrating for people who are impatient and want quick results, but it's positive as long as it stays above support. Gold is doing what it should be doing. GLD may now be in the process of forming a base from which it can make further gains. It would probably be better for some if GLD went up in a straight line, but the current price action remains supportive.

The forces underpinning gold remain

The current geopolitical environment remains supportive of GLD. While the situation between the U.S. and China has been described as a "truce", it could also be described as a "stalemate". The fact is that the trade relationship between the two countries has steadily deteriorated and the recent G-20 meeting has not put an end to that trend. Other places such as the Middle East also continue to simmer with no resolution in sight.

The economic trend remains intact and it's not a positive one. The most recent jobs report may have exceeded estimates, but the trend remains with growth slowing down. The average number of jobs added in 2019 is lower than it was last year. Other economic data also point to an economy that is slowing down.

The rest of the world is showing a similar pattern of slowing down, including important economic regions such as Europe and China. One only needs to look at copper to get a sense of the state of the global economy. If copper is "Doctor Copper" because it's viewed as an indicator of economic health, then the world is heading in the wrong direction.

These trends favor a flight to safety. Normally, that would be the U.S. dollar and treasuries by extension. However, the U.S. has made a number of moves that make some question how safe dollar assets really are. A safe haven is of no use to a third party if those assets can be confiscated or denied by the U.S. government through, for instance, sanctions. That forces people to consider alternative options. Alternative safe havens such as gold.

While some people will probably prefer to stick with physical gold bullion, others may want to have exposure to gold through an Exchange-Traded Fund or ETF. While there are several gold ETFs available, the most suitable one, in my opinion, is the SPDR Gold Trust or GLD. GLD is not only the biggest gold ETF, but it also offers narrow bid-ask spreads thanks to its robust daily trading volume. This liquidity is important for trading when you want to be able to move in and out of an asset as quickly as possible without incurring unnecessary delays or additional costs.

Staying long is warranted

With this in mind, there is reason to be bullish gold. There are some potential headwinds out there that could drag GLD below support, but the tailwinds seem to outweigh the headwinds at this point. If GLD does fall back below current support, a reassessment is needed. But as long as that doesn't happen, GLD looks bullish if we consider all the previously mentioned factors.

As stated in an earlier article, I went long GLD and I see no reason to abandon my position. Not from a technical standpoint and not from a fundamental standpoint. The same reasons that made me decide to become bullish have not been altered. I, therefore, remain long GLD.

Source: Wikimedia Commons

Disclosure: I am/we are long GLD. 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.