Seeking Alpha

Gold Is Setting Up For An 8:1 Reward To Risk Trade

|
About: SPDR Gold Trust ETF (GLD)
by: Lukas Wolgram
Lukas Wolgram
Long/short equity, growth at reasonable price, small-cap, mid-cap
Summary

The ETF GLD is setting up for a trade with a reward to risk ratio greater than 8:1.

A cease in rate decreases and a potential return to rate hikes could put pressure on stocks resulting in money flowing out of stocks and into gold.

Traders should watch the 10-year weekly candlestick chart and the 1-year daily candlestick charts for the trade I present.

The trade involves getting long if GLD breaks through the recent upper down trend line.

Introduction

Gold has been on a tear for much of 2019. The Gold ETF GLD is up 12% year to date, but there's still 25%-30% upside in this ETF when looking at the charts over the next couple of years. Thus I present in this article a trade to get long gold based on technical analysis.

Why Get Long Gold

Gold hasn't been the best investment over the last 8-9 years, but over the last 18 months fears of a recession, political unease, and earlier in the year interest rate rises have all contributed to gold picking up some steam.

ChartData by YCharts

More recently some of these pressures have eased, as the Fed has lowered interest rates in an attempt to avoid a recession. However, these rate decreases are now expected to stop with the December 11 fed meeting futures currently trading at a 95% chance of no change in the fed funds rate. With stocks hitting new all-time highs, it seems as though we may return to a rate hike environment soon. I believe rate hikes will put pressure on stocks, making gold a potential beneficiary of any money moving out of stocks with higher interest rates, and into safer investments like gold. Furthermore, gold provides investors with solid diversification in the event of a recession. Readers should take this with a grain of salt as I'm by no means a macroeconomic expert, but I am a trader. Here's how I believe traders and investors should capitalize on any further upside in gold.

How To Time Getting Long GLD

GLD recently traded above the range it was stuck inside since 2013. The ETF looked poised to move higher back in August but ultimately found itself unable to sustain the move for very long.

While I took a long trade when this occurred, it resulted in minor profits at best. That said I believe there is still more opportunity to the upside in gold.

Source: Thinkorswim

Looking at a 10-year weekly candlestick chart illustrates the potential here. GLD is hovering around the $137.50 breakout level, with the potential to get as high as the mid $170s over the next year or two. This gives GLD a potential increase of 26.5% to the upside.

How then should traders time such a trade? I suggest buying shares or some combination of options (I personally like the 145/170 call spread expiring January 2022 for a $4.85 debit) when GLD breaks through the recent down trend line, more easily visible on a 1-year daily candlestick chart (see below). Traders could use a stop loss on a close back under the support line at $136.63. This would at most risk $4, or a little under 3% assuming the trader gets long shares near $139 while achieving up to $35 of upside on this trade. With a target of $174, This gives the trade an 8.75:1 reward to risk ratio.

Source: Thinkorswim

Conclusion

While I generally like to invest in businesses based on their fundamentals, I also occasionally spot more speculative technical opportunities. It appears GLD is setting up for one such opportunity. Traders and investors alike should pay attention to gold and opportunities such as this one, as it provides an opportunity not only for diversification in assets but also diversification by strategy. This has the potential to increase alpha and ultimately propel investors ahead of overall market returns.

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.

Additional disclosure: I am still long a small portion of a GLD breakout trade I took earlier in the year. I have a stop loss of $136 on these
current shares. I will add significantly if the potential trade in the article materializes.