Thoughts on Gold
I have been seeing the “Trade in Your Scrap Gold” for months…actually, years. [The Gold Kit! “Your satisfaction…guaranteed!”). I don’t think such ads are the sign of a top. They are a sign of the times. You’ve got to look at more than television ads if you want to reach a defensible conclusion about gold. Right now, any conclusion requires a time frame. To say you’re bullish or bearish on gold says nothing. Such a general statement can never be disproven. You’re guaranteed to be right simply because stocks and commodities go up and down.I am not a “gold bug” (for those who aren’t familiar with the term, there is such thing as a “Gold BUGS Index” (GDX). “BUGS” stands for “Basket of Unhedged Gold Stocks”. Gold producers who do not hedge their assets by selling gold futures to lock in price on their production are “unhedged”. The term has been carried over to refer to habitual gold traders…not necessarily “bullish traders” (though that is often seen as the case), but just traders who follow gold. But even though I am not a gold bug, I do have an opinion on gold.
My take on gold is this:
1. Technically, the GLD is a bit early in the breakout from an inverse head-and-shoulder pattern. When an inverse head and shoulder pattern occurs after an UPTREND, it is a continuation pattern, not a reversal pattern.
2. Technically, over the past 6 months, GLD is forming a “cup and handle” pattern, and is printing the “handle” right now — that’s what we’ve been seeing over the past 4 days. The “handle” by itself is not remarkable. It will be the breakout from the handle (if it occurs) that will be remarkable. The next breakout should take GLD to much higher levels. But if GLD does NOT break out from this handle, then it’ll be a “failed cup and handle”, right? And if that’s the case, we can see GLD fall down to $114 or $113 without too much difficulty.
3. GLD has been strongly correlated to currencies…and the dollar has been inversely correlated to the euro. Euro down, dollar up. Euro up (which should happen real soon), dollar down. So gold has been moving with the Dollar. When the dollar-Euro spread narrows, we “should” see gold fall back, right? It’ll fall back and reveal that the move has been generated entirely by those who are taking their money out of the Euro and buying gold. That will be quite revealing, right? But there is a countervailing force — the inverse relationship between GLD and the dollar. This is the “usual” relationship (though there are many exceptions to that rule, leading me to question the usefulness of the rule). Assuming the usual relationship holds true, then a falling Dollar should generate an underlying bid for GLD, if only because GLD is dollar-denominated.
4. So in light of 1-3 above (particularly #3), there are a lot of cross currents going on in the gold trade, which is why you get respected analysts and traders reaching opposite conclusions that are adequately supported by sound theory. Only one person on the planet knows for sure which way gold is going, and that’s the Brit Twit. Everyone else is really watching the action. As I understand it, Dennis Gartman is now bearish on gold. Two weeks ago he was bullish, telling viewers to buy gold with Euros. That turned out to be a solid trade — I guess us retail traders would have shorted the FXE (Euro ETF) and used those proceeds to buy GLD. OK, well I agree with Dennis. If that was the trade (and it was), then that trade should be unwound now! The Euro should bounce now — Germany has banned naked short selling, which will eliminate much of the aggressive supply created by traders who can just pound on the bid like a guy with a big hammer playing “whack a mole”. Now that the guy with the big hammer is taken out of the equation, we should see some stabilization in the Euro. That stabilization will cause the dollar to pull back, and GLD along with it.
5. This dynamic (i.e., #4) is quite obvious — assuming you understand the relationships I’ve described. If you did not understand them, then it’s not obvious. But now that you DO understand them, then the dynamic should at least make logical sense, right? So is Gartman now a big grizzly bear on gold, or is it just a trading call (i.e., “take off that long gold, short Euro trade”)? I don’t know…because I don’t know him. Never spoken with the man. But my bet is that it’s a trading call.
6. So let’s assume that it’s right to take off that “short euro/long gold” trade. Let’s assume that the euro rallies and gold falls. Great. “Don Pardo, Tell him what he’s won!!!” “A good trade!!!”
7. But then what? The underlying issues that are plaguing the euro remain…the can has just been kicked down the road a bit. Then, the process of gaining credibility through bona fide austerity programs (i.e., “guess what. We’re not gonna pay you to retire at 55 anymore…and no, your divorced daughter with three kids doesn’t get your pension when you die. Your pension dies with you. Sorry — she’s gotta get a job or a husband…or both) begins. That takes some time. During that time, GLD will continue to be what it has always been — an asset class that warrants a small but meaningful position in your portfolio — say…10%? Something like that. Not a big monster position…just a position.
8. So there are still many unknowns about the direction of GLD. But the weekly pattern that has been playing out over the past two years (that’s right..two years) remains intact. This is why it’s kind of silly…bordering on stupid…to make a macro call on gold based on 3-4 days of trading. Those had better be very, very special days! And we’ve seen no such action. Merely the ebb and flow of gold, which is what it always does.
9. This was the dynamic that I was prepared to explain on my latest (and perhaps last) appearance on Kudlow but did not get the chance to do so.
And that is my current thesis on GLD.
(For those who traded right along with me as soon as I mentioned that I was buying FAZ…I sold it this morning into the opening strength. I also bought HPQ in extended hours last night and dumped that dog at the open too. The market remains under pressure as traders continue to exchange stock for at any opportunity).
Have a great day. I’ve got an appointment with doctor this morning so will be out for much of the day.
Dan
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