Gold: Declining Assets Warn Of A Deeper Decline

Conclusion, Investment Implications, Strategy

The SPDR Gold Shares ETF (GLD) has declined by 11% since peaking on August 6th and is now testing underlying support at 174.07.  GLD’s recent bearish Tactical trend change amid contracting investor assets warns this support will be broken, which would clear the way for an additional 7% decline to test major support at 161.40.

Introduction

The SPDR Gold Shares ETF (GLD) has declined by 7.14 points or 4% since our  August 27th Special Report entitled Gold At Important Inflection Point, Leaning Lower. In today’s report, we take an updated look at gold prices via GLD, to try to determine if this recent weakness in gold prices will continue.

Editor’s Note: GLD has maintained a stable and essentially lockstep positive linear correlation with gold futures prices throughout the past 15 years, most recently 0.99 over the past 3 months.

GLD At Tactical Decision Point

Chart 1 below plots GLD monthly since 2011 along with its 52-week moving average, the latter a major trend proxy.  The red highlights show that GLD first rose above major overhead resistance at 185.85, its September 2011 benchmark high, in early August before quickly collapsing back below it.

Chart 1

The green highlights show that this rejection of major overhead resistance at 185.85 has resulted in a test of minor underlying support at 174.07.  This test of support sets up another directional decision point for gold prices.

Gold No Longer “Acting Like An Uptrend”

Chart 2 below plots GLD daily since October 2019 in the upper panel along with its 50- and 200-day moving averages, widely-watched minor and major trend proxies.  The lower panel plots a monthly overbought/oversold metric, a 21-day Stochastic oscillator.

Chart 2

During a healthy uptrend, a test of underlying support amid monthly (our Tactical time frame) oversold conditions typically triggers the resumption of that trend.  The vertical green highlights between both panels show that this resumption of the trend occurred in November 2019, and on Mar 16th and Jun 5th. On Sep 8th, however, the red highlights point out that GLD failed in its attempt to resume the uptrend from its 50-day MA and quickly collapsed below it.  This indicates the previous Tactical uptrend, as defined by the 50-day MA, is no longer valid.

Moreover, this bearish trend change now sets the stage for a potential test of major support at 161.40, the current location of the 200-day MA (major trend proxy).

Contracting Asset Flows Are Negative For Gold

Chart 3 below confirms that the previous Tactical uptrend is no longer valid.  It plots GLD daily since May in the upper panel, with the corresponding daily total net assets invested in GLD plotted in the lower panel along with their 21-day (monthly, our Tactical time period) moving average.  These investor assets indicate investor conviction and are the “trend fuel” that drives price direction. 

Chart 3

The green highlights show that monthly expansion in these assets between Mar 24th and August 19th fueled the strong advance in GLD during that period.  The rightmost red highlights show that, more recently, these assets have slipped into a new trend of monthly contraction as of August 20th — and that this trend has aggressively accelerated over just the past 2 days. 

As long as this trend of monthly contraction continues, GLD  — and the gold prices it represents — are likely to decline below 174.07 support as shown in Chart 1.  Should this occur, it would clear the way for a potential test of major support at 161.40 as shown in Chart 2, which is an additional 7% below the market.