Special Report: Gold At A Strategic Decision Point

Conclusion, Investment Implications, Strategy

The SPDR Gold Shares ETF (GLD), which tracks the price of gold bullion, is testing major underlying support amid favorable investor sentiment and seasonality for its larger 2019 major uptrend tor resume.  However, investor asset flows in GLD have been in a trend of monthly contraction since August 20th, which has triggered and fueled an 8% decline.  Unless/until these assets move back into a monthly trend of expansion, new long positions are particularly risky and may be premature.

Introduction

In our September 19th Monthly Investment Compass, we pointed out that that the SPDR Gold Shares ETF (GLD), which tracks the price of gold bullion, was testing important underlying support at 181.24 — and said this was a tactical decision point for gold prices.  Normally, if you are testing support within a major uptrend — which gold has been in since January 2019 — this is a good place to buy.  But, in this case, we pointed out that the total net assets invested in GLD had moved into a trend of monthly contraction as of Aug 20th, which warned this support level would be broken.

The red highlights in Chart 1 below show that’s exactly what happened, as GLD declined below the 50-day MA into late September.  This signaled a minor bearish trend change which has remained in effect since then.

Chart 1

The green highlights in the chart show that the subsequent decline in GLD has resulted in a test of its 200-day moving average, currently at 168.62 which is major support.  The chart also identifies additional support just below there at 164.42, the Apr 14th benchmark high.  This is where the January 2019 major uptrend should resume, if still valid.

The Bigger Picture

Chart 2 below, a longer term monthly chart of GLD since 2008, shows why the major uptrend stalled in early August.  The ETF, and the gold prices it represents, made an attempt to rise above the September 2011 all-time high at 185.85, and failed. 

Chart 2

This chart shows just how important that August peak may be in the long term scheme of things, and warns that the current decline from it may be just beginning.

Investor Sentiment & Seasonality Are Positive

The blue line in the lower panel of Chart 3 below plots a daily survey of futures trader bullishness on gold prices since 2017.  A corresponding price chart of GLD appears in the upper panel.  These futures traders are typically near to intermediate term trend followers.  As a result, they tend to be the most bullish at market tops and the least bullish at market bottoms.

Chart 3

The green highlights show that these traders are currently hovering at a multi-year least bullish extreme, which has coincided with or closely led every Tactical bottom in gold prices during this period.

Chart 4 below plots the annual seasonal trend in gold prices, monthly, since 1977, along with the percentage of positive closes for each month during this period (red line).

Chart 4

The green highlights show that December and January are the 4th and 3rd seasonally strongest months of the year, and represent a big positive change from November which is the 2nd weakest month.  These data also indicate favorable conditions for major support at GLD 168.62 to hold, and to become the starting point of the resumption of its larger 2019 advance.

No Asset Inflows, No Recovery

The blue line in the lower panel of Chart 5 below plots the total daily net assets invested in GLD since April.  The red line plots these assets’ 21-day moving average to indicate a monthly (our Tactical time period) trend of expansion or contraction. 

Chart 5

The green highlights in the lower panel show that the Mar 24th through Aug 19th trend of monthly asset expansion fueled the 22% rise in GLD during that period, and that the current Aug 20th trend of monthly asset contraction has triggered and facilitated the 8% decline in GLD since then.

Charts 1,3 and 4 indicate favorable conditions for GLD’s 2019 major advance to resume — IF it’s still valid.  However, it would take a shift back to a trend of monthly expansion in the total net assets invested in GLD to indicate there is enough near term investor conviction to fuel the resumption of that trend.  Put another way, as long as these assets continue to contract, GLD — and the gold prices it represents — should continue to decline.