There are some commentators who suggest gold will see $2,000+ an ounce in the next several years as the U.S. dollar depreciates and inflation takes hold. As we get closer to the lower end of that target it would be wise for gold investors to start formulating an exit plan if they intend to lock-in profits. Gold is currently selling for around $1,730 an ounce.
Gold has been a top performing investment for over 10 years and periodic price declines should be expected after an investment delivers strong growth. At some point the long-term trend in gold will reverse and those investors who want to capitalize on the meteoric rise need to be on guard for a change in the upward trend. In the meantime, investors in gold need to balance the possibility of more upside, potentially much more.
One of the way investors can get exposure to gold is through the exchange traded fund, SPDR Gold Trust (GLD). Let's take a look at the most recent correction in the price of GLD to see what it can tell us.
The chart above shows a near vertical upward move in July and August that has some of the characteristics of a blow-off top (a near vertical price rise). In this case there was good volume supporting the move. In a classic blow-off top volume fades as the price rises. This is not the first time GLD has experienced accelerated moves to the upside but it is this type of price action an investor should watch closely.
After declining just over 15% from highs back in August the precious metal staged a couple of rally attempts. The first line (1) above marks the top of the rally attempts GLD has staged since the selloff began. The second selloff in December, after a reasonably good rally in October and November, raises an eyebrow. It looks like investors lost confidence in the ability for GLD to move higher and instead of buying, sold another large quantity of shares. This is a mark of distribution, where a lot of selling takes place on declining prices. The circles at the bottom of the chart bring attention to the spikes in selling that took place throughout the last five months. More recent price action has broken through the earlier downward trend line, the first sign of hope for a return to the uptrend. The move higher was also accomplished with good volume, another positive development.
Line number (2) represents the first area of support. This level was maintained for much of the selling but was broken twice in late December. Not exactly the type of action you want to see in an asset attempting to recover an upward trend. Ideally GLD will stay above the $155 price. A move below it would serve as the first warning that more selling may be on the way.
Line 3 represents the top of the rally attempt from October and early November. Line 4 represents the top of the rally attempt at the end of November. GLD is bumping up against line 4 now and needs to break and hold above $170, then $175 to move back into an upward trend. Bottom line, until a sustained move above $175 materializes, GLD could be subject to more selling or sideways action.
It may be GLD needs more time to consolidate recent gains and additional selling could take it below the $155 support mentioned above. If we look at a monthly chart we see the next level of support is around the mid-$140s. As long as GLD holds above that level the trading action could still be considered a price consolidation within a long-term upward trend. Like anything running up a hill, it needs to rest periodically; if we see GLD move below the mid-$140's over the coming months, however, that could mark the beginning of the end of the run.
It is really difficult to make sense of price movements in today's markets. There are so many variable at play it is difficult to ascertain what is driving the price movement at any given time. One week it is liquidity, the next week it is bond yields in Europe and then monetary action. That is why monitoring price movements for clues about the future direction of the investment can be helpful. It doesn't matter what fundamental reason you have for an investment, if the price action is acting contrary to your thesis, you may have it wrong.
At different times during gold's rise clients at Dightman Capital have held an investment in the asset class. At present, however, GLD holds the second to last spot in our investment rankings, just above Silver (SLV). GLD will someday make its way toward the top again and if it gets high enough, we will invest. Until then, we are finding better opportunities in other investments.
For those holding investments in gold it looks like a period of price consolidation is underway. The $155 and $145 price levels for GLD hold important support levels that if broken in the near term, may mark an end to the current bull market in gold.
DISCLOSURE: Our strategies do not hold any positions in precious metals at the time of this writing.