Why The Correction In Gold ETFs Is Not Over (GLD, IAU, SLV, DZZ, UGL)
Sy Harding: Gold created a lot of excitement in 2011 when it spiked up 25% from $1,500 an ounce to a record high of $1,900 in less than two months. That had gold bugs salivating, and widespread projections of $2,500 gold by the end of 2011, $3,000 to $5,000 gold just a year or two away.
There seemed to be sound reasoning for the expectation. In the summer of 2011 the economic recovery had stalled again, the euro-zone debt crisis was at full boil, global stock markets were down (the Dow down 19% from a top in early May). And it had been expected for several years that the Fed’s easy money policies would eventually create runaway inflation. More than enough reasons to pile into gold, as a safe haven in a slowing economy and tumbling stock market, and as a hedge against inflation.
As it was spiking up, gold became popular not just among traders and investors pouring money into gold stocks and etf’s, but consumers going after gold coin and gold-bar offerings on the internet, and gold ‘stores’ springing up like weeds on the streets and highways.
But trends only last until conditions supporting the trend change.
In this case, the stalled economic recovery got back on track, the euro-zone debt crisis faded into the background again, the stock market recovered from its summer correction, and although still expected, inflation had not shown up. Gold topped out as suddenly as it had spiked up, plunging from $1,900 to $1,600 an ounce in five weeks, and to $1,550 by early 2012.
Gold’s extreme volatility since its mid-2011 peak has made it a great trading vehicle, but not much of a buy and hold investment, still down $250 an ounce, 13%, from that 2011 peak.
My technical indicators have been on a sell signal for gold since October 16, with a downside target of $1,650 an ounce, with the caveat that if that level did not hold the next potential support is another $100 an ounce lower, at its mid-year low last year of around $1,550.
Meanwhile, gold had become confined within a symmetrical triangle formation of lower highs on the rally attempts and higher lows on the pullbacks. The direction of the breakout from such a pattern usually indicates the direction for a while.
After considerable indecision so far this year, in the last few days it looks like it has broken out of the triangle formation to the downside, making another down-leg likely.
As the price of gold has been dropping, twirling and bouncing ‘we buy gold’ signs have become dominant on the streets, luring back in those now wanting to sell the gold they’re no longer so excited about owning.
I wonder how many gold ‘investors’ have been surprised to find out that, unlike buying gold stocks or etf’s, gold coins and bars are purchased at retail prices, but sold at wholesale prices, usually around a 20% discount to the prevailing gold price. That can be quite a shock to someone who watches the price of gold fall 20% before deciding to bail out, and then discovers they will face a dealer’s ‘discount’ of another 20% when selling.
In any event, the charts are saying gold’s correction probably has further to go. Conditions and situations in the background don’t seem to dispute that notion.
The appeal of a safe haven has been fading away (note also the decline in bond prices). The economic recovery is back on track. Inflation remains benign. India, the world’s largest importer of gold due to its population’s infatuation with gold jewelry, is determined to cool off that demand. India’s government raised import taxes on gold in March of last year in its first effort to cool off demand, which may have had an influence on last summer’s decline in the price of gold. And last month it increased that import tax again. India has no domestic gold mines and blames gold imports (for jewelry production and investing) for a large portion of its trade deficit, and says it accounts for 80% of the country’s current-account deficit.
So looking at technical indications on charts, or fundamental situations in the background, it looks like gold’s correction has further to go on the downside before our next job comes into play, determining the next buying opportunity.
Related: SPDR Gold Trust (NYSEARCA:GLD), iShares Gold Trust (NYSERCA:IAU), iShres Silver Trust (NYSERCA:SLV), Ultra Gold Trust (NYSEARCA:UGL), Deutsche Bank AG DB Gold Double Short ETN (NYSEARCA:DZZ).