After Hitting New 52-Week Highs, Where is Gold Headed?

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Mike Hammer | February 3, 2020 10:10am NYSE:GDX NYSE:GDXJ

NYSE:GDX | News, Ratings, and Charts

Gold bumped its head against $1,590 in Monday trading overseas, and has backed off to $1,580 in US premarket trading. Which gives us a chance to follow up on Friday’s ruminations about coronavirus and its effects on precious metals prices.

First, a chart to understand what we’re looking at price-wise. This is GLD, the unleveraged US-market gold ETF.

(Source: Fidelity.com)

For the record, GLD hit a new 52-week high on Friday, by 36 cents over the previous high set last Monday. Over the year gold traded above these prices overseas, but “somehow” always managed to drop before US regular trading hours. Nuff said about that for now.

The question we usually ask is “what is gold trying to tell us”.  Over the weekend we’ve reflected on the thoughts in Friday’s article, read more on the coronavirus situation, and a lot more about what people are saying about it in public.  Meaning blogs and such – we try to ignore screaming on Facebook and Twitter, as that can be simply bothersome without substantive content.

What your friendly Gold Enthusiast is seeing is a mix of panic and ostrich, sometimes from the same people.  Ostrich behavior, in case you’re unfamiliar with the metaphor, is when you “stick your head in the sand” and don’t look around or don’t see reality.

Traditional consumer theory says when people get scared they run to safe havens.  Well, in this case we are seeing some evidence of that – GLD did, after all, hit a new 52-week high on Friday. But US investors and traders are definitely not panicking yet, as Monday’s future market shows stocks are trading higher this morning.  If investors were completely rational, you’d expect Friday’s drop to continue, as there was only more news about the virus spreading over the weekend. Yes, “they” are working on an immunization for coronavirus, but it is still likely months away.

So we would expect equity markets to open flat or lower this morning, but they’re up.  Gold, while up on Friday, has dropped slightly and is hovering just under 1580 in the 30 minutes before official market open.  That indicates there isn’t a significant volume of new money looking for a safety trade.

Maybe this means people are “just waiting” for the next batch of useful news.  That would be nice, in the rational consumer view of the world, but isn’t usually how people operate.

People generally sit tight until they are forced from their positions by an over-abundance of change. In other words, most people ostrich until they get a big shove.  Then there’s a spasm of activity, usually accompanied by lots of bluster and flapping.

We clearly aren’t seeing that yet. It will take a quarter of economic reporting to know how much the virus interrupted production, shipping and such, and get a sense of exactly how big the economic effects will be.  In China you can bet they’ll be big – Chinese business practices are not exactly worker-friendly in many respects, especially when the company is losing money.  So a lot of workers are going to be short on income, with predictable effects on local sales. Anticipating that Chinese markets dropped about 8% in Monday trading, no big surprise there.

We don’t yet have a handle on the ripple effects on the global economy.  Will coronavirus push the world into the next recession? Right now we’re betting there will at least be a significant dip, but whether it will trigger enough side effects to start a full-blown worldwide recession remains to be seen.

Signed,

The Gold Enthusiast

 

(DISCLAIMER: The author holds no positions in any mentioned security. The author is long the overall gold sector via positions in NUGT, JNUG, a small position in GOLD, a few junior miners, and covered calls on part of the NUGT and JNUG positions. The author may trade options positions in NUGT and/or JNUG in the next 48 hours if market conditions warrant but has no plans to change other existing positions in the gold sector in that timeframe.)


The SPDR Gold Shares (GLD) was trading at $148.49 per share on Monday morning, down $0.84 (-0.56%). Year-to-date, GLD has gained 20.09%, versus a 22.21% rise in the benchmark S&P 500 index during the same period.

GLD currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #1 of 33 ETFs in the Precious Metals ETFs category.


About the Author: Mike Hammer

Mike HammerFor 30-plus years, Mike Hammer has been an ardent follower, and often-times trader, of gold and silver. With his own money, he began trading in ‘86 and has seen the market at its highest highs and lowest lows, which includes the Black Monday Crash in ‘87, the Crash of ‘08, and the Flash Crash of 2010. Throughout all of this, he’s been on the great side of winning, and sometimes, the hard side of losing. For the past eight years, he’s mentored others about the fine art of trading stocks and ETFs at the Adam Mesh Trading Group.


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