It’s been a rollercoaster ride for the year for the precious metals complex, but gold (GLD) has come out on top, for the time being, sporting an 11% year-to-date return compared to platinum (PPLT), silver (SLV), and palladium (PALL), which all remain in the red. While the metal continues to remain bullish from a long-term standpoint with its quarterly and yearly charts pointing to higher prices, the short-term picture is a little more cloudy. Besides, we could see some minor headwinds from the extremely weak inflation reading in April and relatively optimistic sentiment as we’ve seen the past several weeks. This does not mean one should rush out and sell their gold, but it does mean that a better opportunity to add exposure might be on the way for those that are patient. Let’s take a closer look below:
Beginning with the fundamentals, we can see a chart below that I’ve built, which maps out the 3-month treasury bill rate minus the 12-month rate of change in US CPI. Generally, negative readings for this indicator are bullish for gold, as this means that the Federal Reserve is increasing the money supply faster than inflation can consume in. Therefore, for those looking to hold onto purchasing power, one of the only real options is gold. As the chart below shows, this indicator has been trending negative since last summer and helped to catapult gold through long-term resistance at the $1,380/oz level. During March, this indicator plunged to a new low near (-) 2.50, but has since made a significant rally back towards (-) 1.50. This is due to the recent March reading on inflation, which showed that core CPI was up only 1.5% year-over-year. The good news for the gold bulls is that as long as we remain negative, this is an excellent sign for the gold price as it increases the demand for the metal. However, we are clearly sitting nowhere near as bullish a reading as we were in mid-March, suggesting that we could see a pullback or further pause for gold on the horizon to digest its Q1 and early Q2 advance towards $1,800/oz.
(Source: Author’s Chart)
Moving over to sentiment, we can see that bullish sentiment remains quite high after the strong rally we’ve seen and is currently hanging out near 80% bulls. While this isn’t a sell signal by any means, like when sentiment got miles ahead of itself last August and the metal needed a breather, it does suggest things are a little hot, and we might need some further consolidation to shake out some of the weak hands. Therefore, while some further upside is certainly possible in gold before we see this reading get over-heated, I would be surprised if we got through $1,820/oz on a weekly close before the end of June, given that being bullish is a little crowded here. Based on this, a brief pullback or a rest near the $1,700/oz level seems a little more likely.
(Source: Daily Sentiment Index Data, Author’s Chart)
The good news, however, is that the long-term picture continues to remain intact, and I continue to see 10% pullbacks in the yellow metal as buying opportunities going forward. Given that gold has a rising 200-day moving average and remains above a multi-year breakout, any shakeouts or pauses in the metal are likely going to continue to provide an opportunity to buy the dip. Therefore, while the short-term picture remains a little muddled and I don’t have a ton of conviction over where the next $100/oz move is, I would view any pullbacks to the $1,600/oz level or lower as an opportunity to begin adding back exposure. Multi-year breakouts rarely end with 1-year uptrends, and the long-term picture for gold remains very bright. Having said that, a better opportunity to add exposure should arrive in the next couple of months, and I would not be surprised to see us tag the $1,650/oz level at some point before July.
(Disclosure: I am long GLD)
Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
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The SPDR Gold Shares (GLD) was trading at $160.30 per share on Tuesday afternoon, up $0.88 (+0.55%). Year-to-date, GLD has gained 29.64%, versus a 9.89% rise in the benchmark S&P 500 index during the same period.
About the Author: Taylor Dart
Taylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles. More…