GLD: Get Ready For A Reversal And New All-Time Highs


SomaBull




Summary

I believe that GLD is hitting a low for this correction either today or tomorrow.

GLD is now retesting its 200-day, and this level should act as reliable support just like in the previous bull market.

I feel the timing is good for the reversal to take place.

I believe this is another incredible buying opportunity in GLD and the mining stocks and I'm now ramping up exposure again.


The SPDR Gold Trust ETF (GLD) tanked again on Monday and is down in early market trading on Tuesday to just over 169. Now, more and more investors are starting to question the bull market in gold. But I'm not at all surprised by this decline, as it's been my forecast since the August peak that GLD would correct for a few months, and it was highly likely it would retest its 200-day by around November. Everything is going according to my forecast. Investors are now bailing on gold; this is not what they should be doing. The time to sell was in August, not now. I believe that GLD is hitting a low either today (Tuesday) or tomorrow (Wednesday), and I expect a major reversal to have started by the end of this year. 2021 should be another exceptional year for precious metals and mining stocks; this is an incredible buying opportunity to capture all of those gains.

(Source: StockCharts.com)


The gold bull market is far from over. The main driver has been and will continue to be money supply growth (I'm talking U.S. M2 and gold priced in USD). We have seen zero new stimulus, yet M2 is still rising fairly aggressively, as the money stock has grown by over $150 billion per month since August. When the next stimulus package arrives, M2 will surge.

(Source: Federal Reserve)


I always like to post this graph as it's a great visual representation of how the increase in M2 is unprecedented.

(Source: FRED)


The CBO projects the deficit in the U.S. will be $1+ trillion each year over the decade, and that doesn't take into account any new major stimulus packages (which would substantially increase the deficit in 2021). There is no way to balance the budget, which is why money supply growth will continue unabated. 

This is about the dilution of the USD, and the reason gold has been such a productive asset over the last few years, and why it will continue to be a great store of value for the foreseeable future. Everything else - Fed nominees that are pro-gold, the direction of the USD, who is the President of the U.S., etc. - is irrelevant. 

The price of gold will be driven by significant monetary inflation.

(Source: CBO)


The chart below is extremely important. Notice how in the previous bull market (2001-2011), 95% of the time gold never broke below its 200-day. In the first half of that bull run, the ascent was more slow and steady, with gold continuously retesting its MA (200) and always finding support at this level. 

In the late stages of the bull market, the same happened even though the move was more extreme. The 2008-2009 financial crisis was a one-off event that doesn't accurately represent how gold behaved during that decade. 

In other words, during those 10 years, there was really only one time when the 200-day failed to hold - and it was during the worst financial crisis since the Great Depression. 

Gold is back in a well-defined bull market, and the 200-day should act as a reliable retest level as the move advances higher. What's occurring now in gold is similar to the short-term blow-off top/correction in 2006. 

At that time, many also (incorrectly) assumed that the bull market in gold was over. Interest waned as gold corrected and then did nothing for many months. But of course, that wasn't the end of the bull market, and gold came roaring back (more than tripling in value over the next five years). 

Gold is following a similar corrective path, which shows this is completely normal. I fully expect gold to regain form and hit new all-time highs next year. 

As I said back in August when gold started to tank: "It's in the process of working off much of the recent excessive bullishness and should then build a strong base, which will allow it to catapult higher either at the end of this year or early next year. That's when gold breaks hard above $2,000 and likely reaches $2,500+."

(Source: StockCharts.com)


It would be odd for gold to break above the previous 2011 highs, hitting new all-time highs, only to break down again. Especially given the extraordinary, stimulus-driven environment we are in at the moment. Never say never, but I feel the chances of this scenario playing out are low.

The gold miners have also precisely behaved as expected. As I told subscribers of The Gold Edge in a sector update in July, when the HUI was at 317 and change:

I will reiterate, I still believe that the HUI will eventually top in the 350-400 region over the next several weeks before it corrects. Actually, the low end of that range might be too low. It could be closer to 375. I didn't pick this region out of thin air, as there is key support/resistance at 375-400. I lean towards the HUI surging towards this highlighted area of resistance, and then possibly pulling back to current levels sometime in the fall of this year....If the HUI does peak in that range, then I would expect at least a decent sized correction back down to the 300-325 region over the coming months.

 


The HUI topped just below 375 in August, and at that point, I refined my target correction low for the HUI to 280-300, with the low end of that range as the most likely price objective. From a technical perspective, a retest of the 280-285 region made a lot of sense as it's a backtest of the breakout, and the 200-day was looking like it would intersect here as well. 

It's been my contention that the HUI isn't going to hit 250 during this correction. I believe the index is bottoming right now.

(Source: StockCharts.com)


I felt the timing was right for a correction back in August given seasonality, the slowing of M2 growth, lack of new stimulus, uncertainty with the U.S. Presidential election, and of course, how overbought the sector was at that stage. Now I feel the timing is good for the reverse to take place, as the sector has now worked off those overbought conditions, GLD and the HUI are now at key support levels, M2 will get a shot in the arm (no pun intended) as it seems a new stimulus package will now come sooner rather than later, the election is seemingly out of the way, and the sector is close to entering a strong seasonal period.

Let's look at that last point in a little more detail.

December 15. Keep that date in mind. The sector almost always bottoms by that time. If you analyze the price action in the HUI (an index of gold producers) from December 15 to say the end of January in the following year, over the last 7+ years, there has been a consistent pattern of gains during those 1.5 months.

Below are performance charts of the HUI from December 15 - January 31 of the following year for each of the last seven years. The index averaged double-digit gains over those 1.5 months since 2013. For GLD, it has consistently gained 7% during that period for the last six years. While anything is possible this year, seasonality favors a rebound. I would argue, given how oversold the sector is at this stage, that the odds are good that this streak of gains will continue.

(Source: YCharts)


I believe the sector is bottoming now, but I expect the big gains will come from mid-December and onward. The next few weeks might be more about solidifying the bottom.

In August, I aggressively sold out of my mining stocks, significantly reducing exposure in order to: 1. protect substantial profits, and 2. have plenty of cash in anticipation of the likely correction - in order to take advantage of the decline and increase my outperformance.

I believe this is another incredible buying opportunity in GLD and the mining stocks. If one is looking to trade gold, I think GLD is the best option as it's the largest and most liquid physical gold ETF. Debates about gold-backed ETF products have been prevalent ever since these ETFs came into existence, and there will be debates about them for as long as they continue to exist. There is counterparty risk with GLD (the main complaint and concern), but the ease of buying and selling GLD, along with the low expense ratio, gives it a major advantage over physical gold.

Another significant advantage, and as I've mentioned before:

There's a premium paid on any physical gold purchase, which is one major drawback, especially for short-term holding periods. For example, the spot price of gold is currently $1,925 an ounce. If an investor wants to purchase a 1-ounce American Eagle, the current premium is about $100 per ounce (or 5%). If gold hits $3,000 in the next 2 years, the gain on the purchase is 48%, vs. 55% for GLD (taking into account the 0.40% annual expense fee). An investor might be able to close that gap somewhat if they receive a 1-2% premium on that 1-ounce American Eagle when they sell it, but the total return in GLD would still be 5 percentage points higher in that scenario. That doesn't even take into account the storage cost and cost to insure physical gold.


If an investor wants gold to make up a large percentage (10-20%, or more) of their portfolio and they plan to hold for the long term, then I think physical gold is the best option. For everything else, I believe GLD is the better route.

All of my new buying, though, is going towards the miners (not GLD), given their leverage and still cheap valuations. What most investors don't realize is the gold producers are having exceptional quarters as they are wildly profitable, even at $1,750 gold. It's highly likely that the HUI will surprise to the upside; I believe the index will be north of 400 next year. Many gold stocks are now very oversold, and I think there will be stellar gains from current levels. I'm now ramping up exposure again.

While I can't be 100% certain how things will play out, and there is still a chance that the gold sector declines further (just keep watch of the levels discussed to make sure key support holds), I feel that the fundamentals and technicals are signaling that a likely low is now forming. It's worth taking a risk and increasing exposure at this stage. 

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