Still Too Early to Buy Gold

The SPDR Gold Trust (GLD) and the gold futures contract are closing out a bullish year, with the yellow metal gaining close to 25% since the last trading day of 2019. However, gold bugs and other speculators were hoping for more, especially when the asset snuck its nose above the 2011 high for a few sessions back in August. It has dropped more than 8% since that peak, grinding lower in a bull flag pattern that reached 200-day exponential moving average (EMA) support at the end of November.

Wall Street’s biggest investors reaffirmed their bullish stance on gold in November, with funds run by David Einhorn and Keith Meister increasing or maintaining their long positions. Stanley Druckenmiller went one step further, proclaiming during a CNBC interview that the economy could run “very hot with inflation after the vaccine is introduced” and that he is bullish on gold and gold mining stocks that include Freeport-McMoRan Inc. (FCX).

An accommodative Fed and politicians throwing money at the private sector to keep them afloat is brewing a perfect storm for gold to mount $2,000. That was the prevailing argument at the August top, and it still makes sense, with the Biden administration likely to press for more stimulus. However, the gold inflation hedge now has a rival called Bitcoin, which has grown hugely popular with millennials, who have fallen in love with the financial markets in 2020.

That instrument has soared more than 400% this year, breaking out above the speculative peak posted in December 2017. Meanwhile, gold’s retreat in the fourth quarter has reinforced multi-year resistance at $2,000, raising doubts about price direction in 2021 and beyond. Of course, it’s hard to convince old-timers about Bitcoin’s premier status as alternative currency after decades of exclusive focus on the yellow metal.

Gold Trust Long-Term Chart (2011 – 2020)

The SPDR Gold Trust topped out at $185.85 in September 2011 after a historic rally and eased into a descending triangle that broke to the downside in 2013, signaling the first downtrend since 2008. The decline initially found support at $115 a few months later, but multiple recovery waves failed into the fourth quarter of 2015, when the fund finally bottomed out at $100.85. A bounce into 2016 stalled above $127, marking the next point in a descending trendline of lower highs.

Attempts to break out above the trendline failed in 2017 and 2018, while a 2019 rally succeeded, setting off a wave of buy signals. The uptrend accelerated after the first quarter’s pandemic decline offered a buying opportunity, completing a 100% retracement into the 2011 high in July. It broke out immediately, adding less than 10 points before turning tail in a failure swing that continued into late November.

The monthly stochastic oscillator crossed into a bearish cycle in September, predicting at least six to nine months of relative weakness. The indicator is now expanding through the panel’s midpoint, revealing that the sellers remain in control of the tape, despite December’s hopeful uptick. The correction could stretch into the $150s in this bearish configuration, shaking out another supply of gold bugs before offering a low-risk buying opportunity.

The Bottom Line

Bitcoin has taken the inflation hedge mantle from gold in 2020, triggering a correction that could drop the gold futures contract toward $1,500.

Disclosure: The author held no positions in aforementioned securities at the time of publication.

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