GLD: You'll Want To Own Gold When This Breakout Happens
GLD is in the early stages of a bull market and has gained about 27% since bottoming in 2015, roughly as much as the S&P 500 in that time.
The inflation picture is still good and is likely to get even better for gold.
The gold to silver ratio is above 80, an extreme level that has preceded prior rallies in gold.
Why you'll want to own gold when this breakout happens.
Source: HDWallSource.com
On The Verge of a Breakout
Gold/SPDR Gold Shares (GLD) has been in an uptrend for the last 2.5 years and is up by approximately 27% in that time. This trend reinforces the likelihood that gold is still in the early stages of its bull market. 27% might not seem like a great deal now that Bitcoin is around, but it's about as much as the S&P 500 returned in that time.
Gold Price in US Dollars data by YCharts
Gold has proven to be a somewhat stable, low risk, and relatively high yielding investment in recent years. More importantly, due to the various favorable fundamental and technical developments surrounding gold/GLD, the upward trend is likely to persist and should even accelerate going forward. In other words, gold is on the verge of a major breakout.
About GLD
GLD is the largest, reportedly physically-backed gold exchange-traded fund in the world, with roughly $35 billion worth of net assets. GLD offers market participants an efficient way to access the gold market. The ETF is an attractive alternative to trading gold futures, as it can be traded much like a stock on the NYSE Arca exchange instead of dealing with alternative exchanges and trading requirements pertaining to futures contracts.
Furthermore, GLD is an appealing alternative to trading physical gold, as investors get exposure to the same price action as the physical metal, but can buy and sell gold with great fluidity using GLD. This way investors bypass the inconvenience of having to take physical delivery of the asset.
Since GLD mimics the price of gold almost identically, I will refer to GLD and gold interchangeably throughout this article.
Gold: Good as a Hedge but Not Only
Gold is a very good counterweight to risk in a portfolio. When stock market anxieties increase, so does the price of gold in many cases. Also, this doesn't mean that the gold price will drop going forward if market volatility declines.
In fact, if we've learned anything over the past few years, it's that gold and stocks can easily move in the same direction long term. Since gold bottomed in late 2015 at around $1,050, it has gone up by 27%, this is in conjunction with and comparable to the S&P 500's 29% gain over the same time.
In addition, stock markets are likely to remain more volatile than they have been in recent years, even if volatility does manage to subside near term. Due to the more unpredictable environment, gold could begin to attract additional demand going forward.
Inflation Picture: Good for Gold
Another fundamental element of support for gold is inflation and it's everywhere you look, recent CPI came in at above 2%, the PPI is trending above 2.5%, with final demand goods at around 3.5%, trending well above 3% throughout the last year. Even wage growth is on the rise with recent figures coming in at 2.9%. Crude oil is on its way to $70 fast, likely to $80-85 by year's end. Gold prices will also likely be on the rise due to the relatively early nature of this bull market.
Source: Tradingeconomics.com
You may notice the chart of inflation is a lot like the chart of gold, after crashing and then bottoming out in late 2015 inflation and gold have been on very steady upward trajectories.
Source: StockCharts.com
Gold to Silver Ratio at an Extreme
The gold to silver ratio is above 80 right now. Why should you care? Because the last few times this indicator has gotten so skewed towards gold, there have been significant rallies in gold, silver (SLV), gold miners (GDX) and other precious metal related assets. The last time we were at a comparable level, it was about 75 before the rally of 2016. But the only time the G/S ratio was this high in recent times (last 25 years) it was in 2008, right before the massive gold and silver rally.
Source: Bullionvault.com - Currently the G/S ratio is above 80, and as we can see in 2003, 2008, and 2015, similar readings have led to significant rallies and multiyear bull markets in gold, silver, and other gold-related assets.
The phenomenon behind this trend could be that in the early stages of a precious metals bull market investors begin to accumulate gold first, but when the supply/demand dynamic shifts in gold's market, investors become more attracted to silver, gold miners, and other derivatives in the precious metals space. Former bull markets of late have shown that silver and gold miners begin to outperform gold in the intermediate stages of a bull market, and then start to significantly outperform gold during the later stages of the bull stampede. Silver and gold miners are still underperforming gold, therefore, this too points at gold being in the early stages of this bull run.
Weak Dollar
The USD continues to look weak and the trend is still decisively lower at this time. 88.5 is support now for the dollar, but the greenback hasn't been this cheap since 2014, and it is likely to get even cheaper. Increased government spending, blown out deficits, inflation, and other detrimental developments are causing the dollar to weaken which is another very positive element for gold going forward.
Technical Picture
If we look at GLD's 2.5-year chart we can see that gold has been in a very nice uptrend since hitting a long-term bottom in late 2015. Since then, the road has been rocky, nevertheless, gold is still up by 27% since December 2015, the S&P is up a comparable 29% in that same time frame. GLD is coming up on an important multiyear resistance level around $130 and if this breakout occurs gold could travel a lot higher.
The 1-year gold chart shows that gold is continuing in its very nice uptrend making a series of higher highs and higher lows throughout the year. Moreover, gold is approaching crucial resistance at $1,360, and once gold breaks out past this price point, it will very likely shoot up to $1,400, and then much higher after that. There are very few resistance levels beyond the current ones we see at $1,360, and $1,400.
You'll Want to Own Gold Going Forward
Gold has gained about 27% since it bottomed in late 2015, however, the bull market is still in its very early stages. The gold to silver ratio is massively skewed towards gold right now, historically, a very bullish indicator for gold, silver, and gold miner prices.
The weak dollar is likely to get weaker, and inflation continues to get hotter, fundamentally very bullish factors for gold and GLD. Also, gold is a very good hedge, especially since stocks could be more volatile from now.
Ultimately, gold has demonstrated that in addition to being a good hedge it can rise in tandem with stocks. Fundamentally, there are numerous favorable factors that should easily support a higher gold price going forward.
The upcoming resistance test will be key in showing if gold can breakout above $1,360, and if it can, it is likely to go a lot higher after that. Based on the current fundamental backdrop and technical setup, I see gold trading significantly higher a year from now.
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Disclaimer: This article expresses solely my opinions, is produced for informational purposes only, and is not a recommendation to buy or sell any securities. Investing comes with risk to loss of principal. Please always conduct your own research and consider your investment decisions very carefully.
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Disclosure: I am/we are long GOLD FUTURES, GDX.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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