On Feb. 21, I said that risk/reward at the time was unfavorable for those looking to chase gold lower. Since then, gold has indeed refused to go lower … and even bounced a little higher.
Some five weeks later, I am looking at gold once again, this time in the greater context as it relates to near-term movements in the equity markets.
To be precise, I am considering buying the SPDR Gold Shares (NYSE:GLD) for a few percent if and when equity prices decide to take a little breather and correct in price to the downside for more than a few ticks. (Silver, on the other hand, I find extremely difficult to like for upside at this juncture — at least not until more bullish price action shines through.)
For a little perspective, let us look at a longer-term chart of gold via the SPDR Gold Shares:
The massive run-up in gold peaked with a vertical leap in September 2011 and formed a series of lower highs ever since. What continues to be missing is a lower low, which would confirm a change of trend. Important to understand for these longer trends is that tops are not points, but rather processes that first lead to sideways movements before a more meaningful downtrend can kick in. A lower low would be confirmed on a solid break below $148 on GLD. Thus, I remain bearish on gold over the medium- and longer-term.
To those attracted to perma-bullishness on the flavor/asset of the month, let this longer-term chart of gold also be a reminder that gravity ultimately wins out. Those who didn’t learn from gold surely must have gotten a hint from the latest example: the big selloff in Apple (NASDAQ:AAPL) since last autumn.
Near-term, however, I continue to see upside for gold. While longer-term correlations between stocks and gold are floppy, the short-term inverse correlations during price corrections in stocks is remarkably reliant. Hence my interest in picking up some gold via the SPDR Gold Shares should a correction in stocks be confirmed by price action.
On the closer-up chart of GLD, the level I am watching is $156.75. A daily close above there would move this ETF past its February highs and likely also break the downtrend in place since last October.
Given near-term inverse correlations between stocks and gold, a break above said level is likely to occur on the back of initial price weakness in equities.