To say the last three months have been bullish for gold would be quite the understatement. The SPDR Gold Trust ETF (GLD) is up a hefty 21% since its mid-December low, and though some would argue it’s ready to take a breather, a new stimulus package from the European Central Bank unveiled on Thursday sent the Euro higher, the U.S. dollar lower, and as a result, the gold rally was given new life before it had a chance to pause … let alone retreat.
But can anything truly stave off the profit-takers following what’s been the best uninterrupted rally for gold and GLD in over two years? As is usually the case, it depends.
What a Ride for GLD!
The $64,000 question: What in the world sparks a 21% rally in gold prices right before they fall off the edge of a cliff?
Answer: An assumption that inflation is finally around the corner, which is ultimately an extension of the assumption that the U.S. dollar is finally ready to roll over.
Neither of them really happened in a big way, mind you, until (ironically) yesterday when ECB President Mario Draghi unveiled a substantial stimulus package for the Eurozone. Bank deposit rates in most of Europe are now even more negative, the continent’s benchmark interest rate is — literally — zero, and the central bank has put a major bond repurchase program in place that will include the purchase of corporate bonds.
It’s surprising the Euro didn’t soar further, sending the U.S. dollar even lower than it did. As the daily chart below shows, both the SPDR Gold Trust ETF and the U.S. Dollar Index are partially unwinding yesterday’s big moves. The impact has already been made, however, especially on the dollar, in that it was pulled below all of its key moving average lines, and is back within reach of a significant support level.
The weekly version of the gold/dollar chart puts the recent action in perspective. Namely, it’s worth noting that the recent rally from GLD, and gold prices in general, has snapped the fund out of a bearish rut.
It’s also clear the greenback has stagnated since early last year, while the past three months have been bearish ones within the confines of the U.S. dollar’s trading range.
Other contributing factors have helped push the GLD rally along, but they’re all ultimately rooted in the dollar’s weakness.
Where to From Here for Gold?
It’s a bit counterintuitive, in light of what drives the dollar. The prospect of rate hikes in the United States — even against a backdrop of falling interest rates in Europe — is real, and even likely. This should, in theory, serve as a bullish platform for the U.S. dollar and by extension apply bearish pressure to gold prices. So why does it look like the opposite is one bad day away from happening?
In simplest terms, the relationship between interest rates and currency values has never been as tight as touted, and may be patently backwards in our current situation.
It’s also likely that speculation of higher interests was already built into the dollar’s value in 2014 and early 2015 … about a year to two years early. Gold prices have yet to reflect that move from the U.S. dollar, though they certainly seem intent to catch up now.
With so much more catch-up work to be done, however, it’s conceivable that the SPDR Gold Trust and gold futures (as well as gold miners) could continue to rise even if the greenback doesn’t break under a major floor at 95.50.
And if the 95.50 level should fail to hold up as a floor, it will only fan the bullish flames for gold prices.
As for the lines in the sand, although it’s unlikely it will make a beeline there if it makes it there at all (in that it’s already ripe for a small pullback), there’s a key Fibonacci retracement line waiting at $132.88. That’s also where the fund peaked in early 2014, underscoring the importance of that line now. The equivalent line in the sand for gold futures is $1384.
Bottom Line for Gold
The usual caveats apply, of course. Those are, anything can and may still happen, and don’t expect anything to unfurl the way it statistically should or historically has.
Nevertheless, with rising rates unlikely to prod the dollar much (if any) higher — a U.S. dollar that’s already teetering on the edge of a technical collapse — and gold already out of its bearish confines, the risk/reward ratio now decidedly favors gold and GLD.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
