The one bastion during the recent market tumult has been SPDR Gold Trust ETF (GLD), which tracks the prices of physical gold. After a monumental rally that has carried GLD to new recent highs, yesterday’s price action points to a short-term top in gold.
From a technical standpoint, the gold ETF is getting overbought on a nine-day RSI basis, with a reading above 70. Past instances with similar overbought readings have proven to be a reliable harbinger of a short-term top in GLD.
Yesterday’s price action also indicated the rally may be getting tired, as GLD rallied to make a new high at $127.04, only to pull back and close relatively unchanged on the day. This is a doji pattern in candlestick charting, and many times signifies a trend reversal in the underlying security.
The doji pattern is more meaningful following a strong rally like the one recently evident in gold.
Gold is also diverging from the normal inverse relationship to the U.S. dollar. As the chart shows, GLD and the dollar usually move in a reliably inverse fashion, with dollar strength being a negative for the ETF.
That normal inverse relationship has broken down considerably post-Brexit, with both gold and the dollar strengthening significantly over the past several days. This dollar strength will ultimately provide a headwind for any future short term appreciation in the price of GLD.
Speculation in the gold futures market has also reached an extreme level, with the August basis spiking to new highs. The gold basis is a measure of the futures prices versus the spot price, with futures prices now trading well above the normal carry cost. This is yet another overhang for further appreciation in gold prices.
While the longer-term outlook for gold is most certainly predicated on big macro events, the short-term rally appears to have gotten a little too out of hand. Certainly a pullback to the $124 support level would not be unwarranted.
GLD Stock Trade Idea
Buy GLD July 15 $124 put and sell the GLD July 1 $124 put for a 95-cent net debit.
The maximum risk on the trade is $73 per spread with the maximum gain achieved if GLD is near the $124 level on July 1 expiration.
Make sure to close out the trade by this Friday if GLD is below $124 to avoid any option assignment risk.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
