Gold ETFs Fail The Volatility Test

Advertisement

In my experience as an investment advisor, gold bullion and other precious metals are often very polarizing asset classes to own.

You either love gold because you’re worried about inflation, currency manipulation and market volatility, or you hate it because you have no idea when it actually works to hedge those themes.

Anyone who has been watching the price of the SPDR Gold Shares ETF (GLD) over the past four years has seen the deflationary pressures this yellow metal has succumbed to.

GLD peaked near $185 back in 2011 and is currently trading near its lowest levels of this bull market at $110. That represents a total decline from peak to present day of 40%.

gold-etfs-gld-4yr

Yet over that time span, GLD has briefly surged during times of turmoil in the markets. While not perfectly correlated, a surge in the CBOE VIX Volatility Index and concomitant drop in the SPDR S&P 500 ETF (SPY) usually brought some buyers to the table in precious metals.

The safety aspect of gold bullion as a hard asset class is something that investors have become accustomed to — particularly when international headlines wreaked havoc on global markets.

More recently, the VIX experienced one of its biggest single-day moves of the decade as worries over a Greece default led to significant broad-based equity selling and options hedging. One would think that this environment is the perfect storm for GLD to surge, given the implications felt throughout the global currency, stock and debt markets.

Yet despite this tumult, gold bullion has continued its march lower and is now poised to test the lows established in late-2014 and early 2015. This support level should be a very key area to watch over the next several days as the precious metals bulls will likely try to make a stand. A break below the $110 level in GLD may attract more sellers that throw in the towel on this once-revered asset class.

gold-etfs-gld-1yr

Another concerning and parallel pattern is the weakness in the iShares Silver Trust (SLV). This ETF tracks the daily price movement of silver bullion and broke through its prior support level on Tuesday with heavy volume.

gold-etfs-slv-1yr

The chart of SLV looks to be carving out the next leg of its current downtrend, which is almost certain unless an immediate reversal takes place. Either way, I advocate caution before jumping in to precious metals to try and call a bottom or capture a rebound.

The Bottom Line

Whether you are a die-hard gold bug or a casual observer of the markets, there is no denying the trend pattern of a deflationary investment. With gold and silver now failing to respond as a “flight to safety” instrument, there is an even greater dearth of fundamental logic to own these asset classes at this time.

From a cyclical standpoint, I know we will eventually see a multi-year resurgence in the precious metals space. My advice is to wait for momentum to build and for greater evidence of a sustainable uptrend to develop before jumping in. In addition, several other sectors of the market may offer a more attractive opportunity for your hard-earned capital.

David Fabian is Managing Partner and Chief Operations Officer of FMD Capital Management.
To get more investor insights from FMD Capital, visit their blog.

Learn More: Why I love ETFs, And You Should Too

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2015/07/gld-gold-etfs-volatility/.

©2024 InvestorPlace Media, LLC