The SPDR Gold Shares (NYSEARCA:GLD) exchange-traded fund has certainly been struggling lately. GLD, which tracks the price of gold, has fallen over 3% since the beginning of the month. Much of the weakness was due to the perceived easing in trade tensions with China and the risk-on appetite for stocks. Nothing substantial has actually happened in the trade talks. Unless a deal gets done sometime soon, look for risk to come off and gold to regain some luster.
Gold has served as a proxy lately for progress, or lack of progress, on the U.S.-China trade talks. Invesco’s Chief Global Market Strategist Kristin Hooper noted that gold has weakened on improved trade sentiment. She also noted that the sentiment can change on a dime. GLD is priced as if a trade deal has been reached, which is certainly not the case. Any bumps along the road will send gold higher from here. All it takes is a single tweet.
Hedge funds boosted their short positions by 15% recently to over 30,000 futures contracts. That may seem bearish at first glance. The last time funds were this short was in June, however, which preceded a monster rally in gold. A meaningful move higher will likely lead to a short-covering rally in gold.
Getting Technical With the GLD ETF
GLD is looking oversold from a technical perspective. The nine-day relative strength index reached the 30 area before strengthening. The moving average convergence/divergence is at recent lows. Bollinger Percent B went negative but has since turned positive. The last time these indicators were similarly oversold marked a significant low for gold prices. GLD is also trading at the largest discount to the 20-day moving average over the past year. There is major downside support at $135.
More importantly, GLD had a reversal day yesterday. Shares made a new recent intra-day low at $136.19 before pivoting to close higher on the day at $137.43. This type of reversal pattern is often emblematic of a low being formed. The sellers have finally become exhausted and the buyers have taken control. It is especially powerful after such a sharp selloff and near major support.
Implied volatility in the ETF reached recent lows below the 12 level, as measured by the CBOE Gold Volatility Index (GVZ). Gold’s implied volatility tends to act inversely to implied volatility on stocks, as measured by the CBOE Volatility Index (VIX). It rises on rallying and falls on selling. The last time GVZ was at such low levels was last July, right before GLD broke out big time to the upside. Look for a similar scenario to unfold over the coming weeks.
How to Trade SPDR Gold Shares
Stock traders looking to add gold to their portfolio should be a buyer of GLD on any weakness. A move to fill in the gap at the $141 area would be an initial upside target. A meaningful break of support at the $135 level is a viable stop-out point.
Option traders may want to take advantage of the low levels of implied volatility and buy some comparatively cheap calls. The at-the-money Dec $138 calls cost about $2 per contract, which is less than 1.5% the price of GLD. It won’t take much of an upside move to get these options firmly profitable. Risk is limited to $200 per option. The risk can be further reduced by selling shorter-term, further out-of-the money calls against the long Dec position.
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