GLD: The Long View

When we are looking at the history of the financial markets, it can be argued that no single asset shines more brightly than gold. But these truly long-term trends have waned in recent months, and investors have started to wonder about whether sustainable rallies are possible over the next 12 months. Geopolitical uncertainties have shown stabilization over the last few months and for GLD this type of economic context has translated to a sideways trading range that ultimately indicates indecision. But these types of short-term trading scenarios can miss the bigger picture in terms of where precious metals assets are typically valued in the broader market context. Ultimately, this ‘bigger picture’ suggests that assets like GLD are actually undervalued and that price levels will more than likely be higher at this same time next year. This supports the bullish case for GLD as long as it holds above the 100.60 level.

Source: Atlanta Gold and Coin

If you are a GLD investor and you read the regular market news headlines, the outlook probably looks fairly dismal. The ETF is down roughly 37% from the September 2011 highs and market activity has slowed to a near halt over the last few years. Recent ranges in GLD have defined themselves at 131.20 and 107.50 as the upper and lower bounds. This does suggest that the first level to break amongst these two options will give us the direction of the bigger trend that should be unfolding over the next 1-5 years, as the key will likely lie in the trend seen after this prolonged period of indecision.

So if we are looking at the potential drivers that could fuel gains in GLD, we first must look at the true macro drivers that guide these markets. Gold assets are non-yielding assets, and this is why they tend to perform best in low-interest rate environments. But if you look at most of the public commentaries released by the Federal Reserve over the last year, it might look as though interest rates are about to start moving drastically higher. These are relative terms, however, and when we look at the average interest rate levels that have been in place over the last several decades, it quickly becomes clear that even with a few additional interest rate increases by the Fed, we will still be at very low levels in the US.

“Historically low interest rate levels can create incentives for investors to increase exposure in precious metals assets,” said Tony Davis, gold markets analyst at Atlanta Gold & Coin. “Dovish monetary policy from the Fed has been one of the main drivers in the rallies that have been posted gold and silver over the last several decades.”

With this in mind, we can see that the long-term interest rate outlook in the chart above remains supportive for the long-term outlook in assets like GLD. Lower prices in oil will likely keep a lid on consumer inflation and this is typically cited as the central concern any time the Federal Reserve is ready to raise interest rates. Even with the improvements made in the US economic recovery, we have still only seen tepid increases in the prices paid by consumers and if we see the Fed alter the rate outlook because of these trends, GLD would likely be one of the primary beneficiaries. All combined, this supports bulls over bears when we are looking at the longer-term potential in GLD

Relative to the highs posted in the ETF in 2011, we have only made a 38.2% Fibonacci retracement of the total decline. This means that the scope for extension is still quite broad even if we do see further declines in the next few months. From current levels, a simple 61.8% Fibonacci retracement would equate to rallies of more than 32%, so if the fundamental picture shifts in favor of lower interest rate expectations we will see clear scope for gains. Readings in the Commodity Channel Index suggest that GLD has reached overextended levels to the downside and a break of resistance at 130.30 would mean that the downtrend line from the 2011 highs would actually be invalidated. This, ultimately, would suggest an end to the current sideways period and the beginning of a new bull move that should see multi-year extensions

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.