In our update last week, we suggested that there was downside risk for the SPDR Gold Trust ETF (NYSEARCA:GLD) due to the pending FOMC meeting. We followed up that article with an analysis of gold price action following Federal Reserve announcements. In this second article, we wrote:
The Fed went beyond our expectations and published a plan to reduce its balance sheet holdings. The market viewed this as bearish, and gold was sold off during Janet Yellen’s press conference. The puts that we purchased on GLD became our most profitable trade of the year.
While the dust may have settled following this week’s sell-off, we are flat GLD heading into next week. We will be watching different signals to see whether the current (short-term) downtrends will continue, and will update our Premium subscribers on any positions that we take. Next week for GLD, we are currently more inclined to re-initiate a short position than a long position. Here is our current summary view. We update our summary view each day for our Premium subscribers.
In our weekly outlook, we show the weekly chart for big picture support and resistance areas. GLD finished the week below its 50-week moving average, and has support levels at 118 (from a December 2016 upward support line) and a solid horizontal support at 116 near the 100-week moving average. It could easily find a bottom here, although 118 might be a better long entry point. If GLD falls convincingly below 116, then bulls will want to find support at the 114 price level.
To the upside, any break above 121 will want to target 124. We would expect heavy resistance at the 124 price level, which corresponds roughly to the $1,300 level in gold futures.
Precious Metal COT Report
Our reasons for caution last week were based in part on the commitment of traders (“COT”) report, which had seen three very large increases in hedge fund buying and commercial shorting. This week, we see some reductions in both categories; however, we still view some potential negative pressure for gold and GLD for the upcoming week at these levels.
Our focus on the net short position of the commercial banks is a “game theory” analysis that has been predictive in the past. To quickly summarize, the commercial banks create new “paper” precious metals to satisfy demand. When the net commercial short interest peaks, it has very regularly preceded sharp sell-offs in the price of gold and silver. We wrote a background article on this entitled “Alchemists (Finally) Create Gold,” and we have written weekly updates that used this game theory to predict a sell-off.
The chart below shows the GLD ETF graphed together with the net commercial short position. It is possible that there is some energy left in this downward price move.
Safe Havens and Alternatives
The chart below shows that the real interest rates have recently spiked, which has corresponded with a decline in gold prices. In addition, the USDJPY currency pair has risen (a rising USDJPY means gold is strengthening versus the yen). One can see the obvious correlation between gold, real interest rates and the dollar-yen currency pair. While we don’t believe this chart predicts a nearby fall in gold prices, it does look a little ominous. Gold bulls will definitely want to see some deterioration in real rates and the USDJPY in the week ahead.
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Note: All charts were created on the TradingView website, and the tables were created by Viking Analytics if not otherwise credited.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in GLD over 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.