GLD: Technicals Vs. Fundamentals
Ah, the age old investor’s dilemma. Should I pay attention to the fundamental drivers or technical signals? The perfect trade comes when both technical and fundamental logic aligns, and an obvious interpretation of both leads to one course of action, but this rarely happens. Far more frequently it seems, one is in conflict with the other and traders and investors must decide which to react to. Gold and its many derivatives, including the SPDR Gold Trust ETF (GLD), are in just such a situation right now; technical indicators are telling you to sell, but the fundamentals point to an inexorable rise in price. Often, the lack of any clear cut picture means that the best course of action is to do nothing. As an old FX trader once told me, square can sometimes be the best position, but, in this case, I believe you can justify acting, even if the picture is a little fuzzy.
The three month chart for GLD above shows the technical position quite clearly. Following the collapse in early April, the ETF seemed to be recovering nicely until the price butted up against the 20 Day exponential moving average (20EMA: red line). After three attempts at the indicator, GLD fell sharply again, then once again failed to breach the 20EMA when some degree of recovery ensued last week. This is not a good sign. Friday’s drop could well be seen as the fifth wave in a classic Elliot Wave pattern (down, up, down, up, DOWN) so that analysis also points to GLD having further to fall.
The fundamentals of gold, and thus GLD, however, tell a different story. Two of the world’s largest economic powers, Japan and the US, seem to be in competition to see who can have the easiest monetary policy. QE in both counties is pumping a combined $170 Billion a month into the global economy and both have a Zero Interest Rate Policy in place. With growth slowing in even the powerhouse German economy and the ECB predicting negative GDP growth in the Eurozone for 2013, many are beginning to ask how long it will be before Europe joins the party. The world, it seems, will soon be awash with cash. Unlike Euros, Dollars or Yen, the amount of gold on Earth is finite, so it seems reasonable to expect the yellow metal to appreciate over the coming years. We know that QE must come to an end at some point. Bernanke hinted at that recently, but it will likely come as a reaction to renewed inflationary pressure, another positive for gold and commodities in general.
As usual, part of the answer to the dilemma is based on your time horizon. Generally, technicals are better short term indicators and fundamentals win over the long term. In this case, then, it would seem that GLD is a long term buy, but the question of timing remains. This is where twenty years in the FX market gives me a different perspective. When I think about timing, I focus not on where I will enter a position, but rather where I will exit. The proximity of a logical level to cut a position is far more important to me than trying to buy at the bottom. It’s not that I haven’t tried to hit tops and bottoms; it’s just that, like anybody who has ever traded, I have been spectacularly unsuccessful at it.
With that in mind, look again at the GLD chart. As you can see, while lower highs have been the norm in this pattern, lower lows have not. The 131.00 level has held firm during both drops. This sets up the opportunity to buy at current levels, around 134, in a risk controlled manner with a stop-loss set for a clean break of the low at say, 126, limiting potential losses to around 6%.
When technical signals are in conflict with fundamental signals, there are three options. You can follow one or the other or you can do nothing. Sometimes, shifting your focus from where you enter a position to where you can exit reduces the noise and makes the choice clear. In the case of GLD at these levels, the long term potential seems to outweigh the short term risk.