Although gold and gold-based exchange-traded funds like the SPDR Gold Trust ETF ( GLD ) and the Direxion Daily Gold Miners Bull Trust ( NUGT ) got the new year started on a (very) bullish foot, the rally came to a screeching halt in early March. Even with today's lift in the value of GLD, the fund is still below its March peak.
Not making any gains, however, isn't the same as gold prices giving up ground, and it's possible all those bulls are just taking a break before plowing back into gold again and sending gold prices to higher highs.
The question is, how will we know when gold is over the hump and back on a bullish path?
Why GLD Can't Get Over the Hump
Just for the sake of simplicity we'll use the SPDR Gold Trust ETF as our proxy for gold prices. As for trading it, though, the aforementioned Direxion Daily Gold Miners Bull Trust, the Market Vectors Gold Miners ETF ( GDX ), or one of the other many gold funds out there would work … just pick your most appropriate poison.
Click to Enlarge Whatever the case, the adjacent GLD chart isn't tough to interpret: After rallying 21% from mid-December to early March, gold prices hit a headwind and have been range-bound ever since.
One would think the U.S. dollar - the biggest short-term driver of gold prices - would inversely reflect that move, meaning the greenback fell precipitously in January and February, but that pullback cooled in March and April thus far. One would be wrong, however.
The fact of the matter is, the U.S. Dollar Index has continued to fall at the same steady pace of decline that was established in early December by that back-breaking plunge on Dec. 3. The dollar has tried to rebound a few times since then to no avail. It was just ready to finally take a turn for the worst.
It's the dollar's chart, in fact, that may well hold the key to near-term future for GLD and other gold-based trading instruments.
Click to Enlarge While the greenback has downward momentum (more than we've seen in years), it clearly has a major floor in the way as well. Indeed, the U.S. Dollar Index has a whole zone of support in front of it, from 93.20 to 94. The upper edge of that floor has already done a solid job of stopping the bleeding.
Ergo, the short-term outlook is simple enough - GLD will struggle to move any higher until the U.S. Dollar Index moves any lower.
While the U.S. dollar dictates where gold prices move in the near term, for the long haul, the ebb and flow of the U.S. dollar is a reflection of some of gold's bigger fundamental forces. Namely, we're talking about inflation and actual demand for the metal.
On the demand front, gold dealer and research provider BullionVault may have the best bead on the numbers, comparing real buying with real selling of the precious metal. As of March, the Gold Investor Index reached 53.8, matching November's reading after logging a third higher low since the late-2014 low reading near 50.5. Anything above 50 is technically net-bullish, but the sheer shape of this chart (its broad upward push, to be specific) also indicates real demand continues to grow.
Click to Enlarge The other key dimension of gold prices - inflation - is also pointing toward higher gold prices.
One of the core reasons investors own gold is as a hedge against inflation; it tends to increase in value as inflation rates swell. That's largely the reason gold prices and the values of ETFs like NUGT and GLD soared between 2008 and 2011 - uber-low interest rates were supposed to set up rampant price increases.
When by 2012 it became clear it just wasn't going to happen, the long, painful unwinding of those gold trades began.
Well, real inflation may finally be upon us.
As of the latest look, the annualized consumer inflation rate stands at 0.85% . Stripping the effects of cheap oil out of the equation, though, the inflation rate moves up to 2.2%, topping the Fed's target rate of 2%.
Click to Enlarge That's still palatable, but perhaps not for long.
We've already seen oil prices lift slightly on the dollar's modest demise. But if the U.S. Dollar Index does end up breaking below the aforementioned support level and starts a chain-reaction selloff, oil prices will surge.
This would spur overall inflation upward in a hurry, as the phase of dirt-cheap gasoline prices finally comes to a close in a big way.
Bottom Line for Gold Prices
While gold's got some work to do to get out of its rut, the tide is pushing in a generally bullish direction. Inflation is in the making, demand for physical gold is strengthening and, sooner or later, the greenback will make a major move lower.
As for an upside target for GLD, with no other meaningful ceiling in place, the Fibonacci retracement line at $132.80 is the first best possibility. For gold futures, that's $1384/ounce. If that one fails to contain the rally effort, the next plausible target is the next Fibonacci line at $153.00, or $1597/ounce for gold itself. First things first, however.
Click to Enlarge
Just know it's unlikely gold would get to either target in a straight line.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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