Even with its recent stumble, famous investors like John Paulson and George Soros continue to increase their holdings in the GLD (Dec. 31 closing price: $162.01), the SPDR Gold ETF. Investment management firm Paulson & Co. has a $3 billion+ bet that gold (Jan. 01 10:41pm: $1677.60) shoots through $2000 in 2013, while Soros Fund Management has increased their holdings by nearly 50%. Analysts at the major investment banks have also jumped on the party-wagon, where many have set price targets ranging from $2000 to $4000, with the most ridiculous sitting at $40,000. What they fail to realize is that if gold can’t rally in an environment where central banks are flooding the market with liquidity, what scenario are they waiting for to justify their targets?
Gold has rallied for four years without a major correction (previous one was during the recession). While it is bullish to consolidate after a long bull market, I find it hard to believe that it can sustain another major rally without a notable pullback (30%-40%).
Every bull market eventually stalls. Either the underline fundamentals shift or the market is so saturated with investors already holding the security, that buying interest eventually evaporates (reversal timeframe could vary from weeks to months). Even Apple, which has rallied more than 800% since the recession, has had a 29% correction. Or silver, which corrected 33% in 2011, after rallying nearly 500% from 2009 to 2011. While the fundamentals appear favorable for gold, adding any new positions at current levels should be done with caution.
The GLD recently fell through support (around $162.30) on large volume and had been also trading below its 200 day moving average for over a week. If you’re not already in, wait for a higher high and then add on a pullback. The absolute safest level to establish a position would be around $148-$150 (if you’re patient enough), where bulls are most likely to step in.
While oversold in short term , there is a good possibility that the GLD trades down to the $150 area in 2013, as investors shift to stocks (95% of the major investment banks are extremely optimistic for 2013). Central banks have increased their efforts to stabilize the markets and ‘stimulate growth’. Why would an investor go overweight gold when stocks have recently been the asset that have largely benefitted from their actions? While the Fed has done little to expand its balance sheet in 2012 (that is until QE3 began) gold managed to finish up 6.5% in 2012, while the S&P did double that. If you continue to believe that central banks will keep printing their way to growth, I would argue that exposure to equities is more rational than being overweight gold. Only when earnings growth reverses does that argument get thrown out, where you would then do the reverse.
So what are all those doomsayers shouting about? If the Federal Reserve were to continue to purchase $85 billion in assets every month, their balance sheet would reach astronomical heights by this time next year. Doomsayers believe that the crusade to dissolve the US dollar will eventually cause the currency to collapse and consequently spawn hyper-inflation. However, hoarders of gold (and the GLD) should step back for a second and think about what you would do with gold if fiat currencies ever went out of style. Wouldn’t owning canned/dried food, firearms/ammo and tools make more sense in a chaotic world without paper money?
Getting back to the technicals, my advice is be patient. Wait for gold to break out of its downtrend before jumping in on a pullback. I’d rather be a little late to the party than get in early and wake up one morning and find the GLD down on heavy volume.
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By Antony Filippo (Vconomics)