GLD: A Dog that's Defensive
Summary:
● A brief history of the use of Gold
● Gold’s relationship with inflation
● Analysis of GLD stock
As sad as I am to say this, (GLD), is up for a buy for the first time in a very long time. Although I anticipated this a few weeks ago, it's a difficult reality to adjust to, as the index is notoriously known for not being a great portfolio asset. Inflation-adjusted, gold has merely kept pace with most durable goods, dating back to Roman times.
Gold's tendency to hold strong value over long periods has given it a name amongst investors as an "inflation hedge". Historically, whenever there is a rise in inflation, there is a devaluation of fiat currencies, which simultaneously leads to an increase in the value of gold as investors seek to protect their wealth from the eroding dollar.
Gold is seen as a defense against inflation, as its value does not depend on the performance of any particular economy or government. Limited in nature, unlike fiat currency, which can be printed in unlimited quantities, gold is seen as a hard currency and a valuable commodity.
However, its relationship with inflation has proven to be complex and hasn’t completely been a straight-line, but rather weaves variations over the years. The strong performance of gold during the high inflation years between 1970 and early 1980 confirms its strong potential value in periods of rapid price rises. But what has remained unclear is how gold might fare in a period of prolonged price stability or deflation. This is because a stagflation economy is like a total solar eclipse, very rare.
Although gold might be presenting itself as an anchor in the current raging tides of inflation it is important to put into consideration past data. According to reports, gold investors lost on average 10% between 1980 to 1984 when the annual inflation rate was about 6.5% (Source: CNBC). The precious metal also yielded a negative return of 7.6% from 1988 to 1991 when inflation was about 4.6%. However, 1973 to 1979 proved to be good times for gold investors as gold returned an impressive 35% when the annual inflation rate averaged at around 8.8%.
It is undeniable that there has always been a relationship between gold and inflation but while evidence suggests that to be so, it hasn't been a rosy one. Gold is quite the fickle lady.
Let’s talk analysis
Looking at the monthly charts, the reason I have not been big on gold is that it hit the granddaddy of double tops and then a horn top between August 2020 and March 2022 which was concurrent to the 2011 August-September double top thereby creating just enough of a fake out to get investors to buy at the different tops of the wicks and ultimately creating a third top across the charts.
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Drawing a Fibonacci retracement from the Brexit sell-off in 2015 to the most recent highs of March 2022, we can see what equates to a double top. But here comes a major question: Is it a double top of a double top leading to a continued crash? From a pros-cons case, I would say no.
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Illustrated is a 22% drawdown from peak to trough synonymous with low volatility movement stocks. This can be confirmed by the historic volatility percentage of GLD at 14.08% which is less than half when compared to regular stocks such as Amazon and its likes. To further expatiate this, when a regular stock is sold off at 40% in this manner, a sell-off of 20% on a low volatility index such as GLD is the equivalent of a sell-off necessary for a bottoming pattern. So, I believe it has bottomed.
So are we about to get to a stock sell-off like in 2018 or is this the beginning of a recovery where it will continue to go down?
I would suggest that what we have is the absence of any newly defined downtrend. Rather, we have what looks to be a softening into the moving averages where everything is firming up before its next leg higher.
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Looking at the indicators on the monthly charts, it just turned to a buy in the zone analysis, which was a huge indicator during the 2018 stock sell-off as it stayed strong for a long time causing GLD to be considered a safe investment over two years even through the Covid-19 lockdown and the recovery phase of the stock market.
Although it’s broken below its moving averages on the weekly, I feel it’s more of a fake out because of the presence of a 3-month bottoming pattern where it just reclaimed all three moving averages and started closing higher.
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On the weekly charts, it has recently pulled back in line on its moving average thereby creating double-bottom support after a 7% retreat from its recent February high. This strongly suggests a 14% upside to the Jan 2022 highs and a good safe hedge investment for investors.
It completely played out the formation of a green shoot, the RSI is not showing as overbought which means that it has plenty of room to continue its run. It has already recovered 15% and is likely to go up to $193. This is my price target on GLD which during the stock sell-off, it will rally up to its previous high and create a triple top and reject down.
Although, technicians might say that it made a previous low from the previous low and a previous high from the previous high, therefore, indicating it would make a lower high, just to obscure the skeptics, I am putting my 12 month price target at $190.
On a short-term basis, I think GLD will run up to my stated price, stabilize, and then remain a safe short term investment. There is ability for renewed optimism, it has stayed performing as an buy indicator as soon as it stabilized on a green shoot, leading to a fresh uptrend change on the weekly chart.
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We have a three-falling valley pattern with a crescendo down and currently forming its upward ascent which is also confirmed by a solid bottom.
So, when you look at all the technical indicators,
It's in line with its moving averages across the weekly and monthly charts
Strong zone indicators across all three charts,
It has reclaimed key Fibonacci support levels on all charts and
It has what looks to be a longer-term uptrend and that's why gold bugs are believing that solid gold could get to $4000/oz as this in this very raggedy, soggy, and sour equities market.
I have a GLD trading range of $160 to $190.50 over the next 12 months with this asset, thereby forming a strong defensive play for the upcoming credit events that will be happening in 2023.
Current uncertainty surrounding the equities market and proposed interest rate hikes makes gold one of the few things you can invest in at this point, whether it's to tuck away capital or to make an aggressive move with it.
How many Central Banks have been acquiring gold this year?
Central Banks across different nations have acquired more gold within the past year than has ever been recorded since 1967. The demand for gold has soared by 28% year on year, leading to an acquisition of over 1,181 tons of reserves, according to reports from the World Gold Council (WGC).
Although banks are stating that the buying spree is a result of an attempt to diversify assets, it’s easy to link this to the resultant effects of inflation, and they clearly look like the cookie monster with crumbs all over their face as we walk into the room and ask them what they’re doing.
There’s some serious Central Bank gluttony by these stuffed suits for this gold dust. An intervention may be needed....oh yeah…..they just had one last weekend. Maybe now they’ll stop mainlining gold and start fixing the banking system which is filled with ranker.
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In a sell-off situation, gold has notoriously proven to be a much better option in terms of max drawdowns. GLD is just down 3.6% for the year in comparison to Papa Powell sweeping the leg of the S&P and Nasdaq which is down 21.5% and 15.14% respectively.
The financial sector is a mess, manufacturing is making feeble attempts to get off its knee, and our best and brightest are gearing up for an all-terrain hike like we’ve never experienced. The talented will seize control of broken areas within our economy and I myself am excited at the notion of competing on the world stage. I know there’s a strong group of business owners and talented businessmen like myself that have been in the lab working on our game, quietly developing our craft, and are going to ask for the ball when the game starts.
In closing, while we all sort out the currrent mess, roll up our sleeves, and put in the hard work, then I would suggest everyone who can’t join us should safeguard yourself as the precious metal is a solid buy, a defensive play, and a way to safeguard your money in a short time horizon. It’s not anything that I would want to hold for a multi-year investment but it is something that for the next 3-12 months I see as a solid play for the defense from the barrage of strikes that are starting to take shape within the economy. So put down the lucky charms and go pick up a few GLD shares, you have my blessing.