Bulls and Bears Fight Over Gold... The $8,000 Call (GLD, SGOL, GDX, GDXJ)

Gold was supposed to keep eroding, or so its chart was indicating, earlier this week.  But the weakening dollar vs. euro trade coming back and variations of rumors that China was buying that gold that IMF sold or that China was stress testing the Yuan came into play.  We have looked around at the end of the week news commentary and late-week analysis on gold and the madness between bulls and bears only continues to grow.  We still have bearish and cautious calls on one end, and then a crazy $8,000.00 per ounce call on the other end of the spectrum. The two big ETFs we follow for gold are the SPDR Gold Shares (NYSE: GLD) and ETFS Gold Trust ETF (NYSE: SGOL).  We usually shy away from the Market Vectors Gold Miners ETF (NYSE: GDX) and the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ), but there is an interesting performance observation happening here in the larger of the two ETFs.

This weekend in Barron’s there is an article called “Bullish on Bullion” sourcing GoldMoney.com where the company is restating a call of $8,000.00 per ounce in gold.  This is based partly upon global currency weakening rather than real appreciation, but there is one caution here in such a call.  GoldMoney.com is a company that “enables you to hold gold, silver & platinum that is fully insured and stored securely in specialized bullion vaults in Zürich and London. All metal is owned directly by you with no counterparty risk.”  Its website claims over $879 million of gold, silver, platinum, and currencies as of February 26.  Companies which sell you gold can’t ever really be bearish.  They have to either appeal to your fear or to your greed, but they won’t ever say “gold is overvalued and only speculative in nature”or any derivative of that.

Adam Hewison, our affiliate at INO who called for gold to run from $900 late in 2009 to $1,100 and then $1,200 or higher, gave a cautious new audio-video late this week using an interesting and less common technical analysis to explain why gold may have another month of trouble ahead.  Adam gave a call based upon a series of lower lows and lower highs based on the Donchian channels, but if you look at any new chart this seems to possibly not be correct.  It was very short-lived, but the brief failed rally attempt in
mid-February was a higher-high and the low this last week did make a lower-low.  Without trying to get too picky over which exact penny we see resistance, that still holds true at each $0.50 interval.  The “GLD” closed on Friday at $109.43.  The 50-day moving average is $108.41 and that was skipped over late in the week like it was an invisible line.  Shares hit a high of $109.60 on Friday and resistance looks to be right around $110.00 on the GLD.

As far as the SPDR Gold Shares (NYSE: GLD), this weekend Barron’s noted that this is the biggest of the gold entities with around $40 billion in assets, a no-load and 0.4% expense ratio, but at a 1% premium to its net asset value.  The ETFS Physical Gold Trust (NYSE: SGOL) is a newer ETF that has less history and its trading volume is less active, but it has a 0.39% management fee.

Many investors use the gold miner ETFs of Market Vectors Gold Miners ETF (NYSE: GDX) and the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ) for playing the mining side of gold.  We generally prefer to use bullion plays for tracking gold to eliminate the analysis down at the microeconomic level.  There can be too many variables like labor or geopolitical risks, as well as crucial environmental issues, disasters, and accidents which can all create mine shut-downs.  But… After looking at the GDX there may be something developing here regardless of the price of gold.  The GLD ETF tracks almost exactly the price of gold and is down almost 10% from its recent highs.  The GDX ‘miners ETF’ at $43.89 is now off its December highs of $55.40 by more than 20% even after a near-10% bounce in the last month.  The correlation of this pair of major gold ETFs is often odd or tricky: over the last year the GLD is up close to 20% while the GDX is up over 30%.  There is a pairs trade here, but do not just assume that the GDX always outperforms because if you pick different intervals you get very different performances.

Also this week we saw Dennis Gartman on CNBC calling the trend as clearly upward in gold, in Euro price-terms.  And to complicate matters further, CNBC noted late yesterday: “…the author of an article that said China had confirmed it would buy 191.3 tons of gold from the International Monetary Fund, said on Friday she didn’t have official sources for her story.”  Ouch.

After this week, the gold trade looks rather convoluted.

JON C. OGG