The SPDR Gold Trust (GLD) is easily the largest exchange-traded fund that is backed by gold or any other gold-related asset (like a mining stock). In early trading today, the fund is up 0.75%, but the technical analysts who follow the trends are especially bullish on the ETF.
While it’s undeniable that physical gold is the truest way to hedge against inflation and market instability, using the gold ETFs as a proxy for the gold price can be useful for investors of all sizes. Actually buying into these funds is really only for investors whose portfolios are so massive that the amount of gold they must allocate would rack up enormous storage fees. For everyone else, you can stick to the real thing while paying attention to GLD and other ETFs for buying signals, trends, and timing indications.
Hedging Against Stocks
Providing a safety net or insurance against falling stock markets is always one of the main appeals of gold. According to investment research conduct by Seeking Alpha, this year gold has exhibited an inverse 3-to-1 relationship with the stock markets (using the S&P 500 as a benchmark). This means that for every 1% drop on the S&P 500, gold has risen 3%.
While gold is usually inversely correlated with equities, the 3:1 ratio has many interesting properties. First, it means that the gold price is responding strongly when stocks post losses. This would allow an investor to invest just $1 in gold per every $3 they had tied up in the S&P 500 in order to counteract all of their losses on these stocks. On the other end, this is not a two-way relationship: when the stock market rallies, gold usually falls, but not by nearly as big of a margin.
Moreover, the expectation that the economic situation is too weak for the Fed to raise rates is also adding to the attractiveness of gold and funds like GLD. If rates remain low and yet the stock markets are falling, there’s even more reason to hold gold.
The writing seems to be on the wall: gold ETFs have seen net inflows for 10 straight days, according to Commerzbank, while long positions on gold futures have climbed for 7 straight weeks.
Experts at Nasdaq have pointed out that this lack of a significant downturn in the gold price in spite of last week’s exuberant rebound for U.S. stocks is a particularly strong indicator: “Such conviction from gold buyers is about as bullish as it gets for the gold price, the SPDR Gold Trust (ETF) (GLD) and gold mining stocks for that matter.”
The authors mention a pennant formation in the technical charts. What the hell is a pennant pattern? you’re probably wondering. It basically means that the daily lows for the gold price have been converging with the general price trend during a period of sideways (flat) trading. Although this is only an indicator, it usually signals the price will break higher for the asset in question (like the image to the right). This pattern has been seen in the gold price lately, so many analysts are suggesting that another rally is just around the corner.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.