1/ Gold Trending Lower
2/ Dollar Up Metals Down
3/ Bullish Metal Miners
4/ Winning the Downward Trend
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1/ Gold Trending Lower
If you hadn’t read yesterday’s Chart Advisor then like so many other investors you might think that inflation in the U.S. was running high and getting higher. If it were, then Gold might be a good investment right now because you’d expect it to continue rising in price.
But the likelihood that the Consumer Price Index (CPI) report on Wednesday, or the Producer Price Index (PPI) on Thursday, will show continuing inflation is low. At least that’s what market participants seem to be telegraphing in the following chart that looks at the price trends on State Street’s SPDR Gold Trust ETF (GLD) during the past year.
As long as inflation was on the rise, or as long as investors expected it to stay strong, the price of gold was trending higher. But June brought a new dynamic to the price of gold as GLD broke its upward trend and began a series of lower highs and lower lows.
This downward trend could change quickly if the inflation data presented this week makes a drastic turn from its current trajectory. But if it does not, then the price of gold could suffer a continued downtrend taking it back to its old lows. Considering the current environment, it seems a risky investment at best.
2/ Dollar Up Metals Down
Perhaps the biggest reason that gold prices seem to be trending lower is the price dynamic behind the U.S. dollar index (DXY), and the mathematical relationship behind gold and the greenback.
The next chart demonstrates how this relationship expands to other precious metals like silver. The chart compares iShares’ Silver Trust (SLV) with GLD and DXY.
The last twelve months show a clearly negative correlation between the metals and the dollar. This relationship happens because gold and silver are often priced in dollars. That means that the more valuable the dollar becomes, the more it buys and therefore lower prices buy the same amount of the commodities. If the value of the dollar is falling, then the prices of the commodities naturally rise.
This relationship can become disrupted if the market is unhealthy and experiences stress or unusual conditions. The fact that this relationship has been so persistent over the last year speaks to the fact that markets are actually in a healthy state right now–even though it might not seem that way.
3/ Bullish Metal Miners
Now if the U.S. dollar reverses course, or the price of gold starts an upward trend, the stocks that will likely benefit the most would be the companies of gold and silver miners. The chart below compares GLD with VanEck’s Gold Miners ETF (GDX) and several of the fund’s largest holdings including: Newmont mining (NEM), Barrick Gold (GOLD), El Dorado Gold (EGO), and Freeport McMoran (FCX).
None of these stocks have had impressive gains over the past year, though FCX looks slightly better than its peers in this chart. Now is probably not the time to go shopping for bargains among this group. However, all that could change rapidly if the signs of inflation lead the Federal Open Market Committee (FOMC) to telegraph continuing rate hikes after their September 19th meetings.
4/ Winning the Downward Trend
The long and the short of this topic is that gold prices look weak. Investors probably want to stay clear for a bit, but traders might find the opportunity to make quick profits from strategic, short-term trades that benefit from a fall in prices. This can be accomplished by establishing a short-selling trade using shares of GLD or gold futures contracts.
For the less experienced but still adventurous trader, it can also be done using MicroSectors Gold Miners -3X Inverse Leveraged ETN (GDXD). The following chart compares GLD and GDXD to help you visualize the negative correlation between the two.
GDXD tracks a triple leveraged equation of an index that is inversely related to gold prices. That means that when gold prices drop by 1% within a day, GDXD will rise by 3% in the same day. A simple 10% fall in gold prices could produce a 30% price jump for GDXD.
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Originally posted 12th September 2023
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