Earlier this week, we talked about the drop in gold as shares of the SPDR Gold Shares (GLD) dropped nearly 3% in one day. A drop like that hasn’t happened since 2016 and it got the media’s attention.
Within hours of the decline, I was seeing headlines about how “Gold’s Run Has Ended” and that the one day drop in gold was “The Beginning of the End for Gold.”
That’s exactly what I wanted to see.
My research approach involves analyzing three components of any trade, whether it’s on the market, a stock, or a commodity (like gold).
Here’s a quick education for you. Write it down, it will improve your results as an investor. Here’s the ideal bullish case…
- Fundamentals: I need to see a positive fundamental driver. I’m looking for good earnings, revenue, etc… if I’m researching a stock. In the case of gold, I want to see fundamental drivers like inflation, economic risks… you know, all the things that make us want to protect our assets.
- Technicals: So many investors make the mistake of not using basic technical analysis as part of their research, and they’re missing more than half the driver pf prices in modern markets. For the technical component of my analysis, I look at the short and long-term trends. “The trend is your friend” is what I’m looking to confirm or deny.
- Sentiment: This is where my approach becomes unique. I gauge the market’s sentiment for whatever I’m considering as a trade or investment. Here’s where it takes a twist, I use a contrarian approach on this research component. Follow along below…
Let’s apply this to gold right now.
Fundamentals - BULLISH: The fundamentals for gold remain bullish. Inflation, geopolitical risks, political risks in the U.S., the possibility for stagflation and more. On top of that, we’re still seeing outrageous demand from a myriad of the world’s central banks for many of the same reasons.
Keep in mind that gold’s best historical run came in the 1970s and 80s as the economy hit a period of stagflation.
Technicals – BULLISH: Here’s your chart of the GLD shares. The ETF is currently trading 13% higher year-to-date compared to the Nasdaq 100, which is up 66% for the same period.
GLD shares moved into a long-term bull market trend in December of 2022 and haven’t looked back.
The short- and intermediate-term trends for GLD shares remain bullish as they trade above both trendlines, each of which are trending higher.
The recent 3% pullback brought the shares to their 20-day moving average, which immediately provided support for the trend.
Sentiment – BULLISH: While many investors have jumped on board the gold trend, there are still a lot of bears out there. This week’s instant reaction from a few analysts was exactly what I wanted to see. The negative articles and headlines indicate that there is still an enclave of bears holding out on the bullish trend in gold. Headlines that exclaimed “Buy the dip” or “Gold is never going down” would be a sign that the market has become too optimistic on Gold, a warning sign that you’re in a crowded trade.
Keep in mind that a “crowded trade” isn’t bad until the fundamental and technical drivers start to weaken, that’s when things get dangerous. Gold is far from that point.
Bottom Line
We’re seeing gold stabilize after its one-day drop. The volume on the GLD shares is relatively light, telling us that the market is still feeling a little tepid about buying this dip, which is OK. This is a long-term trade that still has more than 25% upside before the elections in November.
Here’s how I trade that trend.
For the beginners, consider the GLD as an easy alternative to running out to the Costco and buying gold coins. I’ll explain later why I prefer this method.
Those that have an education in options trading may want to consider long-term call option contracts on the GLD.
Full disclosure, I’ve owned January 2025 calls on GLD for some time to take advantage of the current trend. The benefits of this approach include the ability to leverage the returns of GLD beyond that 25% I mentioned above.
About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.