The fundamentals of gold are simple. Historically, people have considered gold as a good store of value.
Whether its inflation, market gyrations, geopolitical tensions, or anything else that makes investors question the value of their worth, gold has been the place to “park” your assets until the storm passes.
As I type this, the market – and the world – seem to be facing the entire list that I just rattled off and more. And things aren’t going to calm down anytime soon.
Inflation: This morning’s consumer price index (CPI) report hinted that prices are still settling down, but we’re far from the Federal Reserve’s target of 2%.
As a matter of fact, many economists are almost writing off the Fed’s target, saying that it’s an unattainable goal, at least for now. The bottom line is that inflation is very much still on the table and the smallest sign that prices are ready to rise again will fan the flames of gold’s rally.
Geopolitical: This morning’s headlines included reports that Russia has amassed 500,000 troops on the border of Ukraine. Europe is preparing for World War Three. War in the Middle East.
I don’t have to go on. We all know the risks here.
Historically, the market has been able to adapt to geopolitical concerns relatively quickly, but current world issues are starting to make investors feel like the geopolitical pressure cooker is about to break a seal.
The Elections: We’re just under six months away from the November 5 general elections… and things are only getting started.
Not to get too nostalgic on you, but back in the day, people looked forward to Election Day. There was excitement in the air, the potential for a fresh perspective and new opportunities.
Today’s pre-election buzz is all about preparation for the unrest. Who’s got their “finger on the scale,” and “how are we going to handle the fallout?”
The markets have proven before that they can remain resilient over the long haul, but short-term uncertainty almost always rocks stocks. Another fundamental drive of gold’s price.
I’ve not gotten into the fact that all the world’s central banks have been hoarding gold for more than a year. This is the almost unspoken story that has supplied a consistent “bid” for gold.
Is this a crowded trade yet? That’s the question that I am always trying to answer when looking at market sentiment for anything.
The answer right now for gold is “no.”
While gold has become more popular over the last year, there are still signs that the crowd doubts the trend will continue.
Just last month we saw a six percent drop in prices that was immediately met with a flurry of analysts claiming that gold’s run had finally finished.
Looking at the options market, put options on the SPDR Gold Trust (GLD) immediately became active as options traders speculated that gold would continue its decline, another sign of pessimism.
Currently, the put/call ratio – a measure of sentiment via the options market – sits at a reading of 0.67. That tells us that there are 67 puts open for every 100 calls. Historically a ratio below 0.50 – double the number of calls than puts – suggests that a stock or ETF is seeing too much optimism.
I expect the put/call ratio to continue lower through October, a sign that more optimism, and money, is making its way into the gold trade ahead of the elections.
A check of Wall Street analysts finds that the target prices for gold among names like JP Morgan and Citigroup hovers around $2,200-$2,300, a target that gold has already surpassed.
Goldman Sach stands as one of the higher watermarks when it comes to price targets for gold at $2,700. Other major banks hold higher targets for 2025.
The bottom line on gold’s sentiment picture is firmly bullish as there are no signs that the trade has become “crowded”.
Gold’s chart is the crown jewel of this analysis.
From a long-term perspective, the GLD have been in a bull market since late 2022. The initiation of that bull market was signaled as the GLD crossed above its 20-month moving average.
Before that, the shares made a two-year bull market run that resulted in more than 60% gains. The timing of that bull market run was like the current as its top was identified by the 2020 elections.
On a shorter-term basis, Gold just completed a 6% “correction” in April that was met with little selling, even though it posted one of its largest single-day losses in years on April 22.
The short- and intermediate-term trendlines continue to forecast higher prices over the next three to six months.
The GLD’s 50-day moving average is in a sharply bullish uptrend with support being drawn at $210 while its shorter-term 20-day moving average is turning from neutral to bullish drawing support from traders at $215.
The combination of these two technical trends is like what we saw in February as GLD shares prepared for a technical breakout that would carry them 20% higher over a 30-trading-day period.
Finally, from a short-term perspective, the GLD shares are in the process of breaking above their top Bollinger Band. A break above this measure of potential volatility typically indicates when a stock or ETF is breaking into what I call a “volatility rally” that will carry prices higher more aggressively often causing a “FOMO” rally.
The combination of intermediate- and short-term technicals suggests that we’re on the cusp of another 20% rally for gold and the GLD shares that will ultimately target a top in both near or after the elections in November.
For investors the play is simple, position for a 20-40% profit by purchasing the SPDR Gold Shares (GLD) at their current price of $222 with a target of $290 or higher over the next six months.
For options traders, consider buying longer-term options to leverage the expected move. I personally prefer buying slightly out-of-the-money calls at the $125 strike price using the January 17, 2025 expiration.
Those calls are priced around $12.35 per contract at the time of this writing.
For comparison, a move to my target of $290 by election day would result in an intrinsic value of $65, resulting in a potential profit of 426% compared to profits of around 29% from simply holding the GLD shares to the $290 target.
