- Gold-positive drivers from early 2014 are not sustainable.
- The Fed Stance and rising interest rates are a gold bear’s best friend.
- GoldBugs, its time to stop avoiding the realities of the fundamentals.
In previous articles, I have outlined some of the reasons why those that are bullish on gold should be preparing for another fall in the underlying market valuations. This, of course, has been a contrarian view as the SPDR Gold Trust ETF (NYSEARCA:GLD) has already posted year-to-date percentage rallies of nearly 15% at its peak. But the real question investors should have been asking throughout this bullish phase is whether or not these moves actually match the market’s underlying fundamentals. But the shorter-term declines that we have been seeing in recent sessions suggest that investors are now realizing that this is not the case: The central drivers propelling that early-year rally are simply unsustainable.
Most of this year’s buying in the SPDR Gold Trust ETF has been inspired by declines in the Dollar, seasonal slowdowns in U.S. economic activity, political turmoil in the Ukraine, and concerns over credit outlets in China. For traders that are looking at market activity using short-term time horizons, these moves in GLD might make things look as though the sun has risen after a tough 2013. But for investors that are focused on the fundamentals, the longer-term environment remains clear. And none of the factors mentioned above have been able to convincingly reverse the carnage investors in GLD were forced to experience in 2013.
Potential Military Tensions vs. Real Demand
Given the market’s historical tendency to look short-term safe haven assets during times of uncertainty, it would not be entirely surprising to see additional spikes in all assets related to the underlying gold price if the situation in the Ukraine continues to receive negative headlines. But these would be spikes that should be viewed as nothing other than a new selling opportunity, as a rising interest rate environment in the U.S. will only serve to build on the already bearish trends that were established last year. Surprise military interventions in remote areas of the world have done nothing to change real demand levels, and this is the only factor that could bring some real buying back into the SPDR Gold Trust ETF. For those on the wrong side of the trade, this (unfortunately) spells incredible difficulties going forward.
Fed Stance, the Dollar
Add to this the increasingly clear policy vision that is being sent from the U.S. Federal Reserve. Fed Chair Yellen released recent comments that indicate economic stimulus will probably run its course well before the end of this year. This is another topic I have argued about with readers, but the writing on the wall is pretty clear at this stage and 2014 should be the final year that marks this stage of the interest rate cycle. If you are an investor with long-term bullish exposure to gold, believe me, I can understand your pain. But it is time to face facts. The relative growth performance in the U.S. is far more encouraging than what we are seeing in almost every region of the world. The seasonal slowdown that temporarily brought stalling growth rates will soon be over and this will serve only to bolster the Fed’s policy stance, bring an end to an outdated quantitative easing program, and lead to rising interest rates sometime next year. None of these factors should be viewed as positives for those long GLD.
Chart Perspective: GLD
(chart source: OT Trend)
The market has looked encouraging for a while but if we are not able to make a convincing break in the SPDR Gold Trust ETF into the 140s, there is little reason to get excited. It is much more important to have an understanding of the longer term trends, and this year’s moves should be viewed as nothing more than a very short-term correction back toward historical averages.