The Technical Breakdown Of Gold: No Bottom Apparent Yet


Gold has not had the best of weeks.  The SPDR Gold Shares ETF (NYSE: GLD), which tracks the physical price of the precious metal, continued its downward pattern, with prices ending up around $125 for a loss of around 6% for the past week.  Further, CME’s Comex unit increased margin requirements for gold trading by 25% in an attempt to quell the rising volatility of the metal.   Even the most ardent of gold bugs must have doubt since, as of yet, there appears to be no sign that the precious metal has put in a bottom.  A bottom would be apparent either in a technical formation, or some sort of range trading in the chart.  Rather,  gold is down 22.82% since the beginning of the year, and is off over 28% from its 52-week high of $174.07 in September of 2012.  Despite the clear downward trend, you can find gold bugs clamoring to investors that a turnaround is near each time there is a small blip up in price.  At this moment, there is indication the overall downward trend has changed.  While the price of gold could conceivably turn around tomorrow, investors might do well to examine the almost axiomatic belief that gold is a safe haven against market volatility.  Even more important, investors may want to examine why such famed hedge manager George Soros had substantially reduced his exposure to the metal.

GLD is showing a number of bearish technical indicators.  The 50-day SMA moved below the 200- day SMA in late March, which is a common bearish sign.  Since that cross over, GLD has dropped 16%.  The MACD is also showing the continuation of the bearish trend.  GLD has popped in price in the short term when the RSI indicator has dropped below 30, showing oversold conditions.  However, these minor bounces have not led to a change in the overall downward trend.

GLD chart

There are many explanations floating around for the substantial downtrend following an almost decade-long upward trend.  Most explanations from gold bugs seem to indicate that this is a temporary price correction, and another leg up in the bull market is right around the corner.  As such, the drop in price is a buying opportunity.  They are cling to the believe that gold is a safe haven, and a store of wealth, which holds its value during periods when volatility negatively impact equity and debt markets, thus creating a buffer against such volatility.  This long-established relationship appears to be breaking down, at least in the short term.   For example, the S & P 500 is down over 4% in the last month, while GLD is down 5.22%.

Famed manager George Soros has even dramatically reduced exposure to the metal.  During the fourth quarter of 2012, Soros Fund Management cut its position in GLD in half, from 1.3 million shares worth around $227 million, to 600,000 shares worth about $97 million.  Soros then reduced his position another 69k shares in the first quarter of 2013.  Other hedge fund managers have continued to maintain their positions, keeping the faith that a turnaround is likely soon.  John Paulson, of Paulson & Co., continues to hold a massive 21.8 million shares of GLD.  This position was worth $3.54 million at the end of 2012, but had dropped to $3.372 billion, a loss of approximately $165 million.  Paulson recently began reporting the results of his gold fund separately from the other funds which are managed, in an apparent attempt to minimize the impact of the substantial losses versus other successful investments his firm has made in other funds.

Gold miners have been hammered even more by the downturn in gold prices.  The Market Vectors Gold Miners ETF (NYSE:GDX) is down 47% in the last year, and is over 56% off its 52-week high.  Miners often trade in more volatile patterns than the underlying metals.  GDX hit a multi-year high of $66.98 in September of 2011.  The recent price of $24.9 presents a drop of 62% from the high.  The RSI indicator hit oversold readings on a few occasions in the last year, but these levels did not result in any appreciable bounce.

GDX chart

It is quite possible that gold will make a substantial comeback at some point.  Perhaps the gold bugs are correct in positing the recent downturn is only a minor correction in a continuing bullish market.  Still, there is currently no technical indicator showing the downward trend is reversing itself.  If and when gold prices come back, gold miners could offer a good opportunity for appreciation.  However, the timing of a gold comeback is impossible to determine.  It is also quite possible that this downtrend could also be the beginning of a longer term bear market for the metal.  At any rate, the technical chart for GLD needs some serious repair, as well as a better overall macro picture for the metal, before investors come back to the metal.  Till then, it might be wise to stay out of the way as there is no need to try and catch a falling knife.

At the time of publication the author does not own any shares of any stocks mentioned in this article.