Trading the New Bull Market in Gold

The stock market has entered no man’s land this past week, with the S&P breaking its intermediate-term uptrend line and yet finding key support at 2,800 where its 200-day moving average sits.

The mid-week snapback rally took the S&P back up to its 50-day moving average that was met with selling pressure Friday, going into the weekend. Fears of rising trade tensions and global implications of such have a grip on market sentiment.

As more tariffs on Chinese imports are being threatened to take place on Sept. 1, the trade war now has expanded into a currency war where China is devaluing the yuan effort to offset the impact of U.S. tariffs. The United States responded loudly by calling China a “currency manipulator” that was throwing cold water on the prospects of trade talks progressing any time soon.

Because the United States is dealing with a Communist country, in the minds of the ruling party in Beijing, the free world’s rules of fair trade and currency don’t apply. They don’t have to answer to an election process or be accountable to investors day-to-day and thus are willing to absorb more pain to maintain the status quo in the long run. After China abruptly walked out of what seamed to be the closing of a deal, it really exposed the Asian country’s leaders’ full intentions of not conforming to changing their decades-old egregious behavior.

The sudden move by China to devalue the yuan is occurring while the European Central Bank does likewise. Plus, the Bank of Japan is maintaining aggressive fiscal stimulus (printing money) and the Federal Reserve now is beginning to lower short-term interest rates, which is igniting a rally in precious metals. Gold is the de facto metal of choice as a global currency hedge.

History is pretty clear that when it comes to a hedge against financial calamity, gold represents the ultimate safe haven. When you can buy it in a liquid form such as through an exchange-traded fund (ETF) like the SPDR Gold Shares ETF (GLD), then there is little discussion on the matter about what to buy. Instead, the questions are how much to buy and at what price. Lately, investors are more than willing to pay up for gold.

From the GLD website, SPDR Gold Shares offer investors an innovative, relatively cost efficient and secure way to access the gold market. Originally listed on the New York Stock Exchange in November 2004, and traded on NYSE Arca since December 13, 2007, the SPDR Gold Shares fund is the largest physically backed gold ETF in the world. The fund’s average daily volume is around 10 million shares and the corresponding put and call options are very liquid.

As noted, shares of GLD began trading in late 2004, so the multi-year chart below shows the price history of the ETF. After trading at around $185 in mid-2011 at the height of quantitative easing (QE) by the Fed, gold prices began a protracted decline when the dollar strengthened on the notion that QE would be wound down as the domestic economy was in primary recovery mode.

When the dollar index (DXY) peaked at 104 in late 2016, the price of GLD traded down to $100. Now, with the dollar pulling back in tandem with the yuan, yen, euro and pound sterling, the allure of owning and trading gold has a whole new luster to it.

What is most interesting is that the current rise in gold is not in any way related to core inflation, but rather coordinated currency devaluation by central banks. Because of the recent events with central banks’ dovish policy moves, shares of GLD spiked to $142.40 during the past week to levels not seen since 2013. My view is that gold is quite overbought in the short term. There was a big upside breakout at $127 and then a second breakout at $136. A pull back to the $135-$136 level would be an ideal level to take a position.

After having build a six-year base, and no sight of when global QE will slow or come to an end, there is a much more promising bull case for gold. The strong dollar has kept a lid on gold prices during this period, but that’s changing with the Fed now lowering rates and ending its balance sheet runoff two months before it planned to do so.

Quantitative easing (QE) is when the Fed buys bonds in the open market to increase the money supply in the economy by swapping out bonds in exchange for cash to the general public. Conversely, quantitative tightening (QT) occurs when the Fed sells bonds, it decreases the money supply by removing cash from the economy in exchange for bonds. When QE is coupled with falling interest rates, currencies decline in value, which causes a massive rotation into gold.

My Quick Income Trader advisory service will begin trading gold in the coming weeks and months, given the new opportunity to benefit from market volatility, currency depreciation and geopolitical risk. Within that service, I recommend the underlying stocks or ETFs, then issue a corresponding covered-call and naked put trade for those investors who want immediate income and/or bigger total return.

Just as a side note, those traders who have participated in each of my naked put recommendations are enjoying an annualized return of 321% with an average return per trade of 32.25%. Thus far, 83.3% of all trades have been profitable since January 1, 2018. Take a tour of Quick Income Trader, click here and find out how to put my weekly strategies to work in your portfolio. Be ready for when I put out my recommendations for gold once my indicators flash a buy signal.