- Transitory geopolitical influences will only generate short-term rallies in GLD.
- Investors should be watching ETF outflows, rather than unrelated news headlines.
- Inability to generate significant momentum and break the September 2013 highs creates added cause for concern.
Those bullish on SPDR Gold Trust ETF (GLD) have been on the receiving end of positive news for the last few months, as those basing investment decision on safe-haven arguments have been able to generate moderate gains in the ETF. When we look at GLD on a year-to-date basis, gains of nearly 7% must seen encouraging after the carnage of 2013. But it is important to keep the broader view in mind and if we assess these markets over the last full year the performance in GLD is still holding in negative territory. For those with long exposure to assets tied to the underlying gold price, this should be cause for concern as the best arguments to buy these assets are transitory in nature.
To be sure, there is little reason to believe that the potential for enhanced military conflicts between Russia and the Ukraine will be ending any time soon. There are plenty of individual scenarios that suggest these stories are set to continue for the time being (here and here we can see some recent examples). But the transitory effects of these types of situations have a limited lifespan and we have seen little in the way of supportive arguments that have directly influenced the supply and demand dynamics of the gold-backed ETF. The rallies that we have seen so far this year can be described as a self-fulfilling prophecy based on safe-haven expectations -- and the fact that even these gains have been limited suggests that bullish positions are in danger.
Fund Outflows in GLD
If you have exposure in GLD, the critical area of concern should be center around the fact that outflow numbers continue to build, as this is a primary suggestion that this year's bullish moves will be short-lived. As of last Friday, the fund said its holdings had dropped below 783 tonnes -- indicating that outflows had reached 10 tonnes for the week. This activity has been matched in the futures and options space, as hedge funds continue to face the reality of the broader environment and cut positions.
These changes are based on the assumption that the Federal Reserveremains on course to end its stimulus programs, and that any Ukraine-fueled rallies will ultimately be short-lived. An improving U.S. economy and the prospect for higher interest rates will continue to weigh on the gold-backed ETFs, the largest of which is GLD. If U.S. bond yields are rising, precious metals assets look much less attractive as they produce no income.
The latest round of employment figures was particularly strong, with monthly jobs addition rising at the fastest rate in over two years. In the chart above, we can see that the unemployment rate also dropped by more than the consensus estimates, falling to 6.3% (its lowest level in nearly 6 years). For those bullish on GLD, a critical question will need to be asked: Do you expect safe-haven influences that are based on geopolitical fears in the Ukraine to outweigh the longer-term influence of US economic trends? If your answer is yes, it might be time to start adding long exposure while valuations are still relatively low. If not, it is a good idea to avoid GLD.
Chart Perspective: GLD
(Chart Source: Yahoo! Finance)
On a short-term basis, those bullish on GLD might see encouraging signs. But for those that are looking at the wider trends, there is still very little reason to get excited. We have already posted a lower high following the sub-140 gains from last September and the inability for markets to generate any real momentum from here poses cause for concern on a chart basis as well. When this activity is viewed against the fundamental backdrop substantial long positions look excessively risky at current levels.