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The current selloff in gold prices looks like the real thing, and the safe-haven metal’s technical behavior relative to stocks suggests the breakdown could eventually prove to be a boon for Wall Street.
The SPDR Gold Shares Trust exchange traded fund slid below the 200-day simple moving average on Tuesday, which many view as a dividing line between long-term uptrends and downtrends, for the first time since January 2009.
That by itself suggests this decline is different than the other pullbacks of more than 10% that have occurred since then. But if that’s not enough, those previous pullbacks–starting in February 2009, December 2009 and September 2011–followed periods of sharp increases in short interest in the GLD. This time, GLD short interest as of Nov. 30 settlement dropped 31% in two weeks to a nine-month low.
And Tom McClellan, publisher of the McClellan Market Report, also noted that one-month borrowing rates for gold have increased to the highest spread over one-month LIBOR in the 22-year history of gold lease rate data. This means it has become as expensive as ever to borrow gold to short it, meaning there isn’t much left in the market except long positions.
When bulls look around and see nothing but other bulls, they tend to get antsy enough to leave the party.
The GLD was down 3.6%, at $152.75 in afternoon trading on Wednesday, while the 200-day SMA currently extends to $157.14. The GLD was last 13% below the Nov. 8 intraday high of $175.46.
Just a few months ago, the outlook for long-term weakness in gold would have been welcomed with open arms by Wall Street investors, as a secular decline in the safe-haven metal would imply a growing appetite for riskier assets, like equities. That thinking has been questioned recently, however, as both gold and stocks have been losing ground this month, just like they did in October 2008 after Lehman Bros. blew up.
The GLD is down 10% so far this month, while the S&P 500 has lost 2.7%.
The key difference between then and now is, in the face of coincident nominal declines, the gold futures had started massively outperforming the S&P 500 after Lehman’s collapse, until peaking at a 20-year relative high in March 2009.
Currently, on a relative strength chart plotting the GLD against the SPDR S&P 500 ETF (SPY), the GLD has fallen Tuesday below the October low, which was sandwiched between relative tops seen in August and November highs. That breakdown confirms a classic “double-top” reversal pattern, suggesting the GLD is within a long-term trend of underperformance relative to the SPY.
Keep in mind that the last big relative downtrend started in March 2009, when the bear market for stocks ended.
Basically, gold’s breakdown today may not immediately benefit stocks, but a likely lasting nominal and relative downtrend should eventually prove a boon for Wall Street.
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The party’s over, it’s been over for a while but goldbugs will hang in there until run over by the freight train.
How is a few billion dollars worth of gold going to fuel a several trillion dollar stock market? Its just like the people that think selling Euro gold will fix their trillions in debt. I will be buying more gold SOON!
Chart in there now.
Thanks technical analysis guy for giving us the relevant chart instead of a stock image of gold bars, which may or may not have that much to do with the SPDR GLD trust, so we can easily assess your interpretation at a glance. Oh wait, that’s not what we have here?
Gold will fall until the first rumor of more Fed LSAPs. That will be the boon for equities. Until then, price moves are nothing more than noise
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MarketBeat looks under the hood of Wall Street each day, finding market-moving news, analyzing trends and highlighting noteworthy commentary from the best blogs and research. MarketBeat is updated frequently throughout the day, helping investors stay on top of what's happening in the markets. MarketBeat lead writer Mark Gongloff spearheads the MarketBeat team, with contributions from other Journal reporters and editors. Have a comment? Write to marketbeat@wsj.com or write Mark at mark.gongloff@wsj.com.
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