Gold bulls have much to cheer about over the past three months since my previous update on SPDR Gold Shares ETF (NYSEARCA:GLD) (XAUUSD:CUR) in early October 2023. However, readers or investors who followed my GLD article should be aware that things were much more pessimistic than currently assessed.
As a reminder, GLD re-tested its early 2023 lows at my previous update. Note the re-test occurred before the initial week of the Israel-Hamas conflict. As a result, I must highlight that the market headed into GLD’s early October lows before the conflict started. Investors who attribute the conflict as the main driving force behind GLD’s recent move miss a critical point: GLD was already bottoming. That was precisely what I highlighted and reminded investors in early October:
However, GLD’s price action indicates a subtle bear trap, as dip buyers returned with conviction toward the close of last week’s trading (pre-conflict). – JR Research GLD article in October 2023
We are nearly at the three-month mark since that article, and the Middle East conflict is nowhere close to being resolved fully. However, it seems like the Israeli government could taper its all-out invasion to a more surgical phase, as the Israeli Defense Force or IDF has started withdrawing “several thousand troops” from Gaza. In other words, it seems like the escalation in the conflict could have peaked.
Despite that, Iran deployed “a warship to the Red Sea after the US Navy destroyed three Houthi boats.” As a result, uncertainty over the Middle Eastern conflict could worsen as the US seeks to secure “a waterway vital to global trade.” However, I urge investors not to fall prey to assessing GLD’s directional bias by evaluating how the conflict in the Middle East could play out to avoid the potential confusion that may entail in your assessment.
Some could point out that the Fed telegraphed three rate cuts in the most recent FOMC, leading buyers to return to GLD. Hang on there for a second. Can you recall when Fed Chair Jerome Powell communicated the three rate cuts? Didn’t it happen in mid-December? When did GLD re-test its May 2023 high ($191 level)? It happened in late November 2023, two weeks before Powell appeared before your screens. Therefore, as I highlighted, Powell didn’t cause GLD to bottom out because that bottom occurred in early October.
So what happened? Why did GLD bottom out and re-test its March 2022 highs when the Middle East conflict didn’t seem to worsen? Why did GLD bottom out well before Powell appeared in his mid-December 2023 FOMC pressor?
Analysts would like you to believe the economy could fall into a recession this year, bolstering the potential for more rate cuts. As a result, it should improve the opportunities for reallocation toward “safe haven” assets like GLD, underpinned by lower interest rates.
However, don’t you realize that the recession thesis is so 2023? As a reminder, economists no longer hold a recession as the consensus view. Economists were extremely bearish in late 2022, not late 2023. In other words, GLD bulls have already astutely bought into the hard landing bullish thesis in November 2022 as it bottomed out. If you still hold onto the recession view to buy GLD, I believe you are over a year late. Why didn’t you buy when the economists were at their most bearish, presenting you with the most attractive risk/reward profile?
So, what could drive GLD forward in 2024? As a price-action investor, it’s second nature to me to consider investor psychology. Recall that Oaktree Capital Management co-founder and co-chairman Howard Marks reminded investors why knowing how to assess investor psychology is critical to sustained outperformance. By the way, Marks is a CFA charter holder. Marks:
When markets are at extreme highs or lows, the essential requirement for achieving a superior view of their future performance lies in understanding what’s responsible for the current conditions. Everyone can study economics, finance, and accounting and learn how the markets are supposed to work. But superior investment results come from exploiting the differences between how things are supposed to work and how they actually do work in the real world. To do that, the essential inputs aren’t economic data or financial statement analysis. The key lies in understanding prevailing investor psychology. – Howard Marks
GLD price chart (monthly) (TradingView)
Based on its late December 2023 price action, GLD is assessed to be close to re-testing its August 2020 high ($194). In other words, GLD is back to a critical level that saw intense selling pressure over the past three years.
However, my assessment suggests that the bullish momentum has improved significantly. Why? GLD’s November 2022 low ($150 level) was potent because it was a bear trap (false downside breakdown). That false break was validated, given the recovery in 2023.
The subsequent steep pullback toward GLD’s October 2023 low was supported again. As a result, the bullish momentum is assessed to have improved markedly, suggesting this breakout attempt could finally be successful after a three-year consolidation.
It’s important to know that the breakout doesn’t have to be linear, and a possible shakeout could still occur before it forces a decisive breakthrough. As a result, investors looking to add more exposure can consider allocating in phases to hedge potential downside risks, as they anticipate a sustained breakout in GLD for 2024 and beyond.
Rating: Maintain Buy.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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