The Gold ETF Offers an Entry

 | Apr 11, 2013 | 12:17 PM EDT  | Comments
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Access to gold can be had in many different ways these days. One of the more popular ways is the SPDR Gold Shares ETF (GLD). Much has been said about gold being a currency on its own or a store of value. But what really moves gold is supply and demand.

When analyzing a so-called "fear trade," it is important to look at the crowd's psychology. Gold moves in relation to inflationary pressure caused by the Federal Reserve injecting more capital into the economy in order to improve growth. By doing so, it weakens the U.S. dollar and causes the demand for gold to surge. Recently, as the euro zone struggles to get its finances in order and the euro takes a huge tumble of its own, we have seen prices of gold in euro terms steadily taking a leap. However, our focus is in terms of the U.S. dollar and what it means for investors who have a position or are looking to take a position in the GLD.

In the chart below, we see that gold has been going through a correction. It can perhaps be explained by money moving out of gold and into more risk-weighted assets such as financials, which have led the S&P 500 to historic highs, or defensive sectors such as healthcare and consumer staples, which have seen positive gains and inflows of capital. From a technical perspective, the relative strength indicator bottomed out at around 30 and thus followed price action, making a leap higher. We have finished the fifth wave down, and the next move up could be either a 3-wave correction or another 5 wave cycle in which it is too early to tell. Gold will break out higher for the time being, but with volatility.

If we use point-and-figure charts, we see that price action has touched and bounced off of major support and is heading higher. However, the price targets are quite far out from where the price of the GLD currently stands. It would need a very strong catalyst to return to the mid to deep $160 range again. Perhaps the "sell in May and go away" philosophy could spark it higher, or better yet, the next chart could depict the things to come.

In this sector rotation model from StockCharts.com, below, we see the sectors that led the rally before the correction. The big money was hiding in financials, healthcare and staples. Financials led the rally, while the more defensive sectors, staples and healthcare, companies that usually have lower betas compared with the more volatile sectors, did a fantastic job of not only holding up but also delivering returns.

This model may be an early warning indicator of a possible start to a recession. If we take the most recent unemployment figures as an indicator, we may be in some trouble down the road. However, it is way too early to make such a bold call, and we would need substantially more evidence. We must watch certain economic figures with extreme caution for the next couple of quarters, such as the unemployment figures, the purchasing managers' index, retail sales, durable goods orders and, most importantly, the GDP report.

So in looking at the price action of gold, we have seen where the smart money is positioned and where price is going next. Money moved out of gold and into stock sectors such as financials, healthcare and staples. The sector rotation model and recent economic data show us what may be looming ahead -- the Fed is not yet close to ending its monthly injections of liquidity. This may be a fantastic opportunity for investors to own gold on a great pullback, as this is only a correction. 

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