All That Glistens Is Not GLD

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By David Gillie

NEW YORK (ETF Digest) -- Gold has lost it high status as the world's alternate currency.

This was confirmed to me when the weekend repair guy came to fix the A/C and gave me a "hot tip" to buy gold. I've even noticed fewer ads on TV featuring a well-coiffed lady with a British accent, peddling gold-plated wooden Nickels (with .003 micrograms of "real gold"). Perhaps a dentist could tell you how much .003 micrograms of real gold is.

Gold has been in a terrific bull market for nearly a decade. Recent currency wars over the past few years send gold into the stratosphere. That didn't go unnoticed and gold became a toy of day traders and speculators. Hedge funds massed gold then quickly dumped it to cover redemptions.

SPDR Gold Shares (GLD) holds physical gold bullion.

 

 

Although GLD is up 26% for the year, the performance over the past quarter has been choppy with a 20% price swing.

Volume on GLD at over 12.8 million shares traded daily gives it the rank of the #14 most traded ETF on the NYSE. Yet, its relative volume recently has only been 1/3 of that. Interest in gold is clearly declining along with its tear term strength.

Hardly a day goes by that I'm not asked what I think about gold. What I think doesn't matter. What matters is what the chart tells us, and it's a mess.
 

  
All of the indicators on this chart are retreating from an extreme overbought condition.

Wild swings in the price of GLD have built a downward channel in the short term. Most significantly, at the end of December we made a lower low for the first time since the 2008 crash. On the long term, GLD has not broken its bull market upward channel and is currently at the top of the long term channel as we see on the weekly GLD chart.

It is noteworthy that we see volume spikes through this channel have been on selling. This could indicate long term holders (pre 2005) or even major institutional/governments reducing positions during the explosive rally. I wouldn't go so far to say that gold is in a "bubble", but it's not uncommon to see a major move up toward the end of a strong rally--as we saw in July last year.

The long term trend indicates that a pull back to the $155 level would not break the trend and it could continue. Gold will certainly not lose its value but we are seeing some sings of trend exhaustion and perhaps the degree of upward trajectory could change.

The caution on the chart is the wild over extension we see that happened in July 2011. This kind of activity often scares "smart money" out of a position or sector. If you have a position in GLD (or related positions), prudence may be to take profits at this level. If you are an aggressive trader, there could be some profits to the downside using inverse ETFs on gold such as PowerShares DB Gold Short (DGZ), PowerShares DB Gold DoubleShort (DZZ) or ProShares UltraShort Gold (GLL). Inverse ETFs on a volatile commodity like gold are not for the 'casual' investor. They move very quickly and a reversal in price could lead to significant losses.

Looking ahead, $155 on GLD or $1,550 on the price of gold futures may be a critical pivot point. In the same vein, a breakout above the $1,720 price in gold could put it into a new upper price channel.

Disclosure: At the time of writing, I own a position in GLL.

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