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Gold Is in 'Make or Break Mode' - Here's the Trade

A near-term correction in gold has set the stage for buyers this summer. Here's the trade.

Gold has been glittering in 2020. Since the calendar flipped to January, shares of the always-popular SPDR Gold Shares ETF  (GLD) - Get SPDR Gold Trust Report have surged nearly 11%.

Compare that with the 7% drop in the average S&P 500 component this year, and it’s not hard to see why gold is getting increased attention from folks who want to hedge against market uncertainty.

But zoom out to the longer term, and gold’s price trajectory becomes a little more nuanced.

From a technical standpoint, gold is in what I'd call make-or-break mode right now. And where the shares trade in the next few sessions could strongly affect where gold is headed over the next couple of months.

To figure out the likely moves from here, we’re turning to the charts on the SPDR Gold Shares ETF for a technical look.

Screen Shot 2020-06-05 at 9.50.05 AM

At a glance, it’s clear that 2020’s price action in gold hasn’t been cut and dried.

For starters, let’s forget the theoreticals and disabuse ourselves of the notion that gold is a good hedge for stocks.  

As far as hedges go, gold is empirically one of the worst assets out there from a correlation standpoint. Gold and equity prices trade in step with one another much more often than they counterbalance each other’s moves.

If you’re looking for an actual hedge, plays like the VIX, tail-risk funds and even treasury securities are more efficient from an uncorrelated-return standpoint.

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But hedge or not, gold still deserves attention on its merits. 

In 2020, trading in GLD started off choppy, but it’s since established a sideways consolidation channel between $158 support and $164 resistance. And as GLD tests the bottom of that range today, it’s flirting with a more sustained correction.

Put simply, if gold materially violates $158 this week, then the shares are likely to backslide further.

On a relative basis, that’s not much of an about-face. 

Despite the surge in gold prices from mid-March, GLD has actually underperformed the colossal rally in the S&P 500 over that stretch. That means all of gold’s year-to-date outperformance actually came in the first 2 1/2 months of the year.

But gold bugs still have reason to feel good about their favorite metal: In the longer term a correction jibes with gold’s uptrend on the weekly chart:

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The 200-week moving average has been acting like a solid proxy for gold’s uptrend for the past year – it marks a logical place for intermediate-term gold traders to park a stop. If that's violated, the trend ends.

But alternatively (and more likely) it's a place for gold bulls to think about adding to their positions if we see a bounce at that level.

Where GLD winds up today says a lot about whether this scenario plays out. A material close below $158 makes a test of the longer-term uptrend look likely. 

A near-term correction in gold sets the stage for buyers this summer.