Gold ETFs Continue to Inflict Maximum Frustration

NEW YORK (Fabian Capital Management) -- The gold market is reaching a point of maximum frustration in terms of forecasting future price moves.

The SPDR Gold Shares ETF (GLD) started the year by jumping out of the gate with a 15% bounce from oversold levels that lifted the spirits of many long-term investors. However, subsequent language from the Federal Reserve confirming the pace of tapering and interest rate policy led to a reversal of fortunes that has been slowly bleeding the price lower.

One of the more interesting changes in the price action of gold this year is that it has completely decoupled from stocks, bonds and currencies in terms of relative price action. It has not been viewed as a flight to safety or inflationary hedge, which has confounded many traders who like to glean an edge with respect to price trend.

More recently, the biggest drivers for intra-day jumps in both GLD and the iShares Silver Trust (SLV) have been geopolitical risk with respect to Russia and Ukraine tensions. However, with calmer heads seeming to prevail, those brief rallies rapidly fizzle in subsequent trading sessions.

Right now GLD is trading mostly sideways with its 200-day moving average flattening out considerably. This is indicative of an asset that has lost its way in terms of bullish or bearish momentum. In my opinion, the tightening consolidation is adding a level of frustration for investors that are looking for a break in either direction to confirm their trading bias.

Another interesting data point has been fund flows which slow very little net change in the total assets attributed to GLD since the begging of the year. According to ETF.com, GLD has lost $671 million in investor redemptions in 2014.

While that may sound like a large number to many exchange-traded funds, when you consider that GLD has $32.5 billion in total assets it represents a net change of only 2%. The weekly data show a tug of war between redemptions and inflows that has yet to attract significant new money.

From a fundamental perspective, current trends suggest demand in Asia is continuing to drive the majority of purchase activity, with China and India as the leading consumers. However, further price increases will need to be supported by stronger consumer and investment activity in developed nations as well.

A look at a three-year price chart shows a much different picture than recent trading activity has indicated. Many market technicians are pointing to the double bottom formation that has supported GLD at $115 and the potential for much higher prices after years of sustained declines.

The caveat is whether or not those lows can hold and ultimately support another leg higher.

The same can be said for gold mining stocks as represented by the MarketVectors Gold Miners ETF (GDX). This ETF has accumulated a similar technical pattern and appears to be trading primarily on the price action of gold bullion rather than the broader stock market which is making new highs. Gold mining stocks are typically more volatile and subject to wider price swings than bullion.

Ultimately, this directionless precious metal will find a new course and I will be able to assert a much stronger conviction for implementing it in my clients' portfolios. However, for the time being I am continuing to stand aside and wait for a more meaningful opportunity.

While I freely admit the wait can be frustrating, I believe patience will pay off as we get additional data to support a bullish or bearish case.

If you do decide to dip a toe into the murky waters that surround this sector, I recommend you do so with at trailing stop loss or sell discipline to mitigate downside risk.

At the time of publication the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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