Gold: Technical Breakout?

01/30/2015 9:00 am EST

Focus: ETFs

Joon Choi

Senior Portfolio Manager, Research Analyst, Signalert Asset Management LLC

Gold prices have been under pressure since August of 2011; technically speaking, I now believe gold has finally bottomed, suggests Joon Choi, in Systems & Forecasts.

SPDR Gold Trust (GLD) represents ownership of physical gold bullion, less the expense ratio of 0.40% for storage and for the ETF sponsor (State Street).

GLD has been around since 2005 and has proven to be a good
vehicle to gain exposure to gold. The monthly GLD chart reveals three strong cases for a bottom in gold:

  • Positive Divergence: GLD made a double rising bottom in MACD while the prices made a lower low (line A). This pattern tends to occur before a significant bottom is formed. Moreover, this is the first time a positive divergence formation has taken place since GLD was launched in 2005.
  • Downside wedge: GLD prices have formed a downside wedge, which is signaling that gold may be ready to breakout, since a wedge pattern usually happens at inflection points; downward wedges point to a bottom and vice versa.
  • Angle change: Decline in prices has moderated recently compared to the previous decline.

Technically, this pattern suggests that GLD should make a large upswing in the coming months, if not in January.

I am recommending two ways to capitalize on the potential bottom in gold. First, buy GLD with a target price of $142 and a stop loss of $109.50 (not intraday but close price).

An alternative is to buy the Market Vectors Gold Miner ETF (GDX), which is more volatile, but a better potential return.

The majority of the miners incurred negative earnings due to heavy depreciation write downs for equipment used to mine gold, but seven out of the top ten stock holdings in GDX have positive cash flow.

Gold miners’ breakeven price is around $1,200, so any increase in the gold price will result in almost pure profit. Hence, a sustainable rally in gold will lead to a GDX breakout since the miners will once again turn profitable.

GDX also has the same three technical patterns exhibited on the monthly GLD chart. Our target price is $38.50 with a $16.80 stop loss (also on a close price).

Gold has been a tough commodity to predict since there are so many moving parts in determining its price (i.e. inflation, currency instability, financial shock). Technical analysis (positive divergence, downward wedge, and angle change) reveals that gold may be poised to breakout from current levels in 2015.

As a result, I am recommending buying either GLD or GDX; the latter being riskier but with better potential payoff. I am sensing gold has finally bottomed and there is a great buying opportunity here.

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