GLD: Why 2021 Will Be A Breakout Year For Gold

GLD: Why 2021 Will Be A Breakout Year For Gold

Ever since spiking above $1,900 back in August, the rush into gold (GLD) came to an abrupt halt as the precious metal sold off for 3 straight months and is down by ~10% off its record high close. Improved prospects of a global economic recovery ahead thanks to the successful development of COVID-19 vaccines have been the key factor behind the continued rotation out of GLD. Indeed, GLD’s number of shares outstanding shrank for 9 weeks in a row. Per DailyFX:

This suggests that redemptions have outpaced subscriptions, reflecting weaker demand for gold among ETF investors.

saupload Gold Prices Trade Lower Amid Stimulus Hopes and Vaccine Rollout body Chart 8.png.full

Source: DailyFX

That being said, to keep it in context, GLD remains up more than 20% YTD and has found support once again at its rising 50-week moving average. As shown in below chart, the long-term uptrend in GLD remains intact as long as GLD stays above the 50WMA.

48007667 16080836001041348Source: WingCapital Investments

While retail investors have been unloading their long positions, it is worthwhile to point out that large speculators have been accumulating on dips, as their net long positioning in gold futures rose by 30k contracts since the August peak:

48007667 16080838018115408 Source: Commitment of Traders, WingCapital Investments

A Repeat Of 2010 Breakout Ahead According to Copper/Gold Ratio

While gold has been under continual selling pressure, it has been a polar opposite picture for copper, a key industrial metal that has recently surged to the highest since 2014.

48007667 16080857971607409 Source: WingCapital Investments

As a result, the copper/gold ratio finally jumped above its 50-week moving average for the first time in years. Looking back, we observe that the technical development bears major significance. Specifically, during the Great Financial Crisis, the copper/gold ratio likewise was in:

  1. Multi-year downtrend between 2007-2009
  2. Bottomed out in early 2009
  3. Closed above its 50-week moving average in late 2009

48007667 16080847521146104

Source: WingCapital Investments

A more crucial observation is that the multi-year bull market in GLD started in late 2008 right before the recovery rally in copper/gold ratio commenced, and only ended in 2011 after GLD more than doubled its price. Also, notice the 50-WMA continued to serve as a launchpad to higher highs over the course of the bull run.

In short, the historical analysis suggests that the bull market in GLD does not necessarily end when a cyclical recovery is underway, and that the recent pullback is no more than a healthy retracement towards its long-term moving average.

Long-Term Fundamental Picture Remains Brighter Than Ever Based On A Ballooning Deficit/GDP Ratio

Further supporting a breakout year ahead in GLD is the fact that the federal deficit vs. GDP ratio is set to balloon above 2008 GFC highs of 10% and even above the WWII record highs of ~30%. Per Axios:

The federal budget deficit will reach $3.3 trillion in the fiscal year ending this month – more than triple the 2019 shortfall, the nonpartisan Congressional Budget Office (CBO) projected on Wednesday.

Why it matters: That would be 16% of GDP, the largest amount since the end of World War II in 1945. The national debt is projected to exceed 100% of GDP in 2021 and rise to 107% in 2023 – “the highest in the nation’s history,” the CBO notes.

As pointed out in our previous outlook on GLD in March this year, the deficit/GDP ratio has been a critically important long-term fundamental indicator for GLD. For instance, in 2009, notice that the breakout in GLD took place just as fiscal spending jumped through the roof post-GFC. Subsequently, the bear market in GLD ensued just as deficit/GDP ratio began normalizing towards pre-crisis levels:

48007667 16080843407105305

Source: Federal Reserve Bank of St. Louis, WingCapital Investments

This time around, the unprecedented amount of fiscal measures enacted to combat the economic fallout from the coronavirus pandemic has already exceeded that from the last crisis with no signs of slowing down. With the deficit/GDP ratio expected to continue expanding for years to come, we anticipate GLD to embark on a multi-year breakout similar to that from 2010. On that note, we reiterate our long-term price target of $3000 in gold (or $300 in GLD), which we expect to be reached by 2022.

<

p class=”p p4″>To summarize, the multi-month sell-off in GLD driven by ETF outflows is no more than a classic retracement in a bull market in our opinion. The long-term technical picture remains positive as long as the 50-week moving average continues to hold. Based on our analysis on the copper/gold and federal deficit/GDP ratios, the fundamental backdrop suggests a breakout year is ahead for GLD resembling that in 2010.

Disclosure: I am/we are long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: We may have intraday options, futures or other derivative positions in the above tickers mentioned.

Credit: SeekingAlpha

One Response

Leave A Comment

Your email address will not be published. Required fields are marked *