Troubling Outlook for GLD

Investors in the SPDR Gold Trust (NYSE: GLD), which tracks the price of gold, closed out a tough week last week as gold prices fell against the rise of the dollar. Most of the GLD’s declines were born on Monday last week, when most of the dollar’s gains were captured. The remainder of the week mostly saw gold and the GLD meander against a similar trading pattern for the dollar. The catalyst for each was surprisingly not so much Greece, but rather it was driven by a renewed focus on the diverging paths of the U.S., European and Japanese central banks. Still, I believe there is an underlying and credible shadow of a Grexit hanging over gold now. This week presents more concern for SPDR Gold Trust (NYSE: GLD) holders as a result, but long-term interests willing to bear near-term volatility should hold on.

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5-Day Chart of GLD at Seeking Alpha

The five-day chart of the SPDR Gold Trust (NYSE: GLD) shows most of the week’s 2.2% loss came at the start of the period. However, a soft new level for the gold tracking ETF held through the remainder of the week as issues that weighed on gold persisted. The GLD even climbed into the close of trading for the week, on hope for a late Friday or weekend restoration for Greece. That appears unlikely now.

The catalyst for the decline in the SPDR Gold Trust (NYSE: GLD) this week was clear. The start of the week produced some very hawkish comments from Federal Reserve Governor Powell. His comments piled on to the tone of the close of the week before, when San Francisco Fed President Williams spoke of a September Fed rate hike. Governor Powell suggested two rate hikes would be appropriate this year, with the first coming in September. This set currency trading into motion, and refocused investors on the longer term issue for currencies, which also impacted the price of gold. The SPDR Gold Trust (GLD) dropped as a result.

The divergence of the U.S. Federal Reserve and the European Central Bank (ECB) and Bank of Japan (BOJ) monetary policies has been the key driver for dollar appreciation against rival currencies over the past year or so. The Fed, of course, ended quantitative easing last year and is apparently planning for liftoff of the Fed Funds Rate sometime this year. Meanwhile, the ECB and BOJ have only just begun extraordinary easing measures. Furthermore, the ECB may have to go the extra mile soon should Greece drive severe disruption in Europe by defaulting on its debt payments and possibly dropping out of the eurozone. As a result, it was exactly the worst time for a Fed member to be speaking hawkishly and Powell excelled at just that last week.

1-Month Chart of the Dollar Index at Bloomberg

This chart of the dollar index shows the nascent gains of the dollar as it recovered some of its recently lost ground last week. The dollar looks poised to climb higher this week as Greece’s Prime Minister has set plans in motion for a referendum vote, to allow the people of Greece to decide if they will accept austerity in its latest form (best last offer from Eurogroup) or drop out of the eurozone and go back to the drachma. Given that leftists are rising to power in Spain and France, there is good reason to worry about which way Greece will go, as it may serve as a guide for the future of the euro.

As a result, we should see strong dollar strength this week, which weighs against gold and the SPDR Gold Trust (NYSE: GLD). It’s difficult to assess an intrinsic value to gold, and thus the GLD, given that I believe it has important currency characteristics and is mankind’s default currency in my view. As a result, I believe it trades like currencies to some degree, and also like a commodity priced in dollars. So as the dollar appreciates in value, the price of gold should decline, just as the euro and oil should. Supports for the GLD look to be at the $110 level, and then to $105, which I believe would be reached if Greece does exit the eurozone. So the outlook for the GLD is not good near-term because of the issues discussed here. My long-term perspective for gold and the GLD remains the same though - hold gold and the GLD, as eventually I believe the dollar must give way to a developing world. Also, political and geopolitical instability and the perhaps someday regressing world call for the holding of mankind’s default currency long-term.

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