Gold Heads Back to 2008 Mortgage Crisis Breakout Level

Steve Kanaval |

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It is safe to say Gold (GLD) is a casualty of the Chinese Stock selloff, as the metal has headed toward new lows today, down 10% year to date at $106.22 in the liquid ETF many managers use to speculate in the metal or hedge. If you are a large money manager or a retail investor, you no doubt pay attention to gold, and have some outlet to buy or sell the metal. This ETF translates well to the Gold Spot Price many watch, and is used as the core benchmark for traders. GLD is a terrific measuring tool – I always keep it somewhere on my screen – and I couldn’t help but notice it testing at lows of -2% in today’s action. 

Gold looks like it has shed premium accumulated on the back of the mortgage crisis of 2008, and the action over from 2008 – 2011 is looking more like an aberration than a trend, as prices have done little more than reprice their selves back to the mean. Using a simple Fibonacci retrace, I have gold holding under the 100 level using the GLD SPDR ETF, and finding value at 96.00. The math there is simple, having travelled 144 points from low to high, where prices began the rally in May 2005. The other good thing is that the ETF translates loosely to the $1000 level in cash gold, and this is a simple support level that makes sense – the $1000 gold spot price.

Gold Bugs Unwelcome at the Picnic

It’s logical that gold has been under pressure – it has been a boon to liquidity across the globe, and a safety net for many during normal flights to quality. When an investor needs cash, they know they can sell gold to raise money. However, I think the metal is in for a period of low volatility, a sideways move, in reaching its normal pullback to $1000. Just about every person on the planet sold all the gold they have in the drawer and shoebox at higher prices – so it seems the gold bugs will again slip out of fashion.

For me, the irony is that the support level is the exact level where gold traders got excited in 2008 at the height of Lehman going out of business, and did what a hedge was supposed to do in the face of economic collapse (prior to being saved by TARP). The strategy was right for those who would have bucked up and bought into strength – they took gold for a nice ride as an ounce of gold traded as high as $1800 – returning nearly 100% in three years and topping out in late 2011. Many took profits along the way, and in hindsight, selling gold at $1500 looks like it may have been a brilliant move.

Asset classes go in and out of favor, and I think gold played an important role for global portfolio managers during the crisis when it became fashionable to have a metals position and understand that gold was moving, and why. I believe we are in a new era, wherein we will focus on other markets (asset classes) that become a hedge, act as the crucial driver and have a place in day-to-day portfolio trading.

The shiny yellow metal is headed for a period where it loses luster as an annual double-digit gainer, providing a liquid upside hedge. It’s official - the mortgage crisis of 2008 is in the rear view mirror. We are on to a new era – time to stack that spare gold back in the shoebox and find a new toy.

Steve Kanaval is the author of the upcoming Equities.com's Small-Cap Throwdown, a premium newsletter designed to help investors identify the best small-cap stocks to add to your portfolio and trading ideas to profit off them. The first issue pits the hottest beverage small-cap stocks against each other to find a winner. Sign-up here for a free issue today!

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