Gold fell sharply Monday due to an unusually large futures seller, attributed to an improperly entered order, or "fat finger." In fact, prices have been vacillating wildly since March. During periods of investor indecision like this one, when gold prices are swinging up and down through their 200-day moving average (a major trend proxy) in search of a sustainable trend, perhaps the most reliable metric — in our view more reliable than price itself — is near-term investor asset flows.
Asbury Research believes that the SPDR Gold Trust ETF's (GLD) recent reversal from important overhead resistance — especially amid contracting investor asset flows, too-bullish investor sentiment, and quarterly overbought extremes — sets up favorable conditions for more weakness and an additional 12% decline to meet our $104.50 downside target. The tight and stable positive correlation between gold prices and long-dated Treasury prices suggests that an upcoming decline in GLD is likely to be accompanied by rising long-term U.S. interest rates.
The blue line in the lower panel of Chart 1 below plots the daily total net assets invested in GLD since March along with their 21-day moving average, the latter of which we use to indicate a trend of monthly expansion or contraction.
The green highlights shows that the May 17 trend of monthly expansion fueled the recent rally into the June 6 high, and that asset contraction since then has driven GLD back into its 200-day moving average, which has resulted in a new trend of monthly contraction.
On a day-to-day basis, as long as this trend of monthly contraction continues, so should the recent decline in GLD and in the price of gold it represents.
Recent Price Activity Now Favors a Bearish Resolution
Chart 2 below, plots GLD monthly since 2007 and shows that the ETF is currently testing — and starting to reverse lower from — major overhead resistance at its September 2011 major downtrend line currently situated at $121.31. A closer look at the chart also reveals that GLD has also just edged below its 12-month moving average (another major trend proxy) at $119.67.
This represents a major, long-term inflection point for gold, from which its 2011 downtrend must resume if still valid.
Chart 3 below plots GLD daily since 2016 and shows that a bearish chart pattern, a head and shoulders confirmed on Nov. 11th, continues to target an eventual, additional 12% decline to $104.50 that will remain valid as long as the "neckline" of the pattern, drawn between the June 2016 and Oct. 7 lows, continues as overhead resistance.
Note that this neckline has already tested and held twice, on April 17 and June 6, which indicates that the bearish implications of the pattern are still intact.