GLD ETF: Short, Medium, And Long-Term Signals (NYSEARCA:GLD)

Preamble

There is no shortage of doomsayers these days, and yet, the stock market appears to be going higher. At the beginning of the year, the Nasdaq composite (IXIC) was sitting at around 10,300 and now, at the time of writing, it’s 11,900, which represents a rise of 15.5%, not too shabby for a world that sits on the precipice of a variety of calamities.

When I think of all the so-called experts waxing lyrical on the topic of; “sell while you still can,” a number of well-known names spring effortlessly to mind. It is conceivable that Peter Schiff’s evergreen forecast that gold will do a moon-shot will eventually come to pass. Nowadays, we are treated to one-word tweets from famed speculator Michael Burry, which give voice to his gloomy forecast for the markets and the world in general. Whilst researching for this article, I attempted to find Mr. Burry’s first prediction of a crash in this latest market cycle. One that I found was published in 2017, and states that investors should prepare for; “an imminent stock market crash”. Unless I’m missing some subtle nuance, isn’t that similar to his prediction for 2022 and 2023?

The thesis for this article is that the medium and long-term signals point to the doomsters being correct, but short-term signals are bullish for the market; at the moment. This being so, potential investors in gold, either physical or through an ETF such as the SPDR Gold Trust ETF (NYSEARCA:GLD), may wish to wait until the right time to pile in.

Short-term signals

There are numerous data that indicate that we currently reside in a benign investing environment, but for this article, only three indicators will be reviewed. To begin with, there is the obvious recent upward trend in the major indices. There has been an upward move in both the Nasdaq and the Dow, which no doubt perplexes those who point to the figures for inflation plus other negative economic information and demand a fall in stock prices. May I remind those who call for a drop that many markets around the world have risen despite a poor economic backdrop; Turkey and Venezuela to name but two.

It is often said that bond investors are far smarter than stock investors, and so the next indicator is the spread between AAA 30-year treasuries and BBB corporate bonds. When times are good, the spread narrows and when the markets are heading for a crash, the spread widens; a lot and quickly. This is an indicator I check daily, and I can advise you that the spread is currently suggesting happy days.

Finally, there is the CBOE Volatility Index (VIX), which is a real-time index that depicts the market’s beliefs for the strength of near-term price changes. This is due to the fact that it is derived from the prices of options with near-term expiration dates. The figure represents the speed at which prices are changing and expresses the degree of fear among investors. At the time of writing, the figure is a modest 19.63.

There are many factors that influence the price of gold, which gold investors are more than familiar with. At the moment, gold is around $1,850 an ounce, despite high inflation and evidence that central banks are buying record amounts of gold. According to the gold Council, central banks bought a record 1,136 tonnes of gold in 2022. Other factors which influence the price of gold are when investors consider stocks attractively priced and when economic conditions appear favorable. The three indicators listed certainly give an insight into the current mindset of market participants. I’m sure some people might argue that the price of gold could be another indicator that investors consider stocks to be fairly valued at this time.

Medium-term signals

An indicator that investors are hearing a lot about these days is the inverted yield curve. Yields are invariably higher for bonds that mature over longer periods due to the increased risk for the investor. An inverted yield curve is when interest rates on long-term bonds are below those of short-term bonds. When this happens, it can be, but not always, a sign of an oncoming recession. And it has been a good indicator, since an inverted yield curve has preceded almost all recessions since 1960.

Ultimately, an economy is dependent on the amount of spare cash consumers have to splash around, and things are not looking good in that direction. By now, I’m sure many have read that employees are living paycheck to paycheck. It would appear that 64% of Americans are struggling financially, even those earning $100,000 pa are feeling the pinch. As a consequence of this, the US consumer-driven economy may well suffer a marked slow-down in the not-too-distant future.

Furthermore, loan delinquencies are on the rise. For instance, CNBC reported that auto loan delinquencies were 26.7% higher than a year ago. Problem loans are not expected to decline any time soon, indeed, they are forecast to rise. Recent reports foresee delinquency on credit card loans rising from 2.1% to 2.60%, the highest since 2010. Delinquency rates on personal loans are also anticipated to climb from 4.1%. to 4.3%. Needless to say, delinquent loans represent a real problem for both banks and the general economy.

Again, there are many other medium-term signals that would lead most market participants to conclude that there are ominous signs of a slowdown of significant proportions ahead.

In my view, once the short-term signals listed turn bearish and these medium signals begin to ring alarm bells, gold will start to move at a pace that many investors will miss. Therefore, I would suggest a position in GLD as insurance.

Long-term signals

Reviewing all the numerous bearish long-term signals is beyond the scope of this article, so just a flavor of economic, political and societal signs is given. Beginning with the economic woes, right now, US government’s debt to GDP is around 125%. Add to that private debt of around 235% and a rising household debt of around 75%. In total, the US has approximately 435% debt to GDP. Needless to say, this does not allow for future liabilities. Just to reduce government debt would likely require a rise in taxes, curbing government expenditure, and adjusting future liabilities such as pensions and healthcare. To date, the government has shown no inclination to reduce debt; quite the opposite, in fact.

According to some reports, around 13% of all listed US companies are “zombies”, that is to say, they are wholly reliant on debt to maintain their viability. Clearly, if the US enters a recession, interest rates rise to combat inflation and there is a drop in the money supply, these zombies may begin to collapse.

One of the biggest drains on the public purse and business finances is crime, which is increasing at an alarming rate. One example of the surge in crime comes from FBI records, which prove that rates of murder rose almost 30% from 2019 to 2020. This was the largest single-year increase ever recorded in the U.S. Newspapers and the media are also full of reports of retail thefts.

It is clearly evident that the US and other Western countries have massive problems to deal with, and these issues will require intelligent, rational and mature political leaders to get the economy on the right track.

Here we get to subjective opinions, and it is up to everyone to consider recent political decisions to determine whether they believe our current crop of leaders is up to the job of fixing things. Unfortunately, in my opinion, there are precious few intelligent, rational, and mature political leaders. This being so, I believe that our current extensive list of predicaments will not end well.

Protecting your wealth

Given that short-term signals point towards further gains for the stock market, there would appear to be no hurry in exiting positions. However, once these signals turn bearish, I doubt if there is a safer place to be than in gold; either physical or through GLD.