There have been reports on the rallying of gold all week, even with the brief pause factored in. However, according to Craig Johnson, chief market technician at Piper Jaffray, it may be better to wait.
While the precious metal may have topped $1500 an ounce, its highest level in more than six years, Johnson breaks down this current trend. “It’s starting to get a little bit ahead of itself,” Johnson states, citing the SPDR Gold Shares ETF (GLD) chart.
He adds, “I’d wait for this stock, take profits here and now, wait for it to pull back to about $130 on the GLD, then I’d be a buyer on that pullback and confirmation of support.” That would speak to a longer-term setup, given the topside break out of a nice consolidation range.
Given what appears to be occurring, were one to pull back and wait, a move to $160 on the GLD implies a 13% upside, a level not reached since 2013.
Nancy Tengler, chief investment strategist at Tengler Wealth Management, came in with some further advice. She notes how the GLD has outdone the S&P by about 600 basis points. That in mind, Tengler adds that she’s not ready to buy the long-term bull case.
Considering YTD, the GLD fund is flat with the market and has historically lagged behind the S&P for about ten years. Tengler adds, “If I believe that slowing global growth is going to infect the US, that interest rates are going negative, then I buy gold.”
Tengler believes things will ultimately consolidate, a bad trade deal with China will probably occur, and equities will begin to rally and outperform. That means it’s time to sell here and invest in dividend-paying stocks.
Leveraged Gold ETF Plays
Investors who are bullish on gold may want to look into a investing in a precious metal ETF such as UGL, DGP, or UGLD. One thing to keep in mind, as these are leveraged products however, is that these ETFs are extremely volatile and more suitable for traders who have a high risk tolerance. Let’s take a look at these 3 leveraged gold ETFs.
The ProShares Ultra Gold ETF (UGL) seeks daily investment results, before fees and expenses, that correspond to two times (2x) the daily performance of the Bloomberg Gold SubindexSM. This leveraged ProShares ETF seeks a return that is 2x the return of its underlying benchmark (target) for a single day, as measured from one NAV calculation to the next. Due to the compounding of daily returns, ProShares’ returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. These effects may be more pronounced in funds with larger or inverse multiples and in funds with volatile benchmarks. Investors should monitor their holdings as frequently as daily.
The DB Gold Double Long ETN (DGP) offers 2x daily long leverage to the broad based Deutsche Bank Liquid Commodity Index-Optimum Yield Gold, making it a powerful tool for investors with a bullish short-term outlook for gold futures and Treasury bills. Investors should note that DGP’s leverage resets on a daily basis, which results in compounding of returns when held for multiple periods. DGP can be a powerful tool for sophisticated investors, but should be avoided by those with a low risk tolerance or a buy-and-hold strategy.
The VelocityShares 3x Long Gold ETN (UGLD) offers leveraged exposure to gold futures, making it potentially useful for those looking to bet heavily on a short-term movement in the price of the precious metal. Given the leverage utilized, UGLD can be expected to exhibit a fair amount of volatility; this ETN is designed for investors who are both risk-tolerant and sophisticated; it has no place in a long-term, buy-and-hold portfolio, and should only be used by those with the ability to monitor the position closely. UGLD can be a very powerful tool if used correctly, but if you’re not familiar with the nuances of leverage and futures-based strategies, it’s best to stay away.
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