GLD: The fiction is dying

OK, gold bugs. Your shiny holdings have crashed and you're back to where you were in early February 2011. The price of the gold exchange-trade fund, GLD, showed a 5.5% opening gap on Monday -- today.

In the present leg down, from $174.07 on Oct. 4, 2012, GLD has declined to today's low, so far, of $131.10, a decline of 24.7%.

Back in 2011, happier days for gold, I wrote "Gold: A letter to a friend" discussing what I saw as the flaws behind idea that gold is "real" money.

This year in the gold market certainly backs up my opinion. Just because a commodity has beauty and a history doesn't mean that it will hold its value, any more than the fact that the dollar is backed by a government with a big army is any guarantee that our fiat money will hold value.

All money is a fiction, whether fiat or commodity, and if we fail to meet Tinker Bell's demand that we believe, the fiction dies and Tink gets sick. That's what's happening to gold right now, as happened to real estate in 2007. The fiction is dying.

GLD broke below its 20-day price channel on April 3, moving into bear phase. It didn't show on my screening list because bear signals on GLD have had only a 37.5% success rate since the present market recovery began in early 2009.

That shows a flaw in my methodology, since it fails to pick up changes in direction immediately. Using data back to 2009 has the advantage of providing a more robust statistical base, but it's not very nimble when the tectonic plates shift.

Bear signals since the present downtrend began have been profitable two out of the three times they have occurred.

GLD's next major resistance level on the weekly chart is $127.80, a correction low in early January during the long uptrend. That's 3.8% below the present trading level.

There's no way to say how strong the resistance is. The low was accompanied by a volume spike, but a weak one.

GLD, with average volume of 16.4 million shares a day, has an excellent options grid with high open interest and a fairly narrow bid/ask spread.

Decision for my account: GLD is clearly in a downtrend and would make a decent bear play. A decline of such magnitude usually is followed by an upward correction, and I shall wait for a break  above the 10-day price channel, ending the current bear phase, and then a fresh break below the 20-day price channel, signally a new bear phase, before entering.

References

My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.