What's Next for Gold?

Gold's recent selloff reflects profit taking and forced liquidations, not sutructural changes. The metal remains fundamentally sound, and history along with the current option positioning favor a rally inside the 3 - 12 month horizon. 

The Selloff

Gold has taken a beating. GLD is trading at $412, a drop of 19% from its high of $510 (the peak on January 29 after an exponential burn-up). GLD fell fast after the start of the Iran war as the market gave into fears of inflation and a stronger dollar. An upward move at this point was less likely anyway as prices were inflated and approaching all time highs once again. Hence, the fall was likely as much about profit taking (and liquidity) as inflationary fears.

By March 10, GLD failed to rally above $490, and once it crossed under its near term low of $460, the bottom fell out. Outflows ensued immediately.  The drawdown in gold tracks very closely to that of equities as the declines are largely driven by the same underlying factors - a shock to the markets, a surge in the dollar, and a pronounced fear of inflation. Interestingly, Saxo Bank analysts point to a shift from gold as a traditional safe-haven to more of a liquidity source. This is a recent development given the war and one particularly true for countries that are net importers of oil - see Turkey's liquidation. 

GLD (Brown) and SPY (Blue) (TradeStation)

The Fundamentals 

Looking ahead, three of four primary factors currently favor a rebound in GLD.  

1. Centrals Bank Buying (BULLISH): Liquidity sales aside (they are temporary), dedollarization of the world economies continues to be an underlying theme with central banks looking to gold as a replacement. Purchases of the precious metal are forecast to reach 755 tonnes in 2026 (JP Morgan). Expect buying to pick up from January lows (only 5 tonnes) given lower prices and a broadening demand base (World Gold Council). 

2. Global Uncertainty (BULLISH):The war in the Middle East has driven fear into equities. With Iran digging in its heels and U.S. troops on their way to the Gulf, a near term resolution looks unlikely. The fear premium could be a tailwind for gold, especially if equities continue to decline. If calmer minds prevail and the war cools down, we could see some relief in oil and a reversal of the 'gold as liquidity' sale - again, bullish for GLD.

3. The Dollar (NEUTRAL): On the other hand, the stronger dollar is a headwind, but it may not last. Persistently high energy prices could bolster inflation and cut into economic growth undermining the dollar as a safe-haven. 

4. The Fed is Stuck - For Now (BULLISH): Stagflation has rates locked for the time being. CME's Fed Watch has the probability of a rate hike by year's end at just over 25%. This is bullish for Gold as it defers any hike (should inflation persist) until the Fed has more clarity. If we see relief in oil and inflationary pressures retreat, we might see a hike earlier, but - as the CME numbers have it - this is less probable.

Options Positioning

Given a put/call ratio of 0.6, the market is projecting a bullish lean for GLD.

Looking at the open interest, there is solid near-term support at the $405 and $400 put walls making an extended pull back beneath these prices less likely. 

On the upside, roughly 2/3 of April's open interest in calls is positioned above $420 providing a gravitational pull upward due to gamma squeeze. May and beyond have huge spikes around $495 and - farther out - $550. If GLD rallies above $475 before May, gamma could provide a tailwind toward $500 by summer.     

Price History 

History too is on the side of GLD. Since its inception, the GLD ETF has only seen 6 drawdowns of 20% or more. The returns following those milestones have been exceptional over the 3, 6, and 12 month timeframes.

Drawdowns for GLD Since ETF Launch (QuantConnect)

Conclusion

GLD is likely to rebound. The dynamics behind the recent selloff are temporary outliers and not structural changes. Fundamental dynamics remain bullish, and options positioning and history all support a continuation of the longer-term bull trend.