You’ve probably heard that gold is a great hedge against inflation. After all, this is considered one of the market’s “truths.”

While this may be true some of the time, there are other times when it simply doesn’t hold up.

Even though gold has historically been used as a hedge against inflation, there are times when the two simply disconnect – just like what is happening right now…

Coming into the start of this year, inflation just wasn’t on investors’ minds.

After all, January’s 1.4% inflation rate was nothing out of the ordinary. It was the exact same rate as the previous month, and prior to that, back in September last year.

The market finally started to take notice, though, when February’s inflation rate hit 1.7%.

So, let’s take a look at what that meant for gold using the SPDR Gold Shares ETF (GLD).

GLD Chart

Source: eSignal

You can see that GLD formed a base in March (green line) and began to rally from there.

(Note: a month’s inflation data is released the following month, so is only reflected in the charts then).

When March’s inflation rate hit 2.6% (released in April), the uptrend began. You can see this with the shorter-term 10-day MA (red dashed line) crossing up through the 50-day MA (blue dash line).

That’s when you started to see inflation stories all over the news…

From March, inflation climbed to 4.2% in April, 5% in May, before reaching 5.4% in June – it’s highest rate in 13 years.

Inflation remained at 5.4% in July, before dropping slightly in August to 5.3%. All the while, as the chart shows, GLD had already clearly turned down.

If gold was truly an inflation hedge, you would expect GLD’s share price to track those monthly inflation numbers.

Having failed to break higher in May high, GLD gapped down in June… and has been trending lower ever since. From its high in May ($178.85), GLD traded down to $160.97 last month – a fall of 10%.

Clearly the link between gold and inflation is broken for now. The question now is… what’s next for gold?

So, let’s go back to the chart…

GLD Chart

The 50-day MA shows us that GLD is in a downtrend. However, from when the 10-day MA crossed down over the 50-day MA in June, they have been tracking each other closely ever since.

Sometimes, though not always, this action in the MAs can precede a change in direction.

The other positive for GLD right now is that it recently held support (the blue line).

As the chart shows, GLD bounced off support on September 29 – along with the RSI turning up (as it did in August).

For GLD to break the current downtrend, it will first need to hold above the blue line. We’ll then need to see the 10-day MA cross back above the 50-day MA.

The next test for GLD is to break above its September high ($171.55).

And from there, GLD will then need to break above and hold its previous high from June 1 ($178.85), to confirm a new uptrend is underway.

Either of these scenarios could provide the setup for a long trade…

For now, though, holding support is the first priority.

If GLD fails to hold support and instead breaks lower, that could provide an opportunity to go short.

That’s why this week’s price action is crucial…

It’s the type of scenario that just pulls traders into the market… they just can’t resist it.

So, along with the rest of the market, there could be plenty of action in GLD over these coming weeks.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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