Gold ETFs Fail The Volatility Test

india-gold-etfDavid Fabian:  In my experience as an investment advisor, gold bullion and other precious metals are often times a very polarizing asset class to own. You either love it because you are worried about inflation, currency manipulation and market volatility, or hate it because you have no idea when it actually works to hedge those themes.

Anyone who has been watching the price of the SPDR Gold Shares ETF (NYSEARCA:GLD) over the last four years has seen the deflationary pressures this yellow metal has succumbed to. GLD peaked near $185 back in 2011 and is currently trading near its lowest levels of this bull market at $110. That represents a total decline from peak to present day of 40%.

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Yet over that time span, GLD has briefly surged during times of turmoil in the markets. While not perfectly correlated, a surge in the CBOE VIX Volatility Index and concomitant drop in the SPDR S&P 500 ETF (NYSEARCA:SPY) usually brought some buyers to the table in precious metals. The flight to safety aspect of gold bullion as a hard asset class is something that investors have become accustomed to – particularly when international headlines wreaked havoc on global markets.

More recently, the VIX experienced one of its biggest single day moves of the decade as worries over a Greece default led to significant broad-based equity selling and options hedging. One would think that this environment is the perfect storm for GLD to surge given the implications felt throughout the global currency, stock, and debt markets.

Yet despite this tumult, gold bullion has continued its march lower and is now poised to test the lows established in late-2014 and early 2015. This support level should be a very key area to watch over the next several days as the precious metals bulls will likely try to make a stand. A break below the $110 level in GLD may attract more sellers that throw in the towel on this once revered asset class.

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Another concerning and parallel pattern is the weakness in the iShares Silver Trust (NYSEARCA:SLV). This ETF tracks the daily price movement of silver bullion and broke through its prior support level on Tuesday with heavy volume.

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The chart of SLV looks to be carving out the next leg of its current downtrend, which will be the playbook unless an immediate reversal takes place. Either way, I am continuing to advocate caution before jumping in to precious metals to try and call a bottom or capture a rebound.

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