Is The Largest Gold ETF (GLD) Nearing A Top?

By Jim Donnelly, Olson Global Markets

When looking at weekly bar charts, the largest gold ETF (GLD) is nearing a test of important resistance in the form of a “rising wedge” top that currently sits at the $130.50 level. This roughly equates to the $1,335 level for “spot” gold. Overbought technical conditions are also present on weekly charts.

It is interesting to point out that “rising wedge” patterns tend to occur in general downturns or bearish trends, and typically end with a bearish breakdown 2/3’s of the time. As a result, they are thought of as bearish “continuation” patterns. In this case, however, the 2-year “rising wedge” pattern that GLD formed is clearly happening at an all time price high for gold, a clear difference. It is also the norm that trading volume tends to dry up when price is approaching the apex of a “rising wedge”, but picks up during a breakdown. Although trading volume is well below levels seen during the April/June period that accompanied a 16-point rise in GLD and a 200-point plunge in the S&P 500 Index, it has been steady during the summer months with a distinct rise scored since the release of last week’s FMOC monetary policy release.

From a fundamental stand point, one of the crucial reasons that GLD has been rising is due to the theory that the greenback will likely become debased as attempts to grow base money supply increase. Last Tuesday’s FOMC report appeared to formally solidify this expectation with overt hints of another round of quantitative easing.

The true test of gold’s strength will likely come as GLD approaches the $130.50 level. A solid break above it, if accompanied by a jump in trading volume, should favor a bullish outcome and an extension to new all-time highs. A failure to punch solidly above $130.50, however, could result in a liquidation of long positions that could result in a nasty retreat.

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