Up 10% Year-to-Date, is Gold Overbought?

It’s been an impressive start to the year for gold (GLD), as the metal remains one of the top-performing assets, second only to bonds (TLT), and one of the few assets that’s shown a positive return year-to-date. Unfortunately, the metal has had a nice run the past few weeks and has found itself a little overbought, after failing at strong resistance near the $1,800/oz area. Therefore, while the fundamental picture remains brighter than ever, this is not the best time to be rushing to add any exposure to gold or gold miners currently. For those looking to add exposure, a pullback of 8-10% towards the $1,600/oz level would provide a much better buying opportunity.

(Source: TC2000.com)

Yesterday, we had our first Fed meeting since the emergency rate cuts in March, and Powell decided to hold steady on further rate cuts after slashing them at the fastest rate since the 2008/2009 Great Financial Crisis. While the fact that the Fed decided to hold rates unchanged is not a big deal for gold, the more significant issue is that we’ve seen multiple calls for $2,500/oz to $3,000/oz gold over the past few weeks, and this often suggests that much of the fundamentals are priced in short-term. Typically, when sentiment gets this bullish, it’s best to either take some profits or, at a bare minimum, not add more exposure. Let’s take a closer look at bullish sentiment below:

(Source: Daily Sentiment Index Data, Author’s Chart)

As we can see from the chart above of bullish sentiment, we’re stretched in the upper edge of the 11-year range, and generally, it has paid to add to long-term positions in gold when we’re in the green zone, not when we’re retreating from the red area. Currently, bullish sentiment sits at 78% on gold and is nowhere near the green zone, which comes in at around 20% bulls. Based on this alone, it would suggest that we have nearly four bulls for every one bear and that the long gold trade is a tad crowded short-term. This does not mean that gold has to collapse or that we’re heading back below $1,500/oz. However, it does suggest that the reward to risk is tilted negative from $1,730/oz, and that a pullback of $100/oz would not be out of the question.

Is there any good news?

(Source: TC2000.com)

If we look at the chart above, we can see that this trend in rate cuts and an increased likelihood of inflation has flipped gold’s 200-day moving average (yellow line) to a positive slope, and this moving average has been strong support on any dips thus far. Based on this change in character and the solid uptrend gold has carved out, we are very likely to continue to see strong buyers show up at this crucial area, which currently comes in near $1,520/oz. Therefore, there is a high probability that we’ll make yet another high low vs. the mid-March lows if we do see weakness, and the worst case for the gold bulls is most likely a drop to the $1,500/oz to $1,540/oz area.

Based on the fact that gold remains slightly overbought with bullish sentiment running only a little hot, we do not have a strong sell signal here at all. However, we do have a caution signal, and it’s generally best to refrain from adding new exposure when the market is warning that we could be a little overbought with sentiment stacked on one side. Therefore, I have no interest in selling out of my gold positions, but I am being patient for a real pullback of 8% or more from the $1,800/oz level before I even consider adding to my position. In summary, the bulls remain in control of the big picture both fundamentally and technically, but piling into gold above $1,730/oz or averaging up probably isn’t the wisest move. Instead, wait for the late to the party speculators to get shaken out, and then think about maybe adding to positions.

Disclosure: I am long GLD

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

Want More Great Investing Ideas?

9 “BUY THE DIP” Growth Stocks for 2020

7 “Safe-Haven” Dividend Stocks for Turbulent Times

REVISED 2020 Stock Market Outlook– Discover why there is more downside ahead and the Top 10 picks for the bear market.

The SPDR Gold Shares (GLD) fell $0.10 (-0.06%) in after-hours trading Thursday. Year-to-date, GLD has gained 28.43%, versus a 9.29% rise in the benchmark S&P 500 index during the same period.

GLD currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 34 ETFs in the Precious Metals ETFs category.