Gold: Bulls In Control

It’s been a frustrating past month for investors in the gold market (GLD) as the metal broke out to new all-time highs in early August, but it has since given up the majority of its gains.

This likely comes as confusing to many gold investors as everyone from technical analysts to the perennial gold bugs was sharing charts of why gold could finish the year above $3,000/oz in August, and some even being ambitious enough to throw 2021 targets of $5,000/oz on the metal.

Unfortunately, when the majority are looking for targets that are nearly double current prices, it’s typically time to pare back exposure, or at a minimum not be coerced into buying.

Since then, we’ve seen the metal slide 10% from its highs, and the sentiment is finally beginning to trend lower, suggesting that we are seeing some frustration among the bull cap. The good news is that while the bulls are getting frustrated, zero damage has been inflicted on gold’s technical chart.

(Source: TC2000.com)

As we can see in the chart above, gold broke out of a massive cup base just last month, and the metal is on track to put in a new yearly closing high. This couldn’t be a more bullish development on a long-term basis as gold is one of the only assets breaking out of a 7+ year base.

However, we often see volatility around these big levels short-term as it’s at all-time lows and all-time highs that we often see the most extreme levels of sentiment. If we look at the chart below, this was exactly what we saw, as bullish sentiment soared above 90% in August and remained there for 2 weeks.

Typically, time spent above 90% bullish is a reason to be cautious as rallies while sentiment resides in this danger zone are ephemeral. Fortunately, this 10% pullback in gold has finally allowed the metal to cool off from a sentiment standpoint, as it came near testing the 50% bulls level despite gold being at all-time highs.

This is a contrarian bullish indicator when an asset class is at all-time highs, as we would expect at least 75% of investors to be bullish.

However, drawn-out corrections in both time and price often make investors second guess their thesis, and this is what it looks like we’re seeing here.

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

The good news is that despite this improvement in sentiment to near 60% bulls, the daily chart for gold continues to hold up very well.

As we can see in the chart below, gold is now re-testing the top of its channel which it’s spent the past two years trading within, and an acceleration outside of a channel often leads to a more accelerated uptrend going forward.

If gold were to fall back inside this channel and break below $1,850/oz, this would have been a negative development.

However, to date, the bulls are playing strong defense at the top of this channel, evidenced by strong weekly closes and sharp reversals on any dip inside this zone. As long as the bulls can continue to defend $1,850/oz, I see no reason to be skeptical of the recent breakout to new all-time highs.

(Source: TC2000.com)

While I typically prefer for bullish sentiment to dip to below 25% below starting new positions, I believe this time could be an exception for gold, because of the all-time high we saw.

If this had been a 20% plus correction for gold or gold was below its 200-day moving average, I would be alarmed at the relatively balanced sentiment levels with 60% bulls and 40% bears.

However, given that gold is at an all-time high, we may see a new floor for sentiment near 50% bulls, coinciding with the shift we’ve seen from a moderately upsloping channel to a move outside that channel recently.

Therefore, while I open to the fact that gold could re-test its low at $1,850/oz, I continue to add to positions in several gold miners like Kirkland Lake Gold (KL), Royal Gold (RGLD), and Probe Mines (PROBF).

The recent weakness in gold has certainly been frustrating for those that bought the breakout in gold or those focused on shorter time-frames, but the bulls remain in control of the big picture here.

Therefore, while I don’t see any reason to be overly aggressive here and I have no plans to add to my gold position just yet, I do see a case for holding miners, which are trading at less than 50% of the price to cash-flow ratios that they were trading at last time gold was above $1,800/oz.

While volatility is certainly possible over the coming weeks in the metals markets, especially with another Fed Meeting on deck, I would view any corrections in gold that hold above $1,850/oz as noise and buying opportunities to scoop up miners that remain undervalued ahead of their Q3 Earnings reports in late October.

Disclosure: I am long KL, RGLD, PROBF, 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.

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The SPDR Gold Shares (GLD) rose $0.68 (+0.37%) in premarket trading Tuesday. Year-to-date, GLD has gained 29.39%, versus a 7.14% 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.