Gold had a strong run falling just short of $2,100 per ounce, became significantly overbought, and has had a modest corrective phase since the peak in early August. We have dropped about $240 dollars or about 12% from the peak down to the $1850 area. Because we believe gold remains in a strong primary bull market, such corrections are likely a “buy the dip” opportunity.
If you look at the price chart carefully, you will note that most of the momentum indicators rotated from overbought to now modestly oversold, and now look like they are trying to turn upward. The red ellipses show “overbought” in momentum versus green, which shows “oversold.” The obvious lesson is to buy when the market is oversold and avoid loading up when the market is overbought.
For those considering making a gold purchase for the first time, or for those thinking of adding to their position prior to the election turmoil, you may want to pay close attention over the next week or two.
Besides getting through this short-term corrective phase, it is worth looking at seasonality. Gold has a fairly reliable seasonal pattern that fits nicely into the comments above.
We have chosen an eight-year study on seasonality because the last peak in gold was in 2012, and thus the study includes several years of correction and then the birth of a new bull market. All of that is contained in the same time frame where new experimental monetary policy has been dominant as well as significant political changes. Therefore, we think the study includes a good deal of new factors that influence the gold market.
Please note that only 13% of the time has gold closed the month of September higher than the opening. In short, September has been the weakest month of the year. Then notice that three of the next four next months are among the strongest of the year, with January being the strongest of the study.
While seasonality does not guarantee gains (frankly, there is no study which can guarantee gains), it clearly shows the odds of gold firming up after September to be a high probability venture. Coupled with the current price action, this provides the investor a high probability “buy the dip” opportunity.
Given the deficits running wild, Modern Monetary Theory becoming popular among Democrats, the uncertainty of the election and its likely tumultuous aftermath, continued stimulus to attempt the repair the damage done by the Lockdown economy; there remain long term strategic reasons to own gold. But like all investments, gold cycles up and down.
It would appear that odds favor an end to the down part of this particular cycle pretty soon. Be alert! A good policy is to give up the attempt to “call the bottom.” It is extremely hard to do. Bottoms can be known only after the fact. If you desire to increase your exposure to gold, it is better to scale in, nibbling as the market attempts to form a bottom. We seem to be just entering that phase.
Right now, the condition of the market, having rotated from very overbought now to oversold, is favorable for those wanting to increase their bullion holdings.
Charts courtesy of Stockcharts.com. Information is derived from sources believed reliable but investment results cannot be guaranteed.
Neland D. Nobel, is a retired portfolio manager and Certified Financial Planner with 45 years of market experience in the securities and gold industry.
