Readers of this blog should be aware that we believe gold has entered a new bull market.
While we believe this to be true, bull markets don’t reach their objective in one smooth move. It is typically “two steps forward and one step backward” kind of action. A step back is now possible and likely probable.
Markets often advance too fast and become what is called overbought. That is what’s happening to gold right now. It does not mean that we have changed our minds about the long term, nor does it mean investors should be sellers. It is meant to be a psychological warning as well as an alert that a buying opportunity may present itself soon.
The term overbought usually applies to measures of momentum where a market moves too far, too fast. The chart below shows the gold price with a number of indicators. We don’t have space to explain all of them. Let’s just say they have been good measures of momentum.
Sentiment is now reading very high. The readings on gold are 81% bulls. Sentiment basically tells you that opinion has become quite lopsided and that excessive bullishness is likely already being discounted in the current price structure.
Futures positioning also shows large speculators (likely hedge funds) have become massively long gold futures contracts. We are seeing large gold exchange trading funds (ETF) purchases as well.
Finally, it is worthwhile just doing some old-fashioned chart reading. Charting of course is part science and part art, but we are impressed that so many indicators are basically saying the same thing, and we thought it important to bring it to your attention.
Markets typically congest around previous lows or highs. Notice between 2011 to 2013, the gold market both broke upward and then down rather hard, right around the level of $1530. Readers might remember that $1530 was our short-term objective when gold broke out from the multiple highs around $1360. The market is now in a resistance zone.
A short-term correction would be healthy. It will keep the market from overheating and thus extend the life of this bull market. More importantly, if you are late getting into the gold market, there is a good possibility of acquiring it at a lower price.
You don’t want to miss it.
Information is derived from reliable sources but results cannot be guaranteed.