Has Gold Moved Too Much, Too Fast?

Over the last nine months, gold has rallied over 20% and it recently jumped to a six-year high. For the most part, the first eight months of the rally were pretty quiet—there was very little media coverage and I wasn’t reading much about the rally on investment related websites. Now all of the sudden Bloomberg and CNBC can’t stop talking about the gold rally and the Wall Street Journal, Investor’s Business Daily, and Yahoo Finance all have stories on their home pages.

The price jumped on Monday and moved above the $1,400 level after hovering down below $1,200 an ounce last fall.

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There are a couple of factors that have helped boost gold prices, mainly the increased tensions between the United States and Iran and the dovish atmosphere in the global interest rate market. Investors tend to look to gold as a safe haven during times of crisis or uncertainty.

The problem for me is the way the sentiment has changed so dramatically in the past month or so. I wrote an article on Seeking Alpha last fall where I made a bullish case for gold. The primary reasons behind my bullish stance were the sentiment toward the commodity and the oversold readings on the chart. At the time gold was oversold based on the 10-week RSI and the weekly stochastic readings. You can see that on the chart above.

As for the sentiment, the Commitment of Traders report from the CFTC showed that large speculators were net short gold for the first time since 2001. It is extremely rare that we see a net short position in gold from the large speculators and using contrarian thinking, the metal seemed ready for a rally.

Flash ahead to today and the Commitment of Traders report shows that large speculators are net long over 200,000 contracts. As recently as April the group held a net long position of approximately 40,000 contracts. But they have really ramped up their bullish stance in the last month or two and that shift shows on the chart below.

This is a concern for me. If you look at all of the attention gold is getting in the media and the huge shift on the Commitment of Traders report, I have to wonder if gold has jumped too much and too fast in the last few months. Going back to the price chart we see that the weekly overbought/oversold indicators are now in overbought territory. If you look back over the last few years, when gold moved in to overbought territory, it didn’t stay there long. There was usually a pullback of some sort—some were quick little dips and there were more extended pullbacks as well.

The current net long position from the large speculators is the biggest net long position the group has had since the first quarter of 2018 and that was right as gold was topping in the $1,375 range.

Given the way gold has moved up in to overbought territory and given how bullish large speculators are, I wouldn’t look for gold to move up too much farther—at least not before it pulls back a little.

If the geopolitical tensions continue and cutting interest rates remains the mantra from central banks, gold certainly could continue to rally. However, I see it pulling back in the next month or two and that would bring the metal down out of overbought territory and would likely cause the large speculators to become less bullish. If those two things happen, we could see the old resistance in the $1,375 area act as support at the time and then gold could resume its current rally.

Earlier this week I posted an article called The Everything Rally. I talked about how unusual it has been over the last few quarters with stocks, bonds, gold, and oil all rallying at the same time. I don’t see that being the case for very much longer. At some point these different asset classes are going to start moving in different directions and I see that happening in the third quarter. It could be that we see all asset classes move lower for a period, but then some will start moving up again. My guess is that stocks start moving lower and gold starts moving higher.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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