Keep an Eye on the Sentiment for Silver and Gold

Over the last four months, silver and gold have been on pretty big rallies. Gold gained 26.2% from its low in March to its close on Wednesday while silver gained 96.6% over the same period. The last time silver saw a rally anywhere close to what we have seen in the last four months was back at the end of 2010 and beginning of 2011.

The weekly chart for silver shows the meteoric rise and how the metal has become incredibly overbought based on the 10-week RSI and the weekly stochastic readings.

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While I always get a little concerned when things get overbought, looking at the chart for silver we see that its 10-week RSI doesn’t hit overbought territory very often. The stochastic readings seem to reach overbought territory far more often and they don’t seem to stay there very long.

For gold, the rally has been longer and steadier. It has moved up from $1,200 an ounce to $1,885 an ounce since the fall of 2018. The price did drop rather sharply back in February and March—during the sell everything panic, but it has recovered nicely. The all-time high came in the summer of 2011 when the price broke above $1,900 for the only time in history.

We see that the overbought/oversold indicators for gold are both in overbought territory, but they aren’t quite as high as silver’s indicators. We also see that when gold’s RSI has been overbought, it has been able to remain in overbought territory for longer periods.

In my 25+ years of studying and analyzing the investment markets, something I have learned is that one of the best indicators for watching silver and gold is the sentiment. And the best sentiment indicator is the Commitment of Traders (COT) reports. I have mentioned the reports before, but it has been a while. The COT reports are issued every Friday by the Commodity Futures Trading Commission. The report shows the net holdings for three categories—large speculators, small speculators, and commercial hedgers.

To me, the one category that matters the most is the large speculator group. I put together the charts for silver and gold to show how the commodities have performed with the COT reports showing the net positions. Each of the metals seems to have a specific level that marks too much optimism.

For silver, the key threshold seems to be the 60K contract mark. The instances where large speculators were long over 60K contracts are marked by the red ovals on the chart. It seems to be a sign that the optimism has reached a peak and we see some selling or a consolidation at the very least when the threshold is reached.

As of July 17, large speculators were net long 43,869 contracts on silver, so we are getting close and after the big run up this week, we might just get there.

For gold, the magic number seems to be the 300K contract mark. We see the instances are marked with red ovals once again. There have only been two instances in the last three years where the threshold reached such a high level of optimism. At this time large speculators are net long 262,428 contracts.

If you are invested in silver, congratulations on the great returns. The same goes for gold investors. However, I would also recommend keeping an eye on the COT reports for the next few weeks. If the silver report shows large speculators are net long more than 60K contracts, proceed with caution. If the gold report shows large speculators are net long more than 300K contracts, be aware that a dip may be in the works.

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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