Gold: What Is Sentiment Telling Us

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July 16, 2019 6:04pm NYSE:GDX NYSE:GDXJ

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Gold (GLD) has enjoyed a huge run off of its June lows, thanks to a complete U-turn in Fed Policy. Initially, 2019 was expected to be the year of three rate cuts and a continued effort to cool off inflation, but Powell has walked back all of his comments, and 50 basis points of cuts before year-end are now on the table.

While this is a boon for the stock market (SPY) that was dealing with recession worries up until just recently, it’s an even bigger help to the yellow metal. The good news for the bulls is that this spike higher in gold has two significant differences between past $100/oz moves higher since 2016.

The first is that this move is showing follow-through as gold is not melting off of its highs like it has been accustomed to doing in the past. The second and more meaningful change of character is that sentiment has heated up to extreme levels, and while this may seem like a bad thing, it’s actually the complete opposite.

I have worked with Daily Sentiment Index [DSI] data for several years and found some interesting nuances that are counter to what common sense might be. I constantly see some analysts harping on the fact that high readings of sentiment are bearish, and low readings for sentiment are bullish. While this is generally true, it is essential to know where these readings are coming within a general trend.

The 2011 top in gold occurred with several readings above the 95% level for bullish sentiment, telling us that more than 19 out of 20 market participants were bullish on gold for a full week near the $1,900/oz top. However, this type of bullish sentiment was occurring after an accelerating three-year uptrend, and therefore, this final spike sentiment was buyers capitulation. However, when we get these same type of readings after a multi-year consolidation, this sentiment is telling us something completely different. In this case, it is telling us that market participants are finally warming up to the metal again after a frustrating and lengthy period of disinterest the past few years.

The point being is that the 5-year high in bullish sentiment for gold we registered on June 24th was the best thing that gold bulls could have asked for. As can be seen in the below chart, both the December 2017 spike to 91% bulls and the Q1 2019 spike to 90% bulls were unable to eclipse the prior sentiment high of 95% bulls.

So what else can this chart of Daily Sentiment Index tell us?

As we can see from the red line on the chart, which is a sentiment moving average, gold is trending higher and above its vital sentiment moving average. This is a positive sign as it shows that more bulls are entering the market on an intermediate-term basis.  When more bulls enter a market after a period of disinterest, this typically leads to any sharp dips being bought up quickly. This moving average is also nowhere near overbought at current levels near 60% bulls. As long as this moving average can stay away from the 80% bulls level, the gold bulls don’t have anything to worry about here from an exuberance standpoint.

Based on this new multi-year high in bullish sentiment that accompanied the recent $1,365/oz breakout, I would expect the most likely scenario is for gold to build a new base between $1,350/oz and $1,450/oz. Breakouts from multi-year bases typically either correct through time or price, and thus far it’s looking like gold might end up correcting through time.  This would be the best-case scenario as it would allow the metal to build a new launchpad above its prior multi-year resistance.I would consider any pullbacks down to the $1,370/oz area to be buying opportunities, especially if these dips are coupled with bullish sentiment falling below the 50% bulls level. As long as gold defends the $1,325/oz on a weekly close, I would consider any pullbacks to be buying opportunities. The next real resistance for gold doesn’t come in until $1,560/oz.

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About the Author 

Taylor Dart has over 10 years of experience in active & passive investing specializing in mid-cap growth stocks, as well as the precious metals sector. He has been writing on Seeking Alpha for four years, and managing his own portfolios since 2008. His main focus is on growth stocks outperforming the market and their peers. In addition to looking at the fundamentals, he uses different timing models for industry groups, and scans upwards of 2000 stocks daily to identify the best fundamental opportunities with the timeliest technical setups.  Taylor is a huge proponent of Trend Following and the “Turtles” who enjoyed compound annual growth rates of over 50 percent per year.



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