It’s been a volatile several weeks for investors in the precious metals space, but while silver (SLV) has slid more than 25% from its highs, gold (GLD) is down just 11%, with the metal now re-testing its multi-year breakout level near the $1,800/oz level.
Despite the fact that this has been a run-of-the-mill correction with minimal technical damage, we have seen a spike in fear among investors, with bullish sentiment coming in at 28% on Wednesday’s close, implying that there are two bears for every one bull in the market.
This heavy dose of pessimism in the face of a very mild correction suggests that many of the bulls are uneasy during this pullback, and the best time to prepare one’s shopping list is when the crowd shifts from overly optimistic to extremely pessimistic in a short period. There’s no guarantee the lows are in just yet, but investors should be preparing their shopping lists.
(Source: Daily Sentiment Index Data, Author’s Chart)
Just eight weeks ago, we had investors crawling over each other to get into gold miners (GDX), with chants for $2,500/oz gold by year-end and $3,500/oz next year. This froth in the sector showed up in sentiment readings, which came in at 94% bulls in early August.
Generally, when sentiment readings get this elevated after an extended run in an asset class, it’s time to start paring back or at least take one’s cursor off the buy button temporarily.
However, we’ve seen a massive sea change over the past three weeks as bullish sentiment for gold has plunged from 94% bulls to 24% bulls as of last week’s close. This same reading showed up at the depths of the COVID-19 Crash in March, while gold fell 15% from its highs.
Given that this correction has only been 11% from peak to trough, this would suggest that investors are more skittish despite a smaller magnitude correction, which is a bullish divergence.
I am often a little cautious when sentiment heads below 30% bulls as panic among investors can often lead to more panic selling. This is because investors get scared in herds, and they tend to panic all at once, selling with abandon. However, the current situation in gold deviates from the norm.
This is because even though we have significant pessimism among investors, we don’t have any real technical damage, and we’re certainly not in a bull market.
In fact, gold just broke out to new all-time highs two months ago, as shown above, and is merely re-testing this breakout level in a very normal fashion.
As long as the bulls can defend this breakout area at $1,800/oz on a monthly close, I see no reason to second-guess the validity of the recent breakout for the gold.
If we zoom in on this pullback on a weekly chart, we can see that gold looks to be building a shallow cup base against this level, and any further leg down in this pattern towards $1,800/oz would fill out this cup-shaped base.
A final leg down in this pattern, which would undercut last week’s lows, would likely lead to complete capitulation in bullish sentiment and would significantly increase the probability of a bottom in the metal.
For now, I remain on the fence as to whether we’ve bottomed. However, the orderly fashion in which this pullback has occurred suggests that the worst of this correction is over from a price standpoint.
So, what’s the best course of action?
I have not yet added to my position in gold, which I started at $1,450/oz during last year’s breakout, but I continue to hold several gold miners like Kirkland Lake Gold (KL) and Pan American (PAAS).
I don’t see any reason to be aggressively buying just yet as we don’t have confirmation of a bottom, but as long as the bulls can continue to defend $1,800/oz on a monthly close, I remain bullish medium-term and long-term on gold. Therefore, I would view any sharp pullbacks as low-risk buying opportunities, and I believe that any undercut of the lows at $1,860/oz for gold is likely to be merely a fake-out, and a final leg down to shake out the weakest hands.
The best time to buy is when investors start getting unnecessarily pessimistic, and we’re finally near that juncture on gold. If we could see a final leg down close to $1,820/oz, this would complete this setup and offer the best buying opportunity in the past several months.
Disclosure: I am long GLD, KL, PAAS
Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
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The SPDR Gold Shares (GLD) was trading at $178.86 per share on Thursday afternoon, up $1.74 (+0.98%). Year-to-date, GLD has gained 25.16%, versus a 5.89% rise in the benchmark S&P 500 index during the same period.
GLD currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #1 of 34 ETFs in the Precious Metals ETFs category.
About the Author: Taylor Dart
Taylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles. More…