Gold: Is Sentiment Getting Overheated?

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August 6, 2019 11:52am NYSE:GDX NYSE:GDXJ

NYSE:GDX | News, Ratings, and Charts

From Taylor Dart

  • Bullish sentiment for gold finished Monday at 96% bulls, and the 30-day sentiment moving average is climbing at a brisk pace.
  • While the long-term picture is bullish for both miners and gold, this unbridled enthusiasm will provide short-term headwinds.
  • I would expect any further rallies from the $1,480/oz level on gold to be retraced as this rally looks to be on borrowed time.

It’s been quite a run for the gold bulls (GLD) since the June low, and we now have the metal up 16% in 50 days, the gold juniors up 50% in 45 days, and some individual miners up as much as 100%. While this is clearly a bullish development long-term as strength tends to beget strength, things are getting quite frothy short-term. We’ve gone from a pool that people barely wanted to dip their toes in during June, to a pool that’s now overcrowded with bodies and with scarcely enough shoulder room to move around. This is a negative development for the gold trade and overrides the continuous new highs short-term. We saw this occur just over a week ago in the S&P-500 (SPY), and the all-time highs the market made on July 26th were irrelevant. The market has since tumbled over 6%, and the main reason for this was due to too much exuberance short-term. I believe this to be a wise time to begin booking partial profits in gold juniors and gold positions, and looking to repurchase those positions when we see an inevitable pullback.

Looking at bullish sentiment for gold below, we can see that we’re now sitting at the 96% level which suggests that there are 19 bulls for every one bear in the market currently. This is an extreme reading short-term, and when the scales get tipped this far, we typically see a minimum of a 3-4% pullback in gold over the next few weeks. In addition to this, any further upside from these levels generally is on borrowed time. The reason for this is that if nearly everyone is bullish, the scales are tipped with almost no one left to buy. This development does not have any negative consequences for the medium-term picture (6-12 months), nor the long-term view, but it is a red flag short-term.

(Source: Daily Sentiment Index Data, Author’s Chart)

If we take a closer look at the above chart, we can see that the red line (sentiment moving average) was still at relatively subdued levels on the initial spike to 95% bulls in June. Based on this, this was not a big deal, and there was no reason to expect a pullback or more than 1-2%. However, the sentiment moving average has moved up from 47% bulls to 77% bulls over the past six weeks, and this is a significant difference from where we sat in June. If we continue to see strength in gold this week, we could head over 80% bulls on the sentiment moving average which confirm this headwind short-term. Based on this new development, I believe this is a wise spot to take partial profits (1/4 of positions) in both gold miners and the metal itself. At the minimum, I would expect a 3-4% pullback over the next few weeks to wash sentiment out to more reasonable levels.

Let’s take a look at where a dip might take us:

Taking a look at a daily gold chart, we’ve got very strong support from the prior breakout at $1,365/oz, and we have a rising 50-day moving average at $1,380/oz. I would expect the 50-day moving average to be a floor on any pullbacks and believe this would present an excellent buying opportunity. The 50-day moving average (blue line) is moving up at a pace of $2.00/oz per trading day, and therefore, this level will increase to $1,405/oz by month-end. As long as the 50-day moving average is defended on any pullbacks, I don’t see any need to re-test the $1,365/oz breakout level. However, a daily close below this 50-day moving average would increase the probabilities of re-testing the prior multi-year base.


To summarize, I do not believe now is the time to be greedy in gold or miners. The prudent move here is to take a little bit off the top and look to buy it back on the dip. For those who are long-term oriented, holding is fine, but I would not be chasing new positions at current levels. This rally in gold looks to be on borrowed time and I would expect any further rallies above the $1,380/oz level to be sold into.

The SPDR Gold Shares (GLD) was trading at $138.90 per share on Tuesday morning, up $1.11 (+0.81%). Year-to-date, GLD has gained 12.33%, versus a 7.09% 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 33 ETFs in the Precious Metals ETFs category.

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About the Author: Taylor Dart

taylor-dartTaylor 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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