Gold: Sentiment Remains Elevated

It’s been a volatile start to the year for the metals complex, but fortunately, gold (GLD) is still positive year-to-date following the de-escalation from the Middle East tensions. The bad news is that this 3% positive year-to-date return for gold has brought with it some short-term euphoria for the metal, with bullish sentiment finishing Monday at over 90% bulls. This reading suggests that 9 out of every 10 market participants are expecting higher prices currently, and is often a short-term caution signal. It absolutely does not mean that gold cannot go higher and make a run at $1,600/oz, but I would argue that the sellers would come out in full force if this did occur before March. Therefore, I see gold as a hold here, but do not believe this is a wise spot to be adding exposure.

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For those following gold and the Federal Reserve’s moves, we’ve seen a distinct change in character to how gold is acting since Q4 2018, as previous raises in the Fed Funds rate were keeping a lid on gold and contributing to strong selling pressure. However, this all changed dramatically in Q4 2018, and that suggested that we likely had a new bull market on our hands. While the Fed raised rates from 25 basis points to 2.50% in December of 2018, gold shrugged this news off and actually went higher, making a substantially higher low. This was despite a multi-year high in the Fed funds rate, and showed that gold was beginning to shrug off bad news. Since then, the market has certainly taken a like to the continuous cuts, with three cuts in 2019. When a market stops going down on bad news and actually rises on that news, often, a bull market is underway or has already begun.

Based on the current outlook, it’s unlikely we’ll see any real movement in the Fed Funds rate for FY-2020, barring any major economic shifts. The fact that the price of gold is holding up near multi-year highs despite this fact is a positive sign, as it suggests that the market is perfectly content with a Fed Funds rate of 1.75%, and this is already low enough to provide a tailwind for gold in the inflation trade. Therefore, from a fundamental standpoint, there’s lots to be bullish about here.

The one issue we have, unfortunately, is that everyone is now bullish, and this is the same predicament we had in August of last year. While this didn’t lead to a waterfall decline, it did weigh on the miners, as bullish sentiment hit 96% on gold last August and the Gold Miners Index (GDX) dropped over 15%. As we can see in the chart below, we’re now at a similar reading for gold, though not as intense, and that would suggest some issues short-term for the miners until this is resolved.

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

If we look at the chart above, we can see that gold is trading well above its sentiment moving average (red line), and is now sitting just inside the exuberance zone that led to sharp corrections in the mining sector in January of 2019, as well as August of 2019. While this reading didn’t immediately lead to selling pressure, it did show up within a month in both instances, and it did not pay to be chasing either gold or miners due to this. Therefore, while I don’t see anything wrong with holding gold here or the miners, I think it’s a poor reward to risk trade to be heavily buying at current levels. Ideally, I would like to see sentiment drop back below 60% before I would be interested in doing any buying whatsoever.

While the long-term chart and fundamentals remain bullish for gold, the sector can be finicky, and it’s imperative to be on guard when everyone turns bullish. Unfortunately, for the bulls, this is the case currently. Therefore, I see patience as the key here, and do not believe investors should throw caution to the window and begin loading up at current levels. While gold is likely to head over $1,625/oz in 2020, I see better opportunities ahead to add exposure. Based on this, I am sitting tight currently, and waiting for a 3-5% correction before adding any new positions.

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(Disclosure: The author is long GLD from $136.80, Franco Nevada Gold (FNV) from $91.00, and Silvercrest (SILV) Metals from $6.45)

The SPDR Gold Shares (GLD) was trading at $148.06 per share on Wednesday morning, up $0.40 (+0.27%). Year-to-date, GLD has gained 19.74%, versus a 23.06% 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.

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.