High Levels of Bullish Sentiment Could Limit Gold’s Upside

It’s been a strong start to the year for the precious metals complex, with gold (GLD) leading the way thus far, up nearly 20% year-to-date. We continue to see bullish price action in the metal, with dips being bought up immediately, and up until late June, there’s been a near dearth of optimism in the trade.

This is because most market participants seem interested in bidding up the high-flying tech names, rather than gravitating towards gold. However, as of this week, we’re finally beginning to see a bit of complacency creep into the metal, with bullish sentiment showing that there are four bulls for every bear. This suggests that any rallies near $1,900/oz this summer might run into some trouble.

Let’s take a closer look below:

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

As we can see from the chart above, bullish sentiment for gold has come a long way from the 30% bulls level in mid-March and has spent the past couple of weeks hovering between 60% and 90%. This is not a cause for concern, as high levels of bullish sentiment often mean that new market participants are coming into the trade, but it can be a bad sign when we hang out in this area for too long.

Currently, bullish sentiment for gold is sitting at 85%, and we’ve visited this level several times since April without an issue. However, the long-term chart of sentiment is beginning to show the first signs of complacency. This is because we haven’t seen any pullbacks below 50% bulls on gold to reset sentiment a little, and I am generally a little more cautious when there’s a dearth of fear showing up in the bull camp.

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

If we look at the above chart, we can see that the 2-month moving average of bullish sentiment for gold (red line) has only visited the 80% level on five occasions in the past decade, with the most recent incident during August of 2019. In all five of these prior occasions, the minimum correction from the sentiment sell signal was 8%, while the median correction was over 10%. The good news, however, is that we have not hit the 80% level yet, and we are just knocking on its door. Therefore, if sentiment could cool off here, or if gold could consolidate some more, there’s no reason to believe we need to see a pullback of this size.

However, if gold were to charge higher here and head into the $1,865/oz – $1,900/oz zone before the end of July, I believe it’s very likely that we could trigger a short-term sell signal based on sentiment. Therefore, I would argue that this area is likely to be a brick wall if we head there this month. This doesn’t mean it’s time to liquidate gold positions or begin taking profits, but it does mean that adding new exposure above $1,825/oz might not be the best idea.

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(Source: TC2000.com)

If we take a long-term view on gold, the metal looks healthy as ever, and it looks like new highs are inevitable here. Meanwhile, the long-term monthly moving average has finally begun to curl up (teal line), and this has generally bred explosive bull markets. Therefore, as long as the bulls can continue to defend the $1,500/oz area, I would consider any pullbacks to be noise, and 10% pullbacks to be buying opportunities. This means that there’s no reason to put too much weight into a sell signal that might materialize later this month for those with a long-term view.

Instead, the point is to be mindful that it’s not worth it to chase any rallies in gold above $1,850/oz. I prefer to buy when the crowd is nervous, not complacent, and a move above $1,850/oz would likely get the herd plowing back into gold.

So, what’s the best course of action here?

I continue to see further medium-term and long-term upside for gold, but I prefer to be a buyer on dips, and I spent the past couple of weeks accumulating miners and adding to my position in gold near $1,700/oz. Currently, I think the best move is to sit tight, but not be in a rush to add new exposure here to gold, as the most likely range looks to be $1,700/oz to $1,900/oz over the next four months.

Therefore, at $1,815/oz, the metal is now outside of the low-risk buying zone, and the potential for a sentiment sell signal means that we could get another chance to buy at $1,750/oz below year-end. For now, there is no reason to worry about this sentiment sell signal developing, and absolutely no reason to be in a rush to sell out positions. However, if we find the metal up another $60/oz before the end of July, I believe investors would be wise not to chase the rally in the metal or miners, as it could end up being a short-term trap.

Disclosure: I am long GLD, AU, KL, AGI

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 $168.77 per share on Tuesday afternoon, up $0.79 (+0.47%). Year-to-date, GLD has gained 18.10%, versus a -0.77% rise in the benchmark S&P 500 index during the same period.

GLD currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 34 ETFs in the Precious Metals ETFs category.

About the Author: Taylor Dart

taylor-dartTaylor 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…