It’s been a strong start to the year for gold prices (GLD), and the metal is one of the few asset classes that are not only positive year-to-date but up double-digits. Unfortunately, for the bulls, we are now seeing the $2,500/oz and $3,000/oz price targets trotted out, and this is generally a bad time to be adding any new exposure to the group. Also, to make matters worse for gold, the metal has run up in nearly a straight line towards its first real resistance level since recording a multi-year breakout last year. While there are no guarantees, it’s likely we might have some trouble in this area. Based on this, while I continue to hold my position in gold, I have zero interest in adding any new exposure to the Gold Miners Index (GDX) or gold itself here.
As we can see in the chart above, it’s been a busy year and a half for gold, and the metal has shot higher following a clean breakout above the $1,380/oz level, a multi-year resistance level at the time. While it’s trended higher with ease following this breakout, we’re finally heading into the first potential pit stop for the metal near $1,800/oz, and this is an area that the bears might scramble to play some defense finally. If we look at the chart above, we can see that this area was a tough spot for gold on three separate occasions in 2011 and 2012, and the metal ultimately rolled over from this area and began a new bear market. While I am not expecting a similar thing to happen this time around as I believe we’re in the early innings of a new bull market, I would be surprised if the bears did not put up a fight at this level on the first test. Therefore, given that futures are trading just shy of $1,800/oz currently, the reward to risk is terrible for new gold positions at current levels.
Some investors might argue that the bazooka of liquidity from the Fed means that this time is different, but this time is never different, it just feels different when the bull herd is busy bidding up prices. As we can see from a sentiment standpoint below, this is exactly what we’re seeing, as bullish sentiment for gold has closed above 90% for three out of the past ten trading days, and is now nearing its August peak. This reading is not as worrisome as the August 2019 reading, which derailed gold temporarily, but it does suggest that we may be getting close to a short-term top, and it’s best to curtail one’s short-term bullish expectations a little. If we were to see a rally above $1,850/oz for gold, we would very likely trigger a sentiment sell signal. Typically, sentiment sell signals lead to 5-10% corrections in the metal on average.
(Source: Daily Sentiment Index Data, Author’s Chart)
While the quarterly and yearly charts for gold and the fundamental backdrop are as bullish as ever, I always get a little nervous when the crowd starts talking about price targets 30% higher. This is what we’re beginning to see as gold approaches the $1,800/oz resistance level, and this means it might be a wise move to trim some miner positions if one is overweight. It can pay to chase in the market, but the key is to chase prices early when everyone is in disagreement after a major low, not chase late when the herd has come to the same consensus. There is no guarantee that gold has to stall out at $1,800/oz, but I see a terrible risk to reward for starting new positions. I plan to add to my gold position this year, but I see no basis for doing so at current levels at $1,790/oz.
(Disclosure: I am long GLD)
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The SPDR Gold Shares (GLD) was trading at $161.14 per share on Wednesday afternoon, down $1.54 (-0.95%). Year-to-date, GLD has gained 30.32%, versus a 3.84% 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 33 ETFs in the Precious Metals ETFs category.
About the Author: Taylor Dart
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.