Why I’m Not in a Rush to Buy Gold

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August 22, 2019 11:09am NYSE:GDX NYSE:GDXJ

NYSE:GDX | News, Ratings, and Charts

From Taylor Dart

  • Bullish sentiment for gold continues to climb, and is now at the third highest levels in the past decade.

  • While bullish sentiment for gold finished the day at 80% bulls Wednesday, the long-term sentiment moving average has reached the 85% level.

  • I do not see this as an opportune time to be doing any buying in metals or miners, and feel those that are patient will be rewarded.

I have vivid memories of being 13 and getting my first paper route, and my Dad was always telling me ‘not to let my money burn a hole in my pocket.’ While the advice is certainly applicable to whatever new clothes or skateboard I wanted to buy at the time, this adage also applies very well to the stock market. Given that our portfolios only have a finite amount of funds, it makes sense to get the most bang for our buck when we are making new portfolio purchases. So how does this apply to the gold (GLD) sector? Investors should not let their unrealized profits in current positions coax them into thinking that they should be adding more and getting aggressive at current levels. Investors who had the foresight to buy miners and gold at much lower prices have put themselves in a great position, but I believe it would be a stupid mistake to go shopping for new miners or adding at current levels. The reason for this is that bullish sentiment is at the 3rd highest level in a decade, and it very rarely pays to run with the herd. When you start hearing the phrase ‘explosive upside,’ and see the recent $3,000/oz and $5,000/oz calls come out of the woodwork; you can bet we’ve likely tipped the scales a little too far short-term. Let’s take a look at the sentiment data below:

(Source: Daily Sentiment Index Data, www.trade-futures.com)

Looking at the above Daily Sentiment Index [DSI] chart I’ve kept up to date for the past decade, there are obvious times to buy, and there are clear times to stand pat or take some profits. The red sentiment moving average shows how market participants feel about gold over the past three months, and the red zone is an area where it typically pays to be patient. This reading oscillates between 1% (everyone is bearish), and 99% (everyone is bullish). Those that get emotionally caught up in the mania and buy in this red zone, typically end up coughing up those shares later on at much less favorable prices. We have entered the red zone as of last week, and this is providing an opportunity for the investors that are willing to be patient, and a trap for those that have let their emotions get the best of them. If you prefer to be in the former group, I believe it’s time to sit back and wait for better prices to put any new money to work.

As I’ve discussed in prior articles, when gold heads into the exuberance zone (red box), we typically see corrections of 5% – 10% off of the highs. From a high of $1,540/oz for this rally, this gives us a target zone for a correction of $1,380/oz to $1,460/oz. This means that investors can consider putting some money to work at $1,460/oz or lower, and can begin to get aggressive if the metal somehow drops beneath the $1,400/oz level. While I would be shocked if we saw sub $1,400/oz, I have seen prices do some crazy things when everyone is on one side of the boat. Short-term support for gold sits at $1,400/oz, with strong support at $1,360/oz. I believe any pullbacks that remain above these levels are simply noise and would view any 5%+ pullbacks from the highs as buying opportunities.

The market does not always repeat itself, but it does often rhyme, and the one constant is that human nature never changes. When everyone must be in a trade, it’s time to start being a contrarian, and when everyone wants to be out of a trade at any price possible, it’s time to start thinking about buying. With everyone rushing into the gold trade and the usual suspects trotting out their $5,000/oz targets, it’s time to let the impatient make the mistakes, and for us to pick up the pieces and capitalize on their mistakes. I remain bullish on gold intermediate-term (6-12 months), but short-term the best course of action is to sit tight and wait for better prices before doing any more buying.

The SPDR Gold Shares (GLD) was trading at $141.34 per share on Thursday morning, down $0.42 (-0.30%). Year-to-date, GLD has gained 14.31%, versus a 9.46% 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.

This article is brought to you courtesy of ETFDailyNews.com.

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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