Could Gold Be Getting Ready For A Run To New Highs?

Tue, Feb 9, 2021 - 2:31pm

From its high at $2075.14 on August 20, 2020, Gold experienced a sustained downside correction into a panic low at $1764.73 on November 30, 2020. That four month decline was then followed by a trading rally into early 2021 ($1927 on 1/6/21) and a subsequence sell-off that last week effectively retested the lows. On Thursday, February 4th, Gold hit a low of $1785.13 and has now turned up significantly with prices today moving back above $1800 at a reading of $1838. One question that is probably echoing in the minds of many precious metals investors right now is, “Have we seen the lows on Gold?

To that end, while nothing can ever be predicted with absolute certainty, there does appear to be a situation in Gold where the probabilities for a favorable turn to the upside are high. In markets, it is always a question of handicapping the probabilities since no one has a crystal ball. What we do know about markets is that very often, there is a similar pattern that can develop near important lows. Often a market like Gold, which was red hot back in early August of last year, will correct either by going sideways or down (or some combination of the two) to a point where sentiment is actually negative and the "investing crowd" has moved on to something else. In the realm of technical analysis, a hot market like Gold will move from overbought to oversold, and is often unloved and below the radar when it is oversold.

Looking at the action of the last few months, we note that Gold has gone through this big swing in sentiment from “the big topic of conversation” in August to being unloved of late. In the chart that follows, we show the GLD Selling Intensity Oscillator which is plotted on an inverse scale. For this gauge, very low readings indicate a market where investors are infatuated and “crowding in”, while very high readings indicate a market where investors have lost interest, are discouraged, and often openly bearish.

Note: Past performance is no guarantee of future results. Investing in ETFs is subject to risk and potential loss of principal. There is no assurance or certainty that any investment or strategy will be successful in meeting its objectives. Before investing in an ETF, please consider the investment objectives, risks, charges and expenses.

As can be seen on the chart, at the very peak in its run in August of last year, Gold generated some of the lowest Selling Intensity values ever seen. Since then, as the market has churned to the downside to the tune of 14.95% over nearly six months, Selling Intensity has moved sharply higher and exceeded the upper oversold threshold of 2.30 on November 30th. More recently, the sell-off of the last few weeks has seen Gold re-visit the prior lows, and in the process has seen Selling Intensity spike up to readings back above 2.30. In our view, this is a good sign that the yellow metal may have now completed a multi-month downward correction.

Note: Past performance is no guarantee of future results. Investing in ETFs is subject to risk and potential loss of principal. There is no assurance or certainty that any investment or strategy will be successful in meeting its objectives. Before investing in an ETF, please consider the investment objectives, risks, charges and expenses.

Another gauge that also generated a contrary opinion signal last week was our Put Volume Extension gauge. Here we are only focusing in on Dollar Put Volume for the GLD ETF, and comparing a short-term quantity of Dollar Put Volume to the medium term average Put Volume. When the short-term Put Volume is nearly double its medium-term average, that often also signals that a climactic wash-out has been seen and last week, this gauge spiked up (or extended up) to near 90% of the medium-term average. That tells us that most traders were pretty bearish on Gold, and it is not surprising that Gold has begun to turn up nicely following that kind of reading.

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In addition to the actual price of Gold, the Gold Mining stocks have been in a fairly pronounced medium-term correction over the last few months mirroring the decline in Gold. Here again, we see that the mining stocks have experienced a significant swing from heavily overbought back in August of last year, to substantially oversold at last week’s trading lows.

Note: Past performance is no guarantee of future results. Investing in ETFs is subject to risk and potential loss of principal. There is no assurance or certainty that any investment or strategy will be successful in meeting its objectives. Before investing in an ETF, please consider the investment objectives, risks, charges and expenses.

To illustrate this, we show the entire trading history of the GDX Van Eck Gold Miners Index going to the early 2000 time period. At the bottom of the screen, we see the “Days Up Per 50” trading gauge. This gauge simply tells us what portion of the time over the last ten weeks that Gold Stocks have been trading positively. When the indicator drops down in the lowest 20% quintile, it means that Gold Stocks have been receiving a lot of on-balance selling pressure, and that signal occurred last Thursday. It is therefore not that surprising that Gold Stocks have come off the lows with a fairly sharp advance over the last few days. What follows next is a brief cascade of other indicators which we follow that also suggest last week likely saw a climactic low in this space, and that often (but not always) this can portend better days ahead.

Note: Past performance is no guarantee of future results. Investing in ETFs is subject to risk and potential loss of principal. There is no assurance or certainty that any investment or strategy will be successful in meeting its objectives. Before investing in an ETF, please consider the investment objectives, risks, charges and expenses.

Above: This is the Detrended Super TRIN for Gold and Silver Mining Stocks which is a version of the ARMS Index. Briefly, the ARMS Index compares the selling pressure on stocks that are going down, versus the buying pressure taking place on stocks that are going up. When there has been a long period of sustained selling pressure, the index moves up and becomes oversold. This does not necessarily mean that a major low has been seen, but often high readings on this gauge attend intermediate-term lows when Gold Stocks are in a bull market (i.e. primary trend is up) and trading lows, when Gold Stocks are in a bear market (i.e. primary trend is down). Right now, the correction of the last few months has been unfolding in a climate where the primary trend for Gold Stocks is up, and thus, the readings seen last week, likely have a good chance of supporting an intermediate-term low. Overall, it adds to the case that sentiment as measured by the pendulum swing from ‘Greed’ to ‘Fear’ has come full circle and that is normally quite bullish...

Note: Past performance is no guarantee of future results. Investing in ETFs is subject to risk and potential loss of principal. There is no assurance or certainty that any investment or strategy will be successful in meeting its objectives. Before investing in an ETF, please consider the investment objectives, risks, charges and expenses.

Above: Medium Term Up-to-Down Volume moved all the way down to its lower band and very close to fully oversold thresholds.

Note: Past performance is no guarantee of future results. Investing in ETFs is subject to risk and potential loss of principal. There is no assurance or certainty that any investment or strategy will be successful in meeting its objectives. Before investing in an ETF, please consider the investment objectives, risks, charges and expenses.

Above: Medium Term Advances and Declines also moved down to fully oversold values highlighting the potential for a low.

Note: Past performance is no guarantee of future results. Investing in ETFs is subject to risk and potential loss of principal. There is no assurance or certainty that any investment or strategy will be successful in meeting its objectives. Before investing in an ETF, please consider the investment objectives, risks, charges and expenses.

As we conclude this article, GDX is at $35.18 and Spot Gold at $1838. For Gold there is a lot of resistance in the low $1900 area, between $1900 and $1920, but we believe there is a good chance this resistance will soon be tested and that in the weeks and months ahead, Gold will once again break out to new all-time highs. Gold Stocks as measured by the GDX, have key resistance just under $39, but are coming off an impressive Double Bottom formation and are presently breaking out topside above key short-term resistance measures. All in all, we expect the Gold Miners to spearhead a move to the upside and we would not be at all surprised to see prices trending higher over time. In our view, there is a good chance that the entire precious metals complex has ended its correction, and that the underlying primary trend bull market could well be in the process of reasserting itself.

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Copyright © 2021 Frank Barbera

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Senior Portfolio Manager
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