Both
gold and silver surged dramatically higher this past week, propelled
by torrents of investment capital deluging in. The resulting major
new highs are really exciting, unleashing widespread
fear-of-missing-out buying. But the precious metals’ blistering
jumps have left them very overbought. They have come so far so fast
they are at and above technical extremes that have proven
unsustainable. So caution is in order here.
Gold
and silver are powering higher on balance in secular bull markets
that have been running for years. And their fundamental
underpinnings are stronger than ever. The Fed’s
astoundingly-epic money printing since mid-March’s stock panic has
catapulted stock markets to dangerous bubble valuations. And the
vast majority of investors have yet to diversify their stock-heavy
portfolios with counter-moving precious metals.
Nevertheless, even the strongest of bull markets never move up in
nice straight lines. They are always an alternating series of major
uplegs then corrections. Bull-market price action looks like a sine
wave meandering around a best-fit uptrend line. This
flowing-then-ebbing bull-market structure is hugely beneficial to
traders, offering plenty of mid-bull opportunities to buy
relatively low then later sell relatively high.
This
two-steps-forward-one-step-back cadence greatly expands the
potential gains bull markets offer. So periodic pullbacks or bigger
corrections should be embraced, not feared. Their mission is to
rebalance sentiment, bleed off the excess greed ubiquitous late in
major uplegs. That prevents bulls from burning out prematurely,
sucking in too much future buying too fast exhausting their upside
potential. Selloffs are healthy!
Prevailing sentiment, popular greed or fear, is ultimately the
arbiter of when bull-market uplegs shift to bull-market corrections
and vice versa. While sentiment is ethereal and impossible to
measure, it can be inferred. The more bullish traders are on a
sector, the more calls for its big gains to extend indefinitely, and
the more capital flowing in, the more greedy and even euphoric
sentiment is. Excessive greed kills uplegs.
There’s a finite amount of capital available to chase any upleg,
adding to its gains. When greed grows potent enough to fuel
widespread fear of missing out, much buying is pulled forward from
coming weeks and months. That soon exhausts available capital
firepower to keep driving prices higher, leaving a void of demand.
With enthusiastic buyers effectively all-in, the balance of
capital-flow power shifts to sellers.
Since traders’ herd psychology drives buying and selling, which
moves prices, sentiment is also evident in price action.
Overboughtness is a hard empirical technical measure of how fast
prices have rallied. As bull-market uplegs start peaking, prices
surge too far too fast to be sustainable. This week warnings are
flashing that gold and silver are entering that precarious state,
where odds increasingly favor imminent selloffs.
Overboughtness can be measured many ways, but I’ve long preferred
the simple approach of looking at prices relative to their
trailing 200-day moving averages. I developed a trading system
based on this over 15 years ago called
Relativity
Trading, which I’ve been refining since. It considers prices as
multiples of their 200dmas. These tend to form horizontal trading
ranges over time, which are very profitable to exploit.
200dmas, the average closes of the last 200 trading days, make ideal
technical baselines from which to measure how far and fast prices
have rallied. 200dmas aren’t static, so they are never rendered
obsolete by changing prevailing price levels. Instead 200dmas are
dynamic, constantly adapting to differing prices. But they change
so gradually that outsized price moves really stand out compared to
these key baselines.
Relative gold, which I shorten to rGold, is simply gold’s daily
close divided by its 200dma. Gold finished at $1868.00 on
Wednesday, the data cutoff for this essay. Its 200dma that day was
$1610.27. Divide the former by the latter, and the rGold multiple
was running 1.160x in the middle of this week. Of course that is
meaningless without context. But chart daily rGold levels over
years, and overboughtness leaps out.
This
Relatively chart superimposes gold’s technicals over that rGold
multiple since just after this secular gold bull started marching
higher in mid-December 2015. This type of chart effectively
flattens out that 200dma baseline to 1.00x, which the relative
multiple meanders around in constant-percentage terms which are
perfectly comparable regardless of prevailing price levels. Gold is
extremely overbought today!
For
my own trading purposes, I base Relativity trading ranges off the
past 5 calendar years. These are updated once annually, late each
year. The current rGold trading range of 0.92x to 1.14x is based
off all gold’s price action from 2015 to 2019. Gold trading less
than 92% of its 200dma is extremely oversold, marking major
correction bottomings. Gold over 114% is extremely overbought,
flagging major upleg toppings.
Again rGold surged to 1.160x in the middle of this week, well above
the upper band of its trading range. Since mid-March’s stock panic,
massive
investment demand has blasted gold 26.9% higher in just 4.1
months! That’s a lot of rallying in a short period of time,
fueling greedy euphoric sentiment manifesting as extreme
overboughtness. This doesn’t mean gold’s upleg will imminently
fail, but odds of that are very high.
The
last time gold was so stretched technically was early September
2019, after gold powered up 32.4% in 12.6 months in a strong upleg.
That pushed rGold up to 1.166x, only slightly more overbought than
this week. Gold had surged too far too fast to be sustainable,
sucking in too much near-future buying which exhausted that capital
firepower. What happened next? Gold indeed retreated 6.4% over the
next 2.7 months.
That
was just a minor pullback-grade selloff, under 10%. Larger
corrections run 10% to 20%, and new bear markets are born over 20%.
Smaller pullbacks also rebalance sentiment, but to a lesser degree
than corrections. But don’t underestimate the pain a 6% gold
pullback would cause. From this Wednesday’s close, that would force
gold back down to $1756. And remember gold stocks amplify gold’s
downside.
The
leading and dominant GDX VanEck Vectors Gold Miners ETF tends to
leverage material gold moves by 2x to 3x. So a 6% gold
pullback tends to hammer the major gold stocks 12% to 18% lower.
And some smaller
mid-tier gold miners with superior fundamentals have even more
leverage to gold, which acts like a double-edged sword in gold
selloffs. So even a fairly-shallow and short gold pullback is risky
for traders.
In
my line of work as a newsletter guy, I receive lots of feedback
which offers a unique read on prevailing sentiment. This week I’ve
been swamped with requests for very-expensive consulting time to
help people build gold-stock and silver-stock portfolios right
now. The fear of missing out is so great they want to buy high,
risks be damned. I’ve seen this phenomenon at past major gold
toppings too, people rushing to chase.
Achieving success in this challenging speculation game demands
buying low then selling high. The time to buy gold, silver, and
their miners’ stocks low is when they have just been crushed deeply
under their own 200dmas. In our newsletters we started aggressively
adding new gold-stock and silver-stock trades right after
mid-March’s stock panic pummeled them to absurd lows. The gains
since have been enormous.
As
April dawned I wrote an essay on
gold stocks’
crash and V-bounce, concluding “the gold stocks will power far
higher.” The day that essay was published, GDX closed at $24.95.
And 3.6 months later this Wednesday, it closed at $41.75 which is
67.3% higher. This upleg’s easy buy-low gains have already been
won. It is very risky deploying heavily in gold and gold stocks
when they get extremely overbought.
And
a mere gold pullback out of super-overbought conditions is the
best-case scenario. This secular gold bull’s only other extreme
rGold reading came back in early July 2016 after its maiden upleg.
Gold soared 29.9% higher in just 6.7 months, stretching as high as
1.152x its 200dma. The resulting euphoria and fear of missing out
was great then, like today. Traders were universally calling for
far-higher prices just ahead.
But
gold had rallied too far too fast, sucking in and exhausting
all-available near-future buying. That left gold at the mercy of a
healthy bull-market correction, which grew severe due to unique
market conditions at the time. Trump’s surprise election victory
unleashed taxphoria stock buying on tax-cut hopes, which propelled
stock markets dramatically higher. That devastated demand for
alternative investments led by gold.
Over
the next 5.3 months, gold plunged 17.3%! While I certainly don’t
expect such an outsized selloff today given current market
conditions, 17% would crush this metal way back down to $1550. And
the major gold stocks would amplify that by 2x to 3x. Why anyone
would want to add material new positions in gold stocks when gold is
extremely overbought is beyond me. The risk-reward ratio buying
really high is poor.
Gold
is extremely overbought because it has soared 4.9% month-to-date in
July. Annualizing that shows how unsustainable such blistering
gains are, gold is blasting higher at an 82% yearly pace! But boy
gold looks tame compared to silver. Silver has skyrocketed 26.2% in
this month alone, annualizing to a jaw-dropping 440% appreciation
rate! Not even highly-volatile silver can sustain such
stratospheric upside for long.
This
next chart applies this same Relativity methodology to silver,
yielding rSilver. Its trading range over the past 5 calendar years
from 2015 to 2019 is running 0.90x to 1.25x. Silver is oversold and
cheap way down at 90% of its 200dma, but overbought and expensive
above 125% of that baseline. In the middle of this week, that
rSilver multiple soared to a new secular-bull high of 1.352x! That
is extremely overbought.
Since mid-March’s stock panic obliterated silver to ridiculous
all-time lows compared to prevailing gold prices, silver has
skyrocketed 92.1% higher in 4.1 months! And silver sure looks to be
shooting parabolic in July’s slice of this massive upleg, everything
north of $18. That has been fueled by enormous demand for silver’s
dominant exchange-traded fund, the SLV iShares Silver Trust. Silver
investment has exploded.
But
that has catapulted silver an astounding 1.352x above its key 200dma
technical baseline! Such extreme overboughtness is unprecedented
within this silver bull. Since silver is so incredibly volatile,
its bull and bear markets are usually considered from those of its
overwhelming
primary driver which is gold. During the past 5 years or so,
silver has only seen two other overboughtness extremes anywhere near
today’s.
Back
in early September 2019 silver peaked concurrently with gold, after
rSilver had surged to 1.270x. Like gold silver had soared too far
too fast to be sustainable, exhausting then-available capital
firepower for buying. So over the next 3.1 months silver retreated
a fairly-mild-for-it 15.5% to bleed off excessive greed and
rebalance sentiment. 15% off silver’s current mid-week high would
force it back down to $19.52.
The
only other time silver was driven to extremely-overbought levels in
this bull by fear-of-missing-out euphoric buying was summer 2016.
rSilver skyrocketed as high as 1.300x as this gold bull’s maiden
upleg was peaking, and was still up at 1.287x the day silver topped
in early August that year. There was nothing wrong with silver
fundamentally, but that extreme overboughtness had to be remedied
through a selloff.
Silver indeed dropped 23.5% over the next 4.7 months. A similar
selloff today would hammer silver all the way back down to $17.57.
It just isn’t prudent to add new silver and silver-stock positions
when silver is extremely overbought. While it may keep rallying for
a spell, the odds increasingly favor imminent big selloffs to
restore balance. Just like anything, the time to add silver
positions is when it is low relative to its 200dma.
The
masthead of our
weekly newsletter apes my favorite Warren Buffett quote, “Brave
When Others Are Afraid, Afraid When Others Are Brave”. That’s the
principle to live by when trading gold, silver, and their miners’
stocks. If everyone else is excited to buy high, greed is rampant,
and euphoric fear of missing out is the popular outlook, then it is
best to sit out. Being afraid when others are brave precludes
buying high.
Back
in mid-April when silver was trading near $15, I wrote an essay on
the “Big Silver
Bull Running!” I urged traders to aggressively buy
fundamentally-superior major silver miners’ stocks, which were still
very cheap then. I concluded “A massive bull run is likely again
after last month’s panic.” As usual being a contrarian fighting the
herd, I got plenty of flak for that outlook. That is being brave
when others are afraid.
I’ve
often advised our subscribers over the decades that buying low and
selling high requires feeling bad when doing it. If you are
eager to buy gold, silver, and their miners’ stocks, you are doing
it at the wrong time! Traders only like the precious-metals sector
after it has surged. To buy low you have to do it when it feels
miserable, when this sector is shunned and beaten-down. Gold and
silver certainly look toppy today.
That
doesn’t mean their strong post-panic uplegs will fail tomorrow.
Self-reinforcing momentum buying can sometimes extend considerably
longer than most expect. The higher gold and silver run, the more
investors want to buy in to chase those gains. The more capital
they deploy, the higher gold and silver go. So
extreme-overboughtness reads aren’t necessarily calling tops, but
warning that their odds are soaring.
Interestingly millennial traders may help decide when gold and
silver roll over into healthy bull selloffs after their strong
uplegs. These young people tend to flock to Robinhood, the popular
app that pioneered commission-free stock trading. That company
instead makes money by selling its users’ order-flow data to
high-frequency-trading firms, which program their computers to
instantly front run millennials’ collective trading.
Robinhood publishes data on how many of its users own particular
stocks. Back in mid-March when gold and silver were bottoming in
the epic fear of that COVID-19-lockdown-spawned stock panic, there
were about 14k users holding the leading and dominant GLD SPDR Gold
Shares gold ETF and under 8k in SLV. As of this week those numbers
have roughly doubled to over 28k and nearly 20k respectively.
GLD’s millennial buying per Robinhood has been relatively consistent
since the panic, but SLV’s has shot parabolic in recent weeks
with silver prices. Robinhooders are notorious for being a
momentum-driven herd. They flood in when prices are surging looking
for fast gains, but quickly abandon stocks to move on to other hot
ones when that upside flags. So they could exit GLD and especially
SLV fast as gains stall.
That
would exacerbate gold and silver downside in their next selloffs.
But again realize that pullbacks and corrections are essential to
keep bull markets healthy. Sentiment must be rebalanced
after greed grows excessive, bleeding off euphoria and restoring
normal psychology. Mid-bull selloffs are very valuable for traders,
leading to the best buy-low opportunities within ongoing bull
markets. That really boosts ultimate gains.
Pullbacks and corrections are entirely a sentiment and technical
thing, and have nothing at all to do with fundamentals. These gold
and silver bulls will continue marching after these selloffs
necessitated by this extreme overboughtness pass. Between mid-March
to early June, the Fed’s balance sheet skyrocketed 66.3% higher on
epic record money printing as Fed officials panicked to try and
stave off a full-blown depression!
With
the US dollar supply ballooning 2/3rds higher in just several
months, colossal monetary inflation is baked into the system which
is really bullish for gold. That flood of liquidity blasted stock
markets higher, leaving the 500 elite companies of the flagship S&P
500 trading at dangerous near-bubble trailing-twelve-month
price-to-earnings ratios averaging 27.8x heading into July. That
portends a major stock-market selloff.
That
will really boost already-strong gold investment demand. American
stock investors remain woefully underinvested in this outstanding
portfolio diversifier. At the end of June, the total value of GLD’s
bullion holdings was just 0.2% of the S&P 500’s collective market
capitalization! Every investor always needs a 10%-to-20% gold
allocation in their portfolios, which acts as insurance
balancing out stocks’ downside risks.
And
silver still needs to mean revert dramatically higher
relative to gold, to regain historic norms in this key
relationship. But a full reversion and overshoot happen over a bull
market, not within a single upleg. Bull markets are an alternating
series of uplegs followed by corrections, two steps forward then one
step back. These ebbings are just as important as the flowings to
ensure bulls eventually reach their best potential.
With
gold and silver both extremely overbought according to their own
secular-bull precedents, I wouldn’t rush to add new precious-metals
positions way up here. While today’s gold and silver uplegs could
defy the odds and keep powering higher, buying high is way too
risky. It is wiser to stay in cash and wait for the inevitable
pullbacks or corrections after extreme-overbought readings, delaying
to buy in relatively low.
For
traders who already prudently bought precious-metals positions low
earlier in major uplegs before they grew extremely overbought, these
technical warnings don’t necessarily demand selling. Instead they
can be used to ratchet up trailing-stop-loss percentages.
That lets traders stay in profitable trades as long as possible to
ride their upside momentum, preserving more of their unrealized
gains when those uplegs fail.
At
Zeal we started aggressively buying and recommending
fundamentally-superior gold and silver miners in our
weekly and
monthly
subscription newsletters back in mid-March right after the
stock-panic lows. We layered into many new positions before this
overboughtness, with unrealized gains already growing as big as
+211%! Our trading books are full of fundamentally-thriving gold
and silver miners that are still running.
To
profitably trade high-potential gold and silver stocks, you need to
stay informed about what’s driving gold and silver. Our newsletters
are a great way, easy to read and affordable. They draw on my vast
experience, knowledge, wisdom, and ongoing research to explain
what’s going on in the markets, why, and how to trade them with
specific stocks. Subscribe
today and take advantage of our 20%-off sale! The only
way to catch buy-low and sell-high periods in real-time is always
staying attuned to market action.
The bottom line is
gold and silver are extremely overbought today. Popular sentiment
has grown greedy and euphoric, with fear-of-missing-out buying
flaring dramatically. That has forced both gold and silver to
very-stretched levels relative to their baseline 200dmas. Such
extremes have warned of uplegs topping in these bull markets,
heralding rebalancing selloffs ranging from fairly-mild pullbacks to
severe corrections.
These essential
selloffs erupting periodically in all bull markets should be
embraced. They offer the best buy-low opportunities ever seen
within ongoing bulls. They also keep bulls healthy, helping to
maximize their ultimate durations and gains. Extreme overboughtness
warns traders to prepare for essential retreats after prices charge
higher. Stop losses can be ratcheted tighter, preserving bigger
gains when selloffs emerge. |