Gold
has been consolidating high since early August, when it rocketed
parabolic on colossal gold-ETF demand. That 6-week-old sideways
drift has worked off some greed and overboughtness, but plenty still
remains. So gold isn’t out of the woods yet for this essential
sentiment-rebalancing selloff. With residual overboughtness still
extreme, gold faces considerable downside risk heading into its
biggest seasonal selloff.
Across the financial markets, absolute price levels usually don’t
matter much in technical and sentimental terms. Though they are
important fundamentally. Supply and demand always converge to drive
prices to sustainable levels, and over time traders come to accept
them as normal. But how fast prices surged or plunged to
current prevailing levels is exceedingly important, greatly
affecting their short-term staying power.
The
faster prices soar, the more excited traders grow about chasing that
profitable upside momentum. As their greed flares and morphs into
euphoria, they throw increasing amounts of capital at the
fast-climbing prices. But such big and aggressive buying is never
sustainable for long. Soon greed sucks in everyone interesting in
buying anytime soon, exhausting their capital firepower. The price
peaks leaving only sellers.
That
spawns a necessary and healthy correction to rebalance sentiment and
technicals. The greed and overboughtness driven by the frenzied
buying into the crest have to be largely eradicated. That
can either happen rapidly in sharp corrections or slowly through
high consolidations. They need to hammer gold low enough, or hold
it down long enough, to work off excessively-bullish sentiment and
greatly-overextended technicals.
Fast
corrections are far more beneficial to speculators, granting deeper
buy-relatively-low opportunities sooner. Investors generally prefer
longer high consolidations, as they are much less volatile spawning
much less anxiety. Gold has definitely taken the latter route far,
meandering sideways in a fairly-tight trading range since early
August. But corrections can still emerge later in high
consolidations, surprising many.
Gold
is nearing a major seasonal juncture which really compounds its
near-term downside risk. This metal’s biggest seasonal selloff
of the year in modern bull-market years typically erupts between
late September to late October. With gold still extremely
overbought and greed quite high heading into this seasonally-weak
span, the odds of gold’s high consolidation rolling over into a
full-blown correction are mounting.
This
first chart of gold’s price action in this secular bull shows how
outsized this metal’s latest upleg grew. Gold’s technicals are
superimposed over an overboughtness measure still flashing warnings
despite the recent high consolidation since gold peaked, which I’ll
explain shortly. While gold surging to new record highs is awesome,
it rocketed up there too far too fast to be sustainable.
That necessitated a rebalancing selloff.
 
Gold’s recent post-stock-panic upleg has proven incredibly strong.
Back in March, gold got sucked into the rare stock panic fueled by
governments’ heavy-handed lockdowns attempting to slow COVID-19’s
spread. Stock panics’ epic fear temporarily infecting gold isn’t
unusual. Traders get so scared they rush to dump almost
everything. Their flight into cash catapults the safe-haven US
dollar higher, unleashing gold selling.
Gold
plummeted 12.1% in just 0.3 months into the dark heart of that stock
panic, bottoming a couple trading days before the US stock markets.
When the US dollar stopped rocketing higher, gold reversed hard and
started surging. Big mean-reversion rallies are also normal after
stock-panic pummelings, and gold’s was textbook-perfect in April,
May, and June. It was rallying higher in a measured, sustainable
fashion.
Up
until mid-July, gold’s mean-reversion upleg remained in the strong
uptrend that was established by this secular bull’s previous upleg
leading into mid-March’s stock panic. Gold powered 42.7% higher
over 18.8 months in that, proving this bull’s biggest and longest
upleg. But in late July gold started shooting parabolic! It
burst out of that stable uptrend to soar vertically, hitting a
series of 9 new all-time-record highs.
That
was fueled by stock traders rushing to buy huge amounts of
gold-exchange-traded-fund shares, led by the world-dominating GLD
SPDR Gold Shares. My popular essay last week detailed that
incredible buying
spree, which was interestingly led by young millennial traders.
Hedge funds really amplified millennials’ gold-ETF trades,
instantly front running them using computers to trade on real-time
order-flow data!
So
in just three weeks from mid-July to early August, gold soared an
incredible 14.9% higher! As this chart shows, that was a vertical
parabolic surge in the context of this bull market. That generated
crazy levels of greed and euphoria, leaving gold universally loved
and everyone wildly bullish on it. It catapulted gold to
extraordinarily-overbought levels, challenging those that helped
slay gold’s previous secular bull.
Overboughtness is a measure of how far and fast prices run compared
to some underlying baseline. An ideal one is prices’ trailing
200-day moving averages. Since 200dmas gradually follow prices,
they never become obsolete like static baselines as prevailing price
levels change. And the heavy smoothing effect of 200dmas distills
out volatility, leaving a great gradual dynamic baseline from which
to compare price moves.
Well
over a decade ago, I developed a trading system based on prices’
relationships with their 200dmas which I called
Relativity
Trading. It quantifies overboughtness and oversoldness by
looking at price levels relative to their 200dmas, hence the
name. When a price is divided by its 200dma, that yields a multiple
in this case called Relative Gold or rGold. Charting these
Relativity multiples over time often reveal trends.
Relativity charts collapse that all-important 200dma baseline to
flat and horizontal at 1.00x, and recast all gold price action
around it. That expresses how far gold has stretched either over or
under its 200dma, in constant-percentage terms that are perfectly
comparable over time regardless of the prevailing gold-price
levels. In late July, I explained rGold in more depth in an essay
warning about
mounting gold overboughtness.
Relativity trading ranges are defined based on the past 5 calendar
years of data, which translates into a gold trading range between
0.92x to 1.14x this metal’s 200dma. Anytime gold falls below 92% of
its key 200dma, it is extremely oversold. And anytime gold surges
above 114% of its 200dma, it is extremely overbought. This
year gold faced no overboughtness extremes until millennial
Robinhooders rushed in.
Heading into mid-March’s stock panic, gold only peaked at 1.127x its
200dma while rGold hit 1.130x at best. There’s no need to worry
about extreme overboughtness until that metric exceeds 1.14x. While
gold’s post-panic mean-reversion upleg was strong, it didn’t
challenge that overboughtness warning zone until late July.
Gold’s big-yet-orderly 23.4% surge in the 4.0 months out of the
stock panic nadir didn’t get overextended.
By
early July gold had rebounded and rallied far enough to stretch to
1.135x its 200dma. But that 1.14x threshold didn’t get crossed
until late July. Once gold runs so far so fast that it extends more
than 14% over its 200dma, a healthy rebalancing selloff is
increasingly likely. But the momentum-chasing gold-ETF-share buying
was so frenzied that gold kept on rocketing higher becoming
ever-more overbought.
That
culminated in an absolutely-stunning rGold read of 1.260x on August
6th when gold peaked at a dazzling new all-time-record high near
$2062! It is exceedingly rare for gold to rocket so far so fast
that it stretches 26% above its 200dma. The last time
anything like that had been witnessed was way back in early
September 2011, 8.9 years earlier. And that episode of
extraordinary overboughtness didn’t end well.
Just
a couple weeks before, gold’s last secular bull had crested at a
then-all-time-record high of $1894. The epic greed and euphoria
then catapulted rGold to an incredible 1.286x! But that
super-extreme level of overboughtness would soon prove
bull-slaying. Right when gold looked so shiny that everyone
expected it to keep powering higher indefinitely, a secular bear was
being stealthily born that proved devastating.
That
would maul gold a massive 44.5% lower over the next 4.3 years!
Extraordinary overboughtness is nothing to be trifled with. Yet
odds are early August 2020’s similar rGold extreme of 1.260x won’t
also kill today’s secular gold bull. Why? It is still quite
small and young by secular-gold-bull standards, clocking in at a
96.2% gain over 4.6 years. Gold’s previous secular bull was vastly
larger, soaring 638.2% across 10.4 years!
But
epic overboughtness still caps gold-bull uplegs, making
rebalancing selloffs necessary. While these can take the form of
either fast corrections or slow consolidations, the more overbought
gold gets the greater the odds of the former. An excellent example
came in this gold bull’s maiden upleg that peaked in early July 2016
at 1.151x gold’s 200dma. That was extreme overboughtness above
rGold’s 1.14x upper resistance.
Over
the next 5.3 months gold plunged 17.3% in a serious correction!
That not only worked off all the excessive greed and overboughtness
when that upleg peaked in euphoria, but replaced them with fear and
extreme oversoldness. This gold bull’s three previous corrections
have averaged 14.3% over 4.1 months each. That is definitely deep
enough and long enough to eradicate greed and restore balance.
Today’s correction following this gold bull’s fourth upleg hasn’t
yet come anywhere close to conforming to that established
precedent. Gold’s initial post-peak selloff was very sharp, with
this metal plummeting a violent 7.5% in just 3 trading days or 0.2
months after early August’s peak! But that is still the full extent
of gold’s rebalancing selloff, as it hasn’t returned to those lows
on a closing basis since that flurry of selling.
Gold
bounced at $1906 mere days after closing at $2062. But that nascent
correction quickly stabilized into the tight high consolidation seen
since, where gold has averaged $1952 since that last upleg crested.
Is it reasonable to see gold’s smallest and shortest correction of
this bull following its second-largest and sharpest-by-far upleg
hitting overboughtness extremes? Probably not, with nothing
close to being rebalanced.
That
day gold’s correction seemingly climaxed with a brutal 5.9% daily
plunge to $1906, rGold still closed way up at 1.160x. That’s
not only above that 1.14x extreme-overboughtness threshold of its
trading range, but still higher than that 1.151x peak of this gold
bull’s first upleg. And gold’s overboughtness has not improved much
since. The lowest this rGold multiple has been since early August
is 1.143x in early September!
Including both its shooting-parabolic phase into early August and
the high consolidation since, gold has continuously remained
extremely overbought for over 8 consecutive weeks! That is
why residual greed and bullishness remain so high. Enthusiasm for
the yellow metal hasn’t waned much, with it still widely touted as a
great trade and investment. Corrections don’t end until nearly
everyone is down on gold again.
Every previous correction in this gold bull not only well exceeded
10%, but hammered gold back down well under its 200dma. So
far in this current rebalancing selloff, gold hasn’t even hit formal
correction territory and it remains way above that 200dma baseline.
That implies the necessary gold selling hasn’t run its course yet.
That is evident in gold’s driving
gold-ETF capital
flows which I discussed in last week’s essay.
While gold could grind sideways for many more months until bullish
sentiment fades to bearish, and eventually converge with its 200dma,
that’s not likely for many reasons. There are plenty of catalysts
that could spark the overdue gold selloff. They include US stock
markets surging again, the oversold US dollar rallying, millennial
traders exiting their gold-ETF positions en masse, and how US
elections play out.
But
there’s another one I’ve been increasingly thinking about given the
timing, seasonals. Gold is on the verge of falling into its
biggest and sharpest seasonal selloff of the year. This next chart
was taken from my last look at
gold and
gold-stock seasonals in late July. It distills out how gold has
fared in modern gold-bull years. Each year is individually indexed
to the prior year’s close, then these are averaged together.
Gold
has enjoyed a strong seasonal uptrend in its modern bull-market
years of 2001 to 2012 and 2016 to 2019. 2020 isn’t included yet
since this year remains a work in progress. Gold marches higher in
three seasonal rallies, its autumn, winter, and spring ones. The
autumn rally is the second-largest one, which averages 6.2% gains
before topping in late September. That major seasonal peak
happens right about now!
Gold
crests on September’s 15th trading day on average, which translates
to September 22nd this year. Gold’s recent autumn rally was
prematurely truncated in early August when excessive buying
exhausted itself. Gold’s high consolidation since has come in a
seasonally-strong time. But between that autumn-rally peak and the
dawn of gold’s winter rally, gold tends to correct sharply. That
comes over the next month.
Between late September to late October, gold has retreated an
average of 1.9% in these modern gold-bull years. That might not
sound like much, but it is gold’s sharpest seasonal decline by far.
Gold’s other two seasonal corrections into mid-March and early June
average 1.4% and 1.2% retreats. And when gold needs to correct
after it has run too far too fast, seasonal weakness way exceeds
that heavily-smoothed average.
The
still-necessary gold selling after early August’s extraordinary
levels of overboughtness is far more likely to materialize in this
seasonally-weak time. That seasonal lull is normally caused by
Indian gold buying for festival season drying up before holiday
buying starts spinning up in the western world. Both of these
trends are likely to prove weaker than normal this year,
exacerbating any technical gold selling.
Indians are shrewd price-conscious gold buyers, and rupee gold
prices are still trading way up near recent lofty all-time-record
highs. Indians are generally gold bargain hunters, not momentum
chasers like American millennials. And with such deep economic
scarring from governments’ economic lockdowns, jewelry buying has
cratered this year. That might not recover anywhere near a
normal holiday-buying season.
So
if this recent high consolidation in gold is going to roll over into
a full-blown correction, this coming seasonal-lull month is the time
it is most likely to happen. And just like buying begot more buying
into early August’s peak, selling will cascade. As soon as gold
starts to break down technically, traders will increasingly
sell. The more selling they do, the farther gold will fall. That
will drive even more selling.
Key
technical levels will exacerbate this vicious circle. Many
technically-oriented traders including the hyper-leveraged
gold-futures speculators closely watch gold’s 50-day moving
average. That is running $1926 as of the middle of this week. A
decisive close under there will spook traders. Next comes gold’s
correction-to-date low of $1906 in mid-August, and then the
psychologically-heavy $1900 big round number.
Once
gold is pushed below those key technical levels, it is a long way
down to gold’s 200dma following way below at $1703! If this
necessary and healthy gold correction simply extends to this gold
bull’s average of 14.3%, we’d be looking at a major bottoming far
lower near $1767. Wherever that appears, it has to happen over
a bigger and longer time frame than gold’s 7.5% selloff at worst so
far over just 3 trading days.
The
millennial Robinhooders and their hedge-fund imitators that flooded
into gold-ETF shares at frenzied rates into early August are weak
hands. They bought high in peak euphoria, so their losses will
snowball fast as gold corrects. That could lead to massive
symmetrical selling in gold-ETF shares, led by GLD and to a lesser
extent the IAU iShares Gold Trust. Big differential gold-ETF-share
selling would hammer gold.
Both
speculators and investors should embrace these inevitable
rebalancing corrections, as they yield the best mid-bull buying
opportunities within ongoing bull markets. That is when to
aggressively redeploy in gold, gold ETFs, gold-stock ETFs, and
individual gold stocks with superior fundamentals. Bulls’
inexorable upleg-correction cycles are great boons for traders,
greatly expanding potential gains to be won in those bulls!
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 dozens of new positions before
gold stocks grew too overbought, which were stopped out recently at
huge realized gains running as high as +199%! Our subscribers
multiplied their wealth within months.
To
profitably trade high-potential gold stocks, you need to stay
informed about what’s driving gold. Our popular 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!
Corrections are the time to do your gold-stock homework, preparing
to redeploy as they pass.
The
bottom line is the persistent extreme overboughtness in gold remains
a serious downside risk. After shooting parabolic into early
August, the high consolidation since has yet to rebalance away
excessive greed and extreme overboughtness. Yet that still has to
happen before this gold bull’s next major upleg can start marching
higher. After such a vertical upleg euphorically climaxing, a
correction remains highly likely.
Gold’s technicals are still very stretched heading into its biggest
seasonal pullback of the year, running over the next month or so.
Any material selling could easily force gold to break below key
technical levels not far under current prices. That would unleash
both gold-futures and gold-ETF-share selling that could easily
cascade. But the resulting overdue gold correction will create
excellent mid-bull buying opportunities. | 
