by Craig Hemke, Sprott Money:
Gold Bull Markets And Price Pullbacks
Over the holiday weekend, I’ve seen many posts and comments about how “gold is overbought” and “due for a pullback”. That may be true, of course, as all bull markets in gold play out in a series of higher highs and higher lows. But is gold truly “overbought”? That’s a good question.
Most of this analysis appears to be based on a feeling that “price is too high”. Generalist investors who don’t often focus on gold see the price above $3000 and think it’s too expensive. But too expensive compared to what? Stock? Bonds? Or is it just the price itself that bothers people?
TRUTH LIVES on at https://sgtreport.tv/
The point here is this: I’m not going to tell you that gold can’t or won’t have another pullback in price soon. It most likely will. If anything, it’s because that’s precisely how bull markets play out. In gold, you always seem to get two steps forward and then one step back before the next steps forward begin. The result is a chart that shows higher highs, followed by higher lows. You can see this in the chart below:
Gold spot price – Daily
Evaluating Gold’s Trend And Market Structure
Now that chart makes it appear price is going “parabolic”, and the rate of price increase certainly seems to be accelerating. However, if we look closer and simply examine the trend year-to-date, the current rally appears to be quite orderly, apart from the sharp drop due to Trump’s tariff announcement in early April and the quick reversal that followed a few days later.
Gold spot price – Daily
Is Gold Actually Overbought
Back to the original question, though: Is gold overbought and due for a significant pullback in price? One traditional measure of sentiment is the Relative Strength Index, where any reading over 70 is generally considered a measure that something is, indeed, overbought in the short term. As you can see below, COMEX gold futures reached an RSI of 76 earlier this month before the Trump tariff announcements. Price then fell $200 and the index dropped to 41. As I type, it’s back to 76.
So maybe another pullback begins as soon as tomorrow? Maybe. Your guess is as good as mine. But in terms of gold being “expensive” and a “crowded trade”, I’m not so sure. Yes, the gold price has rallied over $700 year-to-date, but this comes during a time of solid fundamentals and coincides with a sharp drop in the U.S. Dollar Index, which is now more than 11% off its early-January highs.
Gold spot price – Daily
Gold Futures, CoT Report, And Open Interest
And as to whether or not gold is a “crowded trade”, the best indicator of that is the monthly Commitment of Traders (CoT) report from the CFTC. These reports measure the summary positioning of speculating hedge funds and other traders, as well as the supposedly neutral producers and Banks. The most recent report was surveyed on Tuesday, the 15th of April, and released late last Friday, the 18th. What did it show?
