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Times like these illustrate why having a cool head in a crisis is so important. The ability to be objective and focus on the data while those around you are throwing in the towel left and right is key to investing. Having a well-defined process based on data will not only see you through the scary moments but significantly increase the size of your portfolio at the same time.
Gold has been hammered since June 11, when it peaked in 1906. It has fallen $138 so far, or over 7%, in just five days. Such shock moves in such a short space of time—based on nothing and ahead of and post an event like the FOMC meeting—are typical of manipulation by the Bullion Banks, but that is an article for another day. Dimitri Speck’s book “The Gold Cartel” provides compelling statistical evidence for this.
The peak for the recent rally in Gold actually occurred a few days earlier on June 1 at 1919, a negatively divergent higher high. I tweeted this the day before:
I cited the RSI of 70+ being extreme overbought. I got many responses stating categorically that an RSI of 70 or greater does not mean it’s overbought. This is an example where data meets emotion, and the former almost always wins. Such emotional responses only provided further evidence of the prevailing extreme bullishness. People talking their book—their bias, based on emotion—and ignoring the data.
Fast forward to today, and what do we see? The same thing is happening yet again but in the opposite direction. Following the dramatic sell-off in Gold and other metals, everyone is throwing in the towel, which is exactly what such sell-offs are designed to do: squeeze out all of the weak hands. “Buy low, sell high” is the simplest rule but so few follow it because it goes against human nature. Instead, they chase or buy at the top and sell at the bottom. This is the price you pay for trading or investing based on emotion.
By contrast, if you held no position whatsoever in Gold and looked objectively at the data, it sure looks like a good time to buy:
- Gold has already fallen $150, or 8%, in just days from its peak of 1919
- Sentiment is extremely bearish
- Gold is extreme oversold with a daily RSI of 27
- 1770 represents the 61.8% retracement of the entire move up from 1673 to 1919
- There is a possible inverse Head & Shoulders pattern on the weekly chart that, if it plays out, suggests new record highs ahead.
This is just a sample of the data supporting the idea that we’re approaching a significant low, just as the RSI >70 signaled a peak was coming. This does not mean that you should run out and buy Gold. That risks catching a falling knife. I recommend you wait for a break of resistance, as there is still plenty of upside thereafter. A break of 1800 would be the first sign that the bottom may be in, but 1870 would be a better one. My target on the upside remains 2100+, perhaps a lot higher.
In conclusion, emotion is a portfolio killer. This is most true of the precious metals sector in particular. Sentiment is one of the most dominant factors in Gold and Silver. It is a fantastic contrarian indicator. When everyone is bullish in Gold and it’s extreme overbought, it tends to fall. There are numerous examples of this going back over the years. It’s also true that there are occasions when Gold continues higher in spite of being extreme overbought and bullish, as we saw in the rallies in 2020, 2016, and from 2008-2011, but these are the exceptions, not the rule. The odds are heavily in favor of the downside when these conditions arise.
It’s obviously the same in the opposite direction when Gold becomes extreme oversold and bearish. Could it go even lower? Sure, anything is possible. But the odds, the probabilities, are heavily weighted in your favor that Gold is about to rally when it is oversold and bearish. This is what we’re seeing now. The key is being able to dismiss your emotion, your fear, and focus on the data. At the same time, you don’t want to risk catching a falling knife, so buy on a break of resistance. This provides some confirmation that the bottom is indeed in and we’re going higher.
Finally, I still believe we’re heading up to new record highs either later this year or in early 2022, and this sell-off, engineered or not, provides the fuel for that rally. We’ve seen this before ahead of every major rally. Think March 2020, August 2018, December 2016, and December 2015, to name a few. Only a break of 1673 negates this outlook.