While Q2 started off strong, it was a rough finish to the quarter for the price of gold (GLD), with the metal dipping back into negative territory, down just over 4% year-to-date. This weak performance following the June Federal Reserve Meeting, where we saw the discussion of an earlier rate hike than initially planned. While this certainly wasn’t a positive development for the metal, the $100/oz decrease in the gold price looks to be an overreaction, and it’s certainly accomplished one thing: killing the majority of the bulls in the trade.
As of last week, the bullish sentiment was down more than 4500 basis points from May levels, sliding from 70% bulls to just 17% bulls on Tuesday of last week. This suggests that the scales have been tilted in favor of the bulls again, with sentiment so poor that further weakness should push this indicator onto a buy signal.
(Source: Daily Sentiment Index Data, Author’s Chart)
As shown in the chart above, bullish sentiment has come to a long distance from May levels when the above indicator showed more than more bulls for every bear in the trade. In just a month, this reading has shifted to more than four bears for every one bull in the trade, a massive improvement for those waiting for a contrarian buy signal in the metal.
As the chart above shows, dips below 20% bulls have typically been short-lived (except for 2018), and they have usually bred significant rallies within the next three months. The two most recent instances were in November of 2020 and March of 2021, with gold rallying 11% in 5 weeks and 14% in 11 weeks, respectively. While these rallies were short-lived, the important thing is that gold’s downside is typically relatively muted when sentiment falls below 20% bulls, with any further weakness typically getting bought up almost immediately.
The good news is that we’ve seen this massive decline in sentiment with little damage done to the bigger technical picture. This is because gold remains above its multi-year breakout level of $1,765/oz, above its key monthly moving average, and continues to build a handle to its 10-year cup breakout. As it stands currently, gold has fallen beneath the downtrend line on its handle, and reversing above $1,835/oz will be key to regaining short-term momentum. However, as long as we remain in this handle pattern and above $1,670/oz, I see no reason to call this a failed multi-year breakout and instead view this as a violent shakeout and re-test breakout level.
If we zoom out even further to the quarterly chart, we can see that gold is hovering right above its quarterly moving average (green line). While the back half of Q2 was terrible from a performance standpoint, it was merely an inside quarter, suggesting limited technical weakness in the big picture. The key now will be which way this inside quarter breaks, with a break above $1,915/oz opening the door to new all-time highs and a break below $1,710/oz being a bearish development, pointing to a re-test of the $1,670/oz strong support.
So, what’s the best course of action?
Given that gold continues be one of the only asset classes trying to follow through from a multi-year base breakout, I believe any dips below $1,775/oz would present low-risk buying opportunities, with a risk of just 7% to the strong support level at $1,670/oz. Assuming this breakout is successful and the metal can hold $1,670/oz, the upside from this breakout is above $2,200/oz, translating to a reward to risk ratio of nearly 4 to 1, with $400/oz in upside, and barely $100/oz in downside. However, miners also look to be a solid play on the metal, offering more leverage if they’re bought on weakness.
While gold remains out of favor and has had a terrible performance since its all-time highs last August, I believe this decline has helped to push many bulls out of the trade, setting up the metal for an explosive move higher if it can get back above $1,915/oz. The key to this thesis remaining intact is holding above $1,670/oz, which is a pivotal level for the bulls. However, for now, I see no reason to lose sight of the big picture, which remains bullish and similar to palladium’s breakout in 2017, given its breakout, re-test, and then resumption higher after a 24% correction from its highs.
Disclosure: I am long GLD
Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
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