Gold looks overbought – but it just keeps going up

Thanks to the wonders of modern technology, I am now able to transcribe conversations from yesterday using just my memory.

I’m able to tweak the bits I can’t remember precisely, to make them more entertaining.

And omit the bits where somebody was waffling.

And that’s what I’ve done for you today in today’s Money Morning.

Here follows a conversation with my broker from yesterday about gold and gold stocks…

The bull market that just won’t stop

“Steve.” We’ll call him Steve. It’s neutral, it’s believable. “Steve, I want to lighten up on gold stocks here. We need to sell something.”

“Why?” he answered doubtfully in the annoying, cynical tone he takes when he doesn’t agree with me.

“It’s all gone up too far too fast.”


“It won’t last. You know what happens when these things sell off.”


“And it’s way overbought. On just about any measure you like.”

“It’s been way overbought for over a month”, he observed.


“What if it doesn’t sell off?”

“It will”, I said. “It’s bound to.”

“But what if it doesn’t?”

“We always get a sell-off in February and March.”

“We haven’t this year.”

“Which makes it even more likely. There’s too much euphoria. Too much bullish sentiment. The ‘to-the-moon’ crowd is crowing. The COT data [commitments of traders – the positions of the professional futures traders] has gone to extremes again. We’ve had a MACD [moving average convergence/divergence] sell signal.”

“That’s already been invalidated.”

“I know, but – the large caps are up over 80% in two months. That’s too much.”

“Is it? From how oversold they were? So maybe it consolidates for a while. Or they could carry on going up.”

I was starting to doubt my convictions.

“Look, I’m confident this is going to go lower and between now and July, I’ll be able to buy in at much lower prices.”

“How will you know when to buy back in?”

And so it went on.

Steve is a fantastic broker during a bull market. Once you’ve got a position, he likes to ride it all the way. Unfortunately, that makes him a rotten broker during a bear market. His risk management is terrible.

Wall of worry? Or irrational exuberance?

So who’s right? Is this a new bull market? Or have gold and gold stocks got way ahead of themselves and should we be taking profits?

If you read my stuff every week – and who doesn’t? – you’ll know that I’ve been cynical about gold for a some time now. Meanwhile, gold has kept on rising. I’ve been wrong.

Something Steve then said chimed rather.

“Remember bull markets throw you off. You’re climbing the wall of worry.”

“Yes, but –”

“That’s what they do.”

Is that what’s happened here? Looking at overbought readings, COT data, sentiment and all the rest of it, and with the recency bias of a five-year bear market, have I failed to climb the wall of worry?

“Who do you know that’s been in this one, right from the get go, fully invested?” he asked.

“No one.”

“Nobody! Everybody’s missed it. Everybody. They’re all sitting in cash, not believing this move. They’re all “waiting for the pullback and then they’ll get in”. And the pullback hasn’t come.”

He continued. “There really isn’t very much for them to buy. So many mining companies are dead, there really aren’t many opportunities. So it doesn’t take much money to push up prices. That’s what you’re seeing. I can see the money-flows.”

He’s absolutely right, of course. If this is a new bull market, the most challenging job is to stay invested. This move has caught many people unawares. It’s been treated as though it’s a bear market rally and profits have been taken too quickly.

That’s one of the beauties of owning physical metal. It’s such a pain in the backside to sell, you mostly don’t get round to it. And so you are forced to stay invested.

But ETFs, stocks, options, spreadbetting positions – they’re too easy to trade. And you are goaded into trading, when perhaps it would be wiser (and cheaper) to do nothing.

That’s why it can be a good idea to have a trading account and an account for longer-term positions.

Defying the wisdom of Steve

Despite the wisdom of Steve, I remain of the mind that gold has got ahead of itself and that we’re going to get a correction. But when? And by how much? Those are the million-dollar questions. Gold sentiment seems to change on a sixpence.

In my short-term account I’m now out of gold and gold stocks. In fact, I actually took a small short position against gold last week – and got stopped out. I may try again. I’ve still got way too much exposure via physical metal. In my longer-term account I have a few gold stocks and special situations.

So I win whichever way gold goes. But if it goes up, I don’t win by as much as I would like. So I’m hoping – never a good investment strategy – it goes down first. Then, of course, I will nail the bottom to the day, buy shed loads of gold stocks, watch them double and triple and retire to the tropics.

My first target for gold is the $1,150 to $1,180 area – for reasons I’ll explain in another missive. As for the HUI (the index of unhedged, large cap, gold stocks) I’m thinking 125-140 (it’s 170 now).

Now watch it go up, up and up.