Gold continues to rise, but technical studies suggest gold is overbought
Gold continues its dynamic rally moving to higher ground for the fourth consecutive day, with the last three consecutive days resulting in a new record settlement price. As of 4:00 PM ET, gold futures basis the most active April contract is currently trading up $11.70 and fixed at $2138.20. However, today gold futures are trading well off of $2150.50 its intraday high, the first occasion in the last few days in which gold has not closed near or at its daily high.
The current rally became dynamically stronger last Friday, March 1st when gold futures opened just at its 50-day simple moving average and gained $41 in trading. The $41 gain occurred after a report by the Institute for Supply Management which revealed its manufacturing index dropped to 47.8 in February, “signifying an economic contraction.” This is according to Ryan McIntyre, managing partner at Sprott Asset Management.
Follow-through buying was evident yesterday with gold futures scoring over a $30 gain taking the precious yellow metal to $2126.30.
However, this latest rally is not broad-based but rather fueled by a “jump in speculative betting”, according to Adrian Ash, director of research at BullionVault. Speaking to MarketWatch he said there is “no gold rush among Western investors right now, not in physical bullion and not outside Comex futures and options.”
Ash added that “gold exchange-traded funds continue to “shrink to pre-pandemic size; coin shops are slashing their premiums and buy-back prices to try clearing the flood of customer selling.”
The current rally is fueled largely by overwhelming optimism that the Federal Reserve will begin its pivot from interest rate hikes to its first interest rate cut since March 2022. However, this optimism is not in-line with recent comments of multiple Federal Reserve members including Chairman Powell. Fed officials continue to express the narrative that “they are in no rush to cut rates”.
Investors are hoping to gain more insight when Chairman Powell heads to Capitol Hill for his semi-annual testimony to the House and Senate beginning tomorrow. According to the CME’s FedWatch tool, there is a 97% probability that the Federal Reserve will not begin to cut rates at their March FOMC meeting and a 79.1% probability that the Fed’s benchmark Fed funds rate will remain unchanged at the May meeting.
However, this probability indicator dramatically favors a rate cut by June with only a 27.2% probability that they will not cut rates in June.
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That being said, there are technical indicators that suggest that the recent rise in gold prices has put the precious yellow metal in an overbought situation. The chart above is a daily Japanese candlestick chart of gold with a stochastic oscillator. This study indicates that gold is very much overbought well over 80%, with the %K line crossing below the %D line which signals a strong potential for gold prices to decline. According to Investopedia, “ Stochastic oscillator charting generally consists of two lines: one reflecting the actual value of the oscillator for each session, and one reflecting its three-day simple moving average. Because price is thought to follow momentum, the intersection of these two lines is considered to be a signal that a reversal may be in the works, as it indicates a large shift in momentum from day to day.”
The chart above is also a daily Japanese candlestick chart with the RSI (Relative Strength Index) at 76.23. The RSI is a momentum indicator that measures the speed and magnitude of recent price changes used to evaluate if the market is over or undervalued. The RSI has moved above 70 indicating that gold is overbought and also suggests that gold could be primed for a trend reversal or a technical price pullback according to Investopedia.
While both of these technical studies strongly indicate that gold is overbought, the caveat to these momentum indicators is that gold could continue to rise and continue to be overbought. However, the fact that both of these indicators suggest that gold is extremely overbought warrants our attention as a potential indication that gold could pivot from its current bullish demeanor and signal imminent price correction.
Wishing you as always good trading,
Kitco Media
Gary Wagner
Tim Moseley