Sunday, May 8, 2016

The Entire Precious Metals Market Is Overbought In The Short-Term But Does It Matter In The Long-Term?

The last rally in precious metals prices and related stocks resulted in overbought condition. Nearly all charts, based on the COT reports, show bullish extremes:

Sentiment index shows over-optimism:

Big speculators, called Managed Money Managers, are holding one of the highest net long position in gold futures:

Silver shows similar patterns. For example, big speculators hold the highest net long position in silver futures in history:

Summarizing - in the short-term red warnings lights are flashing over the precious metals market.

However, in the long-term it may look different.

Let us look at the year 2005, when gold was in its initial phase of a bull market:

The green area marks the periods of over-optimism. Since the beginning of August 2005 speculators have been holding the highest net long positions in gold futures. Despite this fact, gold prices went up from $437 to $526 per ounce (an increase of 20.4%). What happened then?

The chart below shows it:

Well, gold went up from $526 to $710 per ounce in the middle of 2006 and then, after a serious correction, went through the roof.

I would say that the short-term conditions should not overshadow the big picture.

1 comment:

  1. Thanks for the analysis... since it is May and many small gold stocks have doubled I have been lightening up with a view of taking stock and buying back later this summer possibly into others. But your point is a good one, that in a bull market you make money by holding rather than trying to trade in and out.