As I suggested last week, gold has enjoyed continued buoyancy with the spot price closing at $1319 this week. Year to date, gold has gained 20% with 12 record highs in the past 14 trading sessions. Positive seasonality will continue to provide wind to the back of gold bulls for two more weeks. So it is possible for gold to eke out an even bigger gain yet. But the incredible streak of positive days that has propelled the yellow metal higher as well as the rising bullish sentiment is telling us that we are near a top.
The Daily Sentiment Index for gold hit the critical 90% level this week, as it did for silver (95% DSI) last week. While the 90% DSI doesn’t mean that gold has to suddenly reverse course, it is another sign that things are getting overheated in the short term. The whole commodity complex right now is arguably very frothy with major bullish sentiment accompanying rallies in silver, cotton, wheat, corn, sugar, oats, etc.
Bullish Percent Index
Also, the bullish percent index for the gold sector index has reached 80%. This is close to the 85%+ level which has corresponded with tops in the past. The bullish percent index for the Gold Miners Index has been acting like a very good barometer for the AMEX Gold Bugs index (HUI). And while it isn’t yet above 85%, it is high enough to add to the consensus that we are close to a top here.
Not surprisingly, the retail investor is clamoring to get on board the gold bandwagon. According to TrimTabs, the SPDR Gold ETF (GLD), year to date has had inflows of $6.7 billion which is a +35% increase in its asset base.
Something else to keep in mind is that gold and the dollar do have a mirror relationship to each other - even though it may be more tenuous now than it has been before. With the US dollar at an extremely low bullish sentiment level, it would not be surprising to see the massive sentiment gap between them close by gold falling and the dollar rallying.
If you’ve enjoyed gains by riding this latest rally, it is time to seek out target areas to pare positions and to move up your stop-loss levels. While gold may move higher, any further gains will probably be given back and then some. There will be better times to be long gold as it continues on its secular bull market.
The following weeks will not provide for a low risk environment for the gold bugs. Too many things are aligning for gold to be able to continue to rally strongly: technicals, sentiment, and seasonality.
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