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What’s going on with gold? Is this a garden variety correction or is the bull market in precious metals over? Is it time to buy or should investors stay away?
Let’s see what the charts tell us.
First and foremost, it’s critical to note that gold was egregiously overbought going into this correction. The precious metal had a weekly RSI of 80 was trading 35% above its 10-week moving average (roughly the same as the 50-day moving average). To put that into perspective it was move extended above this moving average than the 2008 peak, 2011, peak, and 2021 peak.
To be clear: gold was ripe for a drop. Any time a security gets this overbought/ overextended above a critical moving average, it’s not unusual for it to experience a violent correction.
Having said that, since dropping gold has held its 50-DMA. This is a great sign for gold bulls as it signals that buyers are still showing significant demand at more reasonable prices.
Moreover, the gold to stock ratio has also held its 50-DMA. This again suggests investors are still bullish gold and prefer it to stocks.
The big picture for that ratio suggests this is just a back-test of a recent breakout to the upside. This is a common technical development. The fact this ratio held here is again signaling that gold’s bull market remains intact.
Finally and perhaps most critically, we need to note that what’s happening in gold wasn’t just a $USD debasement move. Gold has in fact exploded higher when priced in Euros, Yen and Francs.
All of this suggests that the secular bull market in gold remains intact. Provided gold holds its 50-DMA, investors should be safe buying here.
For those investors who are looking for larger gains, consider precious metals miners, which benefit from cash flow that rises dramatically as gold prices soar.
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