Should investors buy gold on this dip?

  • Gold was rejected at key resistance at $1,560/oz, and has been pummeled since.

  • Bullish sentiment on gold has slid to 66% as of Monday’s close, but the long-term sentiment moving average still remains very elevated.

  • I see no reason to rush in and buy just yet, as I believe we will see lower prices before the bottom is in.

The past week has been a rollercoaster for those trading the metals complex, and a wake-up call for anyone who chased gold (GLD) in an extremely complacent market. If one is going to chase, they have to chase early, as chasing late is a great way to get tossed out of otherwise good positions at lightning speed. As I’ve discussed for the past two weeks for gold (GLD), this level was any price above $1,480/oz, and any gains above this level would likely get retraced. While there was undoubtedly some profits to be had by those that were very nimble as gold soared to $1,550/oz, many bulls likely got trapped. I do not think we have seen the lows in gold yet based on several indicators, and believe patience is the key here.

We’ve seen a sharp weekly reversal for gold since it tagged the $1,560/oz level last week, and already, the bulls have proclaimed it’s time to buy the dip with both hands. When the time comes to buy, the bulls don’t typically want to, and they certainly won’t be talking about. The fact that many of the same people that were talking about $2,000/oz last week are pounding the table saying the lows are in suggests we’re not there yet. Let’s examine bullish sentiment below to see what it looks like after three days of selling and $60/oz shaved off of the yellow metal.

(Source: Author’s Chart, Daily Sentiment Index Data)

As we can see from the above chart, while we have dropped through the irrational exuberance zone, we’re nowhere near the pessimism zone. To suggest that we have got a shift from extreme optimism to pessimism, I’d want to see the bullish sentiment on gold drop below 50% at a minimum. This is a reading more than 15 points below the current reading of 66% bulls. Based on previous occurrences, I would guess that this would require a drop to $1,470/oz or lower.

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(Source: Daily Sentiment Index Data)

As I’ve shown in past articles, gold has only seen sentiment this exuberant in four occasions in the past decade, and each time the metal corrected a minimum of 8%. The median correction was 11%. Given that we are only 4.5% off of the highs currently, we still have some room to fall if this lines up with past precedents. Let’s look at the technical picture to see where we might land:

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Looking at the daily chart above, we’ve got strong resistance at $1,560/oz, and the first real support comes in at $1,420/oz. Below that, we have massive support at $1,360/oz. While there’s no guarantee that we have to keep dropping until we hit support, the first level I’m watching to begin to get very interested is the $1,420/oz level. I would consider nibbling above this level, but would not be aggressive. If we were to correct the minimum, which is 8% from the $1,565/oz high, this would place us at $1,440/oz, which is just above the first key support level. For this reason, I believe we still have lower to go as the minimum I’m looking for to put a dent in the bulls confidence is $1,455/oz or lower. This would be slightly below the minimum correction we’ve seen in the past, and roughly a 6.5% correction.

To summarize, while we’ve seen a step in the right direction, the bulls are still too emboldened for my liking and busy counting their unrealized profits with glazed-over eyes. I am waiting for them to start second-guessing their decision to hold their miners and not take profits and will be most interested in pouncing if this correction continues below $1,450/oz. For now, I believe the best course of action is to be patient. This correction is not likely over just yet.

The SPDR Gold Shares (GLD) was trading at $140.99 per share on Tuesday morning, down $0.40 (-0.28%). Year-to-date, GLD has gained 14.02%, versus a 11.48% rise in the benchmark S&P 500 index during the same period.

GLD currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #1 of 33 ETFs in the Precious Metals ETFs category.

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About the Author: Taylor Dart

taylor-dartTaylor Dart has over 10 years of experience in active & passive investing specializing in mid-cap growth stocks, as well as the precious metals sector. He has been writing on Seeking Alpha for four years, and managing his own portfolios since 2008. His main focus is on growth stocks outperforming the market and their peers. In addition to looking at the fundamentals, he uses different timing models for industry groups, and scans upwards of 2000 stocks daily to identify the best fundamental opportunities with the timeliest technical setups. Taylor is a huge proponent of Trend Following and the “Turtles” who enjoyed compound annual growth rates of over 50 percent per year..

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