Gold and silver are on an impressive run higher since mid-November; gold is up around $100 an ounce (~8%) and silver is up nearly $2 (~13%). Silver is up 7 consecutive trading sessions and gold has risen in 10 of the last 12 trading sessions – the run has been strong enough that one could consider both precious metals to be ‘overbought’ using standard technical indicators such as RSI (at top of charts below) and MFI (at bottom of charts below):
Gold is in a powerful uptrend with the next area of major resistance near former support at $1310. $1260 should now become support.
Since breaking out above $15.00 last week silver has not stopped, rallying a further ~5% since confirming that it has put in place a multi-month bottom between August and December of 2018.
Is overbought a bad thing? The answer in this case is a resounding NO!
Both gold and silver are rallying after putting in place potentially highly significant long term bottoms. Therefore, we want to see strong buying day after day in order to gain confirmation that the bottom is in and an uptrend is now underway.
Bull markets are characterized by persistently overbought conditions just as bear markets are characterized by persistently oversold conditions. Moreover, overbought technical conditions can correct either by price or by time and bull markets often correct via time. This means that if one always exits long positions when oscillators reach ‘overbought’ territory they often won’t be able to buy back in at lower prices, instead the train will leave them waiting at the station.
The fact that both gold and silver have moved into technically overbought territory (RSI above 70 and MFI above 80) is a very good sign for precious metals bulls especially considering that sentiment indicators remain in neutral territory – that’s right, investors aren’t even bullish on precious metals yet!
With that being said I would expect sentiment to improve significantly once gold crosses the US$1300 threshold and silver crosses the US$16 level. A consolidation or even a small pullback in the next couple of weeks once gold and/or silver reach the red shaded areas in the above charts would be completely healthy and to be expected. Something to look for in the event of a pullback in gold/silver over the coming weeks will be how far the daily 14-period RSI pulls back; in the strongest uptrends the RSI will consistently remain in the 60s or 70s or even 80s while never dropping back below the median line (50).
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