After warning back on February 2nd of this year that a substantial correction in Gold was coming, we now see the flipside scenario unfolding. Sentiment is overwhelmingly pessimistic, suggesting that a rally is fast approaching.
The Daily Sentiment Index (DSI) for Gold has closed below the critical 10% level, which often is associated with a bullish trend reversal. While Gold prices don't have to suddenly reverse course, this 10% DSI reading is an early indicator that a substantial rally may be coming.
It seems like we constantly discuss sentiment readings and “crowded” trades. That's because they almost always offer significant opportunities in that they often mark turning points for a security and/or the market as a whole. As a reminder, a "crowded" trade is one where too many investors are piling in on the “buy” or “sell” side (we’re currently seeing it on the “buy” side in the tech-heavy Nasdaq Index).
The theory of contrary opinion asserts that if a majority of traders agree on the direction of a market move, then the odds are significant that prices will, in fact, move in the opposite direction.
Many investors do not want to touch Gold right now. It may trade a bit lower over the near term, however, here's why you should think about buying it now.
The Daily Sentiment Index (DSI) is a contrary indicator. The DSI provides an "emotional" indicator of market behavior.
Daily Sentiment Index at Extremes: Typical Behavior (trade-futures.com)
A number of clear patterns have emerged from years of sentiment data:
When the DSI rises to the 85% area or higher, the odds of a top are significant
When the DSI falls to the 15% area or lower, the odds of a bottom are significant
The longer the DSI remains at a high level, the larger and longer the likely potential decline
The longer the DSI remains at a low level, the larger and longer the likely potential rally
The DSI for Gold currently sits at 91% bears and only 9% bulls, indicating a high level of pessimism (bearish extreme) right now.
Sentiment data is suggesting that a significant rise in Gold prices may be coming soon. If a rally does occur, it will likely be substantial, eventually ending when the DSI flips from a bearish extreme to a bullish extreme.
Disclosure: George Kiraly Jr., CFP®, MBA is the Founder & Chief Investment Officer of LodeStar Advisory Group, LLC, an independent Registered Investment Adviser located in Short Hills, New Jersey. George Kiraly, LodeStar Advisory Group, and/or its clients may hold positions in the ETFs, mutual funds and/or any investment asset mentioned above. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. The above commentary does not constitute individual investment advice. The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.