Recent market movements have propelled gold to an extremely overbought position in terms of momentum against all major fiat currencies. This is evident in the daily Relative Strength Index (RSI) charts, which indicate that gold’s upside momentum has reached levels comparable to those seen at its peak in 2011. This overbought condition extends to gold’s performance against the Euro, Yen, Swiss franc, Australian dollar, and Canadian dollar. Conversely, these currencies have become oversold relative to gold. While gold’s momentum against the US dollar is not as extreme, it is still noteworthy. This overbought situation suggests a high likelihood that gold has either reached or is approaching a multi-month price peak. However, two factors indicate that the April 2024 extreme may not mark the end of the cyclical gold price rise and, by extension, the decline of fiat currencies. The first factor is sentiment, as indicated by the COT data. Speculator sentiment remains skeptical towards gold, with the collective net-long position of small traders (the so-called ‘dumb money’) near a 14-month low despite gold’s recent price surge. This sentiment suggests that there is still significant room for speculative buying in gold. The second factor is the fundamental backdrop, as reflected by the Gold True Fundamentals Model (GTFM). The GTFM, which had turned bearish due to rising real interest rates, has since reverted to neutral territory following the recent breakdown in the XLY/XLP ratio. The model is likely to turn bullish in the near future due to several factors: a shift from risk-on to risk-off in the stock market, a likely weakening trend in US economic data, the Fed’s inclination towards monetary policy easing, and the Biden administration’s efforts to stimulate the economy ahead of the November 2024 election.
Gold’s Momentum Extreme: A Short-Term Peak or a Bear Market Signal?
