We’ve seen a relatively normal correction over the past two months for gold from its new all-time highs, but despite this moderate pullback, investors look to be giving up on the metal.
Based on Monday’s readings, bullish sentiment on the yellow metal is now lower than in December 2019 when gold was sitting $400/oz lower below $1,500/oz.
These recent readings suggest that many were likely caught buying the metal well above $2,000/oz in August, and are now being shaken out of the trade as few rational people would be pessimistic on an asset class that’s up over 27% year-to-date. Let’s take a closer look below:
As we can see from the chart above, the metal headed back into the danger zone (red box) in August, as bullish sentiment soared to above 90% bulls and the 20-week moving average for sentiment headed above 80% bulls.
In the past, this has been a very bearish signal as the metal has typically seen a draw-down of 8% or larger after trading inside this zone. Two months later, this signal has played out almost exactly as expected, though the correction has been a little deeper than the norm. Given the decline, the sentiment moving average ha slid from 85% bulls to 60% bulls, and this is nowhere near the extreme pessimism zone that often leads to multi-year buying opportunities.
However, it’s important to note that we’ve only headed inside this zone on eight occasions in the last 12 years, and never came remotely close to this zone in the 2010-2011 period when gold was consistently making new all-time highs. Therefore, while a mean reversion is undoubtedly to be expected as we’ve seen, a pullback into the green box (extreme pessimism) is highly unlikely.