forex Bullish Gold May Be Seriously Overbought

[Anzo Lim 0]

https://www.wikifx.com/sg_en/

If history can be viewed as a reference, the chance of gold falling in the next two weeks is very high. In Asian markets on Wednesday, the 14-day relative strength index of gold spiked to 90, well above 70 which is  typically used as the overbought average. Since 2000, the gold RSI index has risen above the 85 level only three times and in all three occasions gold showed a decline in the following 10 trading days, with an average decline of 1%, while gold rose 7% in the previous 10 trading days.

To be sure, in these three cases in October 2010, February 2016, and June 2019, gold had eventually resumed its upward trend,but momentum had slowed down. Gold performs best when interest rates fall and the dollar weakens. If tensions in the Middle East do not further escalate, most of the volatility in interest rates and the dollar may stop temporarily, and same for the rebound in gold, at least temporary.

Currently, the market is enthusiastically expecting a bullish trend in gold. However, long position holders should mind whether this gold-purchasing zeal at the beginning of the new year is overheated. The latest CFTC Commitment of Traders data also shows that as of December 31^st , 2019, hedge funds and other fund managers continued to increase their long positions in gold and silver, of which speculative net longs in gold increased by 22,273 contracts to 327,925.

Edited January 8, 2020 by Anzo Lim