Gold Price Forecast – Key Signal From A Little-Known Gold Index You Can't Afford To Miss

July 7, 2020
CFA, Editor & Founder @ Sunshine Profits

gold bars

We just saw another gargantuan sign pointing to precious metals' very likely turnaround. And once again, most investors are either not aware of it, or are choosing to ignore it (gold can only go up, right?). The signal came from the Gold Miners Bullish Percent Index. It’s been months… or perhaps even years since we covered this index and the reason is simple. It was not providing any major indications, and it was plain boring.

The index rose from the abyss of boredom to an exciting pedestal as it moved to the 100 level – the highest level that it can achieve. Why is this important? Let’s recall what this index means:

The Gold Miners Bullish Percent Index ($BPGDM) is a gauge of overbought and oversold conditions for the gold mining sector. It is a breadth indicator based on the number of stocks with Point & Figure buy signals (a Point & Figure chart emphasizes strong moves while ignoring small ones) within this index.

The index can take value between 0 and 100, 0 meaning extremely oversold conditions and 100 meaning extremely overbought conditions. There were only a few times when the index moved to 0 and there was only one time when it moved to 100 (before the current situation).

Practically in all previous cases, the signals were very meaningful. The first time the index moved to 0, was when gold stocks hit the rock bottom in 2008. The next time was in 2013, when the gold miners were already after a huge decline, and while it didn’t mark the final bottom, it did mean that the biggest part of the move was already over and that the bottom is going to be in shortly. Then, we saw two more times when the index moved to 0: in late 2014 and in mid-2015. On both occasions, gold miners formed major bottoms.

The only previous case when the index moved to 100, was at the 2016 top, when the index was topping close to the current price levels.

And… That’s it. There were no more extreme signals since this index was introduced in 2008.

With only 5 extreme cases in the past and a near-100% efficiency in timing the major turning points, the fact that the Gold Miners Bullish Percent Index just hit the 100 level is a screaming sell signal for the precious metals sector.

It perfectly fits the tendency for the USD Index to start huge rallies close to the middle of the year, and gold’s long-term turning point.

In yesterday’s gold trading analysis, we emphasized the following major facts:

  • In mid 2008, the USDX first moved lower before truly soaring.
  • In Q3 2011 (close to the middle of the year), the USDX also moved lower, forming a broad bottom, before soaring sharply.
  • In mid 2014, the USD Index also dipped while being between the 50-day moving average (marked with blue) and the 200-day moving average (marked with red) – exactly where they are right now.
  • In 2016, the USD Index moved a bit lower and reversed (at about 93) before the middle of the year. That was also when gold topped.

The biggest rallies in the USD Index of the previous years started in the middle of the year. But this specific pattern goes beyond that. There were numerous smaller rallies that started in the middle of the year or close to it. There were also tops, which would indicate that mid-year is actually an important turning point for the U.S. currency, but most of them were bottoms, especially in recent years. Since the most recent move was down, the implications are bullish for the USDX and bearish for gold.

Gold’s very long-term turning point is here and since the most recent move was to the upside, the implications are bearish. They are particularly bearish since gold just invalidated the tiny breakout above its November 2011 high.

Naturally, everyone’s trading falls within their responsibility, but in our opinion, if there ever was a time to either enter a short position in the miners or to increase its size if it wasn’t already sizable, it’s now. We made money on the March decline and on the March rebound, and it seems that another massive slide is about to start. When everyone is on one side of the boat, it’s a good idea to be on the other side, and the Gold Miners Bullish Percent Index literally indicates that this is the case with mining stocks.

Summary

It's a rare moment when the Gold Miners Bullish Percent Index flashes a signal – but when that happens, precious metals investors better pay attention. Right now, this indicator has reached the gold 2016 top values, and we know what happened in the gold and silver arena next.

The following days are not likely to be pleasant times for anyone who refuses to jump on the bullish bandwagon just because prices moved higher in the previous months. But what’s profitable is rarely the thing that feels good initially. As silver often moves in close relation to the king of metals, forecasting gold’s rally without a bigger decline first is thus likely to be misleading. The times when gold is trading well above the 2011 highs will come, but they are unlikely to be seen without being preceded by a sharp drop first.

Naturally, the above is up-to-date at the moment of publishing and the situation may – and is likely to – change in the future. If you’d like to receive follow-ups to the above analysis, we invite you to sign up to our gold newsletter. You’ll receive our articles for free and if you don’t like them, you can unsubscribe in just a few seconds. Sign up today.

Przemyslaw Radomski, CFA

Editor-in-chief, Gold & Silver Fund Manager
Sunshine Profits - Effective Investments through Diligence and Care

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All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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The term “carat” comes from “carob seed,” which was standard for weighing small quantities in the Middle East.

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