Overbought & Crowded | Gold Price Analysis

Gold Price Trends And Short-Term Pullbacks

The notion that the gold trade is "overbought" and "crowded" continues to be put forth as reason to sell gold and/or postpone purchases. While price will always move in unpredictable ways in the short term, the evidence that it's somehow overextended and due for a sharp pullback simply doesn't exist.

If this theme sounds familiar, it's likely because we just wrote about it a few weeks ago. For review, here's a post from mid-April.

And the gold price has pulled back from all-time highs to a recent low near $3200. However, did you know that last Friday, May 23, price posted its highest ever weekly close? You may have missed that milestone ahead of the holiday weekend, so here's the chart as your reminder:

Gold Price - Weekly

Technical Indicators And Relative Strength Index

Since the chart looks fine, let's address again the idea that gold is "overbought" and a "crowded trade".

Let's start with "overbought".  This notion suggests that price has moved too far and too fast, and maybe that's mostly true. Bull markets in gold are defined by a pattern of two-steps-forward-and-one-step-back, which leads to a chart that paints a series of higher highs and higher lows. Look again at that weekly chart above and you can clearly see this pattern playing out.

But what about technical indicators? Is gold overbought in technical terms? Perhaps the most basic measurement for this is the Relative Strength Index. In general terms, an RSI reading above 70 measures something as overbought, with a reading below 30 indicating oversold. And where are COMEX gold futures as I type on Tuesday, May 27? The daily chart RSI is right in the middle at 52.

Gold Price - Daily

However, on the weekly chart, the RSI is higher at 68, and the monthly chart shows a level of 86. Whoa! That's near the highs of 2008 and 2020. This is definitely something of which we need to be mindful. However, as you can see below, the monthly RSI can maintain and burn off the high levels while price maintains higher levels, too, so we can't just take this one indicator and settle the argument. And again, on the daily chart, the RSI is neutral and near 50.

Gold Price - Monthly

Gold ETFs And Commitment Of Traders Report

OK, so what about this "crowded" stuff. If you read X, you'll get the impression that everyone from your Uber driver to your bartender now owns gold and, as such, everyone who is going to buy has already bought. But is this truly the case or does it just feel that way due to the ongoing rally?

Here are three items for your consideration. The first is the latest update on gold ETF flows. Yes, there was a spike of interest and inflows earlier this year but look at what the latest dip in price has wrought: the largest weekly OUTFLOW since 2020 and the third-largest outflow EVER. Obviously, the most recent surge of investor interest could be called "weak hands", simply chasing a trade, and by the looks of it, most of them have already been washed out.

Next, let's check the latest Commitment of Traders report. Below you'll see that as of Tuesday, May 20, the Large Speculators (primarily hedge funds) were shown to be net long 164,000 COMEX gold contracts. While that may seem like a lot, it's actually the smallest reported net long position since late February of 2024—back before price finally broke out above $2100.

Family Office Gold Allocations And Investor Sentiment

And then there's this...

The most recent Family Office survey is below. What's shown is the probability of future investment across all asset classes for these ultra-wealthy investors and institutions. Take a good, long look at their combined opinion of gold:

So, in the supposedly "crowded trade" of gold, just 21% of these influential investors plan to increase their asset allocation to gold over the next five years. That leaves 79%—basically four out of five—that plan to "stay the same", "decrease", or plan no investment at all in gold. 79%! When these stats are flipped and 80% of these advisors are long and increasing their gold holdings, well maybe then we can talk about gold being "crowded". For now, gold remains an underinvested afterthought for most big money asset managers.

And don't forget that for general investors, mainstream financial advisors barely recommend gold at all. In this most recent Bank of America survey, nearly 80% of advisors hold ZERO gold for their clients and another 15% recommend gold as a small holding. Again, how is this a "crowded trade" when almost no one outside of our little "gold bug" community even considers gold as an investment?

Summer Rally Potential And Market Outlook

In summary, the gold price will move up and down based upon myriad factors, many of which we can't anticipate. But be wary of the notion that gold is "overbought and overcrowded" and overdue for a sharp pullback. It's far from both, and the pending summer rally will catch many observers by surprise.

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