Gold fever is spreading, but some analysts question whether investors have become too enamored of the yellow metal.
Based on the relative strength index used by technical analysts, gold currently is at the most overbought levels since 2011 and 2012 when the price of gold topped $1,800 and consistently traded above $1,700, says Mark Newton, technical market analyst at Newton Advisors LLC, a provider of technical market analysis for institutions and retail investors.
“The question is, does that mean ‘sell’?” he asks. “That’s not always the case, particularly for something that has been trading in a range for five to six years. Sometimes assets can run much higher than technical indicators would suggest.”
Newton is near-term cautious—but long-term bullish—on gold. His bullish stance is predicated on his belief that the economy is slowing and will eventually roll over in 2020.
“If the economy weakens more substantially, that will cause a big move up in gold because yields will be compressed and the dollar will weaken—those are bullish things for precious metals,” he says.
Foster from VanEck also is long-term bullish on gold.
“Gold has been forming a base for about six years where it has been range bound around the $1,200 mark,” he explains. “I can’t overstate the significance of this breakout because for momentum players and those who play the technical side of the markets this breakout is very significant.”
He’s also bullish from a fundamentals perspective. “I think we’re moving into a risk-off investing environment that will favor gold,” Foster says.
That said, gold investors need to be on guard against good economic news that could torpedo the gold rally. “The Fed is trying to engineer a soft landing,” Foster says. “If it’s successful, that wouldn’t be good for gold.”