Overbought or Oversold? Let These Mathematical Signals Be Your Guide

overbought or oversold? let these mathematical signals be your guide

just the facts, ma'am dragnet TV series sgt. joe friday

Anticipate before you participate in the market. This is a classic piece of advice I like to give investors and have written about extensively in my CEO blog, Frank Talk. Financial markets are influenced by relatively predictable cycles and trading patterns, and by better understanding these we are able to react thoughtfully to headline noise or unexpected market developments.

How many of you remember the old police procedural Dragnet? In it, Sgt. Joe Friday famously uses the line “Just the facts, ma’am.” I’ve always felt this nuts-and-bolts attitude relates perfectly to how our investments team makes its decisions on where to allocate capital. Follow the models, look at the math—and leave emotions at the door.

A Sentiment Indicator for Contrarian Investing

At U.S. Global Investors, one tool that we find particularly useful to track the different market cycles is our U.S. Global Sentiment Indicator. This indicator tracks 126 commodities, indices, sectors, currencies and international markets to help monitor volatility and cash flow levels.

Using this indicator, we note the percentage of positions that have five-day moving averages above or below the 20-day moving averages. Then we compare it to the S&P 500 Index. As you can see in the chart below, as of Wednesday, the sentiment indicator rebounded to 54 percent, rallying from a low of around 20 percent at the end of June.

The U.S. global sentiment indicator reaches 54 percent mid-week
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While a drop below 20 percent means the market is extremely oversold, we do not view the market as overbought until around the 80 percent mark. Having a keen awareness of these movements allows our investments team to be more proactive rather than reactive. It helps us manage our emotions and not be swept away by negative media or overly optimistic headlines.

Explore this topic further in the Managing Expectations whitepaper!

Is the Gold Market Being Suppressed?

Gold continued its trek lower this week, the price steadying around $1,220 an ounce on Tuesday following Federal Reserve Chair Jerome Powell’s congressional testimony. Powell commented that he thought the U.S. was on course for continued steady growth, supporting his expectation of a rate hike every three months. These comments sent the dollar up and gold down.

Despite this movement, I’m amazed that gold is holding up so well, particularly when you compare real interest rates in the U.S., Japan and the European Union.

Japan leads the world in government debt that trades negative yield
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In addition to these price moves, we’ve seen suppression and manipulation in the gold market in recent years. This is a topic I discussed this week in our webcast, cohosted by Randy Smallwood, CEO of Wheaton Precious Metals.

What do I mean by “gold suppression”? Historically, the price of gold has tracked U.S. debt, but as you can see in the chart below, that seems no longer to be the case.

suppression of gold? gold price has traditionally tracked U.S. debt
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The question, then, is not whether gold is actively being suppressed, but to what extent and by whom. Traders working at some big banks, including UBS to Deutsche Bank to HSBC, have already been charged for manipulating the price of precious metals futures contracts and fined as much as $30 million by the Commodity Futures Trading Commission (CFTC).

However, I’m skeptical that this has resolved the issue. In the past several years, gold has traded down in the week prior to China’s Golden Week, when markets are closed. As much as $2.25 billion of the yellow metal was dumped in the futures market in October 2016, as someone clearly sought to take advantage of the fact that markets were closed for the week in the world’s largest buyer of gold.

gold and silver price manipulation headlines

During the webcast, Randy Smallwood thoughtfully pointed out that the deliberate suppression of prices can't go on forever. I agree, and believe that precious metals such as gold and silver are significantly undervalued right now.

So what should investors be paying attention to?