In last week’s update on the gold sector, we neglected to point out that gold stocks actually reached all time record oversold levels before reversing on Thursday.
As Steve Saville points out here, the gold sector has indeed never before traded this far below its 200 day moving average. Mr. Saville employs the BGMI (Barron’s Gold Mining Index) in his analysis, as it is the oldest gold mining stock index – in fact, the BGMI allows us to look as far back as the 1940s. The historical record is actually quite clear with regard to what tends to happen after such ‘oversold’ extremes are recorded.
Gold stocks produce an ‘oversold’ record amid price/momentum divergences – (click HERE or click on image to enlarge.)
Mr. Saville writes:
“It turned out that almost anything was possible, because at last week’s low the HUI was 55.9% below its 200-week MA. Therefore, using either the BGMI or the XAU as a sector proxy up to and including 2000 and the HUI as a sector proxy thereafter, at last week’s low the gold-mining sector of the stock market was further below its 200-week moving average (MA) than it had ever been.
We know from painful experience that there are no absolute benchmarks when it comes to sentiment and ‘oversold’ extremes, so the current extreme does not provide buyers with a guarantee of success. However, it isn’t every day that you get the opportunity to buy an investment at its most ‘oversold’ level in history.”