Has Gold gone too far?

S2N spotlight

Yesterday we shared some trend following strategy backtests and made a case for how strong gold has been, which you can review here. I forgot to add this chart yesterday; last year was a record number of all-time highs.

The question I want to ask today is: has gold gone too far?

For simplicity sake, I am going to stick with daily data and see what happens when the short-term Relative Strength Index (RSI) is overbought. As you can see in the chart below, I am working with a 5-day RSI and sell my holdings when the RSI goes over 80 for an overbought signal. I mark it with a red cross on the chart; there are 929 red crosses, and then measure the performance of gold for 1 month, 3 months, and 6 months after each sell signal. Clearly, this is not a good signal, as all 3 time frames are positive. There are many ways to fine-tune this, like measuring the return 1 day after or 1 week. But we are not day traders so lets assume this is not the right sell signal.

In this version, I have worked with a 44-day RSI (2 months (business days)) and a 70% threshold. As you can see, this is a much better signal generator; the only catch is that the current RSI reading is 60, so there is no sell signal.

S2N observations

I have one extra thing to add to the gold complex, and that is the gold/silver ratio. This chart shows that gold is more than 1.5 standard deviations from its long-term average with silver. The world is in a very precarious geopolitical situation at the moment, and the demand for safe havens is unlikely to abate any time soon. Silver could well play catch up and present a very good alternative in the precious metals space.

Tesla is under pressure with a 5-day down streak. This is not at record levels, but we are in a pretty rare space.

S2N screener alerts

17 days and counting is how many days in a row META stock has been rising.

Performance review

For those who are new to the letter, the shading is Z-Score adjusted so that only moves bigger than usual for the symbol are highlighted.

Chart gallery

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