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Defining 'Oversold' In Gold

ByEric De Groot
Published 04/01/2015, 07:04 AM
Updated 07/09/2023, 06:31 AM

Similar to crude oil, gold follows cycles that flow from one extreme to another. These flows, directed by the self-interests of global investors, are influence by human behavior. Amid all the distractions of the daily chatter, most struggle to recognize the flow, let alone define its extremes. This makes challenging interpretations of oversold and overbought difficult for the average investor.

Investors learn the hard way that interpretations cannot be opinion driven. Gold's trend, described as oversold not long ago, was cited as the definition of 'the bottom' by some. This call, most likely premature in terms of the cycles, has many committed to gold again.

The definition of extreme, however, is mufti-dimensional—layered by price and time. It must be defined by computers.

Short-term

Traders focus on the short-term. The green boxes define an OVERSOLD trend (chart 1),

Gold, Gold Priced In Major Currencies - Short Term Chart

Intermediate-Term

Traders and investors focus on the intermediate-term. The red box defines EXTREMELY OVERSOLD (chart 2, below).

Gold, Gold Priced in Major Currencies Intermediate-Term Chart

Long-Term

Investors focus on the long-term. Long-term oversold or EXCEPTIONAL OVERSOLD is only observed every three to five decades (chart 3, below).

Gold, Gold Priced in Major Currencies, Long-Term Chart

Recognition of the flow and definition of extreme help investors separate sales pitches from the message of the market. This type of analysis, which can be applied to all markets, compliments market reviews.

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