Gold is now most overbought in 5 years; Is it time to sell?

Despite its reputation as more of a store of value than a creator of wealth, gold has been outperforming many other assets and asset classes since the start of 2024. 

This trend is exemplified not only by the fact that the precious metal has achieved multiple new all-time highs (ATH) since January – and that it is trading just under the most recent ATH at $2,744 at press time on October 23 – but also by the fact that it is 33.04% in the green year-to-date (YTD). 

The benchmark S&P 500 stock market index is 23.37% up within the same time frame.

The performance has made gold exceptionally popular among investors and, as is frequently the case, has made the yellow metal highly overbought. In fact, the world’s largest commodity by market capitalization is the most overbought it has been since August 2019, per the data published by Barchart on October 22.

Why is gold surging in 2024?

Such a setup might indicate that investors would be wise to take a short position against gold or at least cease investing in the asset, but the situation is somewhat more complicated.

At the surface level, historical examples show that gold being overbought does not signal an imminent collapse. For example, the commodity did experience a fall of about $100 per ounce in September 2019 but was back on the upward trajectory by October.

Furthermore, the precious metal has much going for it in 2024. 

One driver of its rise has been the combination of high inflation, high interest rates, and the associated recessionary fears. While the price surge has slowed down significantly since the year started, and the Federal Reserve started cutting borrowing costs in September, the fears have not yet been fully alleviated.

Simultaneously, the growing geopolitical tensions, present and rising worldwide from South America to the Taiwan Strait and the 38th Parallel, also indicate traders will continue seeking the safety of the world’s most long-standing safe haven asset.

Additionally, if the analysis of Bank of America (NYSE: BAC) is to be believed, gold’s role will only increase as it may be the only haven standing.

Finally, the precious metal is likely to benefit from continued upward pressure due to a global central bank buying spree – and particularly a buying spree among BRICS countries as they work to reduce their dependence on the dollar as the reserve currency.

Is selling gold the right call after the rallies?

Given the concoction of factors, it is hardly surprising that the commodity also boasts a persistent bullishness among some of the market’s most prominent experts and strategists. Indeed, multiple analysts have, in recent months, joined Bloomberg’s Mike McGlone in assessing gold is headed for $3,000.

As could be inferred from the many strokes painting a bullish picture of gold, constructing a sell case is mostly difficult. 

This fact is only reinforced if it is presumed the commodity was intended as a long-term, safe asset, as there is a general consensus that this logic is still at play – and that a major crash for gold would only come as part of a greater, overall collapse.

Still, investors who purchased the precious metal years ago and wish to participate in what many Wall Street experts expect to be the continuation of the artificial intelligence (AI) boom might have a solid opportunity to create the cash pile they need by offloading the commodity.

That being said, for all the optimistic forecasts for the commodity, the fact that it is highly overbought in October 2024 makes it an unattractive new investment unless it is part of a highly specific strategy.