Gold is grinding higher, but a continuation of the trend isn’t guaranteed.

There is only one other time in history we have witnessed gold prices trader higher than they currently are: 2011. At that time, the US government debt had been downgraded by rating agencies and it seemed the world, the US dollar, and the stock market were melting down before our eyes. This time around, the yellow metal rally has a completely different backdrop. Stock indices are (reasonably) near all-time highs, the dollar is hovering at levels considered to be unsustainably lofty in years past, and despite aggressive monetary policy and debt loads, the US government is still considered a risk-free borrower. Yet, gold has managed to find a way to move higher.

The 2020 gold rally has occurred despite dramatically differing fundamentals to the 2011 highs, but one has to wonder if the result will be the same. In 2011 a overheated rally nearly went parabolic before finally putting in what we now know was a blow-off top. If the 2020 version is a repeat of this pattern, we probably have some upside potential before buying runs out. With that said, the market is technically overbought on most metrics and the bottom could fall out at any time. Thus, bullish strategies should keep the substantial risk of being “long and wrong” in mind. We have an idea of how to play both sides of the coin without taking a lot of risks or utilizing an inconvenient amount of margin. We will talk about that soon.

The RSI (Relative Strength Index) on a monthly chart is approaching 80.00. This is a level that cannot last in the long run, but in the short-run can make the most bearish of the bears rethink their logic. For example, in 2011 a trader who sold in July due to the 80.00 RSI reading assuming the highs were near likely sold within weeks of the high but would have suffered a $300 per ounce drawdown before the trade went as planned. If you aren’t familiar with futures market math, $300 equates to $30,000 per 100-ounce contract!