Gold Becomes Overbought; What To Do Now?

Gold is seriously challenging the crucial resistance zone of $1200-$1220.

Daily gold futures price chart show that it is overbought.

Should you be worried?

Gold (NYSEARCA: GLD) is seriously threatening to violate the resistance zone of $1200-$1220 with more than 1 percent in gains. At the time of writing this article, the yellow metal was trading at $1214.8 per ounce after having tested an intraday high of $1218.9.

Source: Novi.ba

In my last article on gold published on January 5 titled Gold Is About To Face Its First Major Test On The Rebound, I had discussed why I expected the precious metal to hit the resistance and eventually climb the hurdle. At that time, gold futures were at $1183 per ounce.

A significant contribution to the rally has come from the weakness in U.S. dollar (NYSEARCA: UUP). The greenback has corrected more than 3 percent from its recent high of 103.82.

Source: TradingView

Bulls are clearing the hurdles in front of them, one at a time. First, they crossed the 30-day SMA, then they conquered the 50-day SMA, and now they are aiming to take out the first crucial resistance. Beyond this zone of $1200-$1220, the precious metal should jump to $1250-$1260.

Source: TradingView

But, some investors are worried that Aurum has rallied too fast and is overbought. They are not incorrect; the 14-day RSI and the 14-day MFI values indicate that gold has indeed entered the overbought territory. But, this isn't a reason enough to sell, not at least for the long-term investors. The short-term traders can definitely consider booking some profits.

The long-term investors have nothing to be concerned about. Barring some minor profit-booking, gold should do well to cross over the resistance, failing which it risks falling once again to $1100 or so. The weekly gold futures price chart below clearly indicates that the yellow metal is rising after retesting the multi-year resistance trendline.

Source: TradingView

The fear of gold being overbought takes a strong beating when looking at the 14-week RSI and the 14-week MFI values of 47.6967 and 41.1337 respectively. Instead, these readings suggest that there is ample room to run in the coming weeks as well.

Gold is doing well to dislodge the bears as it crosses each resistance one-by-one. While stating this, it is hard not to be reminded of this famous quote from the legendary investor Warren Buffett,

I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.

I am not expecting the positive mood to be spoiled anytime soon. The correction in the greenback may end in the near future as it also nears the oversold territory, but that would cause nothing more than minor pullbacks in gold.

So, long-term investors who got in near $1140 do not have to book profits now. Only the short-term traders should consider reducing their exposure.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.