Gold suffered huge losses after the 1300 critical support gave way on 04 October 2016, triggering all the stop losses below it. As a result, Gold was flushed down 5% to a low of 1241 within 4 days where it consolidated subsequently.

Nonetheless, from a wider perspective, we believe that Gold is only in the midst of a correction phase to the healthy bull market that just started in December 2015. The 8 year cycle, 200 Moving Average and Gold Silver ratio studies have shown that Gold has already turned into a bull market.

With that in mind, the current correction presents a good buying opportunity to hop back on-to the uptrend. Buying the dip should be the current strategy for Gold and Silver and that led us to take a deeper look into the past 10 year Relative Strength Index (RSI) performance to optimally time the market.

Relative Strength Index performance

We did a study on the RSI, specifically to spot buying signals when the RSI rebounds back above the 30 level after dipping into the oversold region. A RSI reading above 70 indicates overbought territory while a RSI reading below 30 indicates oversold territory.

For this study, we analysed the data going back to 2006 where Gold and Silver experienced both Bull and Bear market.

Entry criteria:

• Wait for an oversold period, RSI below 30
• A buy entry would be triggered after the RSI closes back above the 30 oversold region
• The return is calculated as the difference between the respective highs to the close of the signal bar

During the booming bull market from 2006 – 2008, the RSI did not even tested the 30 oversold region. The lowest it tested was the 33.67 area and the average oversold region hovered around the 35.50 area.

Chart 1. Gold (Daily chart)

Once again, during the whole period since 2011, the RSI has never tested the 30 oversold region. The lowest it tested was 30.58 which only happened once while the average for the oversold region was around 37.00 where the rebound signalled ample opportunities to rejoin the uptrend.