It looked as if Gold had gotten way too ahead of itself.  As you can see on the chart below, Gold surged to over 25% higher than its 200 day moving avergae.  It subsequently sold off about 10% to the 1,100 level. If you look at the past surge ahead of the 200 day (one was 37% and the other was about 30%) there seemed to be a sharp technical selloff combined with “base-building” for the next rally.

Gold and the 200 day moving average

We would bet though that this is not the time to expect a selloff on par with these previous technical related selloffs. In addition note that the last major selloff in Gold was from early 2008 to end of 2008 which of course coincided with the financial crisis, the stronger US$ and therefore weaker commodity prices across the board.  A quote from Marc Faber provides an interesting take on Gold for the next 6-12 months:

“A company’s stock could be less expensive at 100 dollars than when it was selling for 10 dollars, because earnings growth has outpaced the appreciation of the shares and therefore its price/earnings ratio has declined. So gold could be cheaper at the current price than when it was at less than 300 USD because of the explosion of foreign exchange reserves in the world, zero interest rates, the huge debt overhang, and the expectation of further money printing.”

Don’t get us wrong. Gold was one of the best performing global assets in the 2000s decade, and its unlikely it will carry forward with that leading performance. But for right now we see Gold trading much higher.

The Covert Analytics Team