Gold took a big hit last week, dropping 4.7%, and now just about every financial news website that I visit contains an article proclaiming the end to gold’s 12-year bull market. I’ve seen this movie before.
A New York Times story warned us in May 2006 that the yellow metal could be a bubble about to pop after prices plunged 4.9% in one day to $678.70/oz. Economist Nouriel Roubini, who rose to fame by predicting the 2008 credit crunch, cautioned us about gold in 2009, saying it “looks suspiciously like a bubble” In his article The Gold Bubble and The Gold Bugs, Roubini also suggested that gold bugs instead “stock up on guns, canned food, and other commodities that you can actually use in your log cabin.” And in January 2010 when gold was trading at $1,087/oz, hedge fund legend George Soros said that bullion was “the ultimate asset bubble.” Gold went on to close at a record $1,886.40/oz on September 2, 2011.
Now, with gold plunging 20.4% from its all time high to $1501/oz, has the bubble finally burst? Well, gold corrected 22% in 2006 and 29% in 2008, so the current pullback – while unnerving – isn’t atypical.
Having said that, there’s been a fair amount of technical damage inflicted on this particular precious metal. My strategy for managing downside risk has only spent seven trading days in SPDR Gold Shares (GLD) since early-December 2012. In addition, in mid-February gold’s intermediate-trend 50 day average crossed below its long-term 200 day average in a pattern called a Death Cross that often foreshadows big drops. And finally, Friday’s $63.50/oz free-fall wiped out strong support (blue line on chart).
While my outlook over the next several weeks to months is extremely cautious, I’m expecting gold to eventually regain its lost luster and I’ll be a buyer when risk normalizes. For now, however, my Gold reading: Bear Market.
Please note that my readings will change without notice, so please don’t buy or sell solely based on anything you read in this blog.