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“Don’t gain the world and lose your soul; wisdom is better than silver or gold.” – Bob Marley
There is no asset in the world that generates as much love and hate as Gold. There is not a day that goes by without a multitude of extreme predictions on where the yellow metal is going. After Gold has had a sharp rally or sell-off, these predictions intensify as emotions run wild.
We are in one of those periods today.
Gold is currently “oversold.” Its 14-period RSI (a technical indicator that can range from 0 to 100, where 0 is maximum oversold and 100 is maximum overbought) is at 27.83. Going back to 1972 (first year off the Gold Standard), this reading is lower than 97% of daily readings. So that’s pretty extreme in a historical context.
Removing emotion from the equation, what does this tell us about forward returns?
Going back to 1972, forward returns for Gold are above average in the following 1 week through 3 months but below average in the following 6 months through 12 months. In all periods, though, the average forward returns are positive.
Is there anything different about the oversold condition today as compared to other oversold periods? Yes. It is occurring with Gold in a long-term uptrend (above its 200-day moving average). How have returns fared historically following an extreme oversold condition in an uptrend?
Significantly better, with outperformance in all time periods. However, you’ll notice the sample size is much smaller. This is only the 55th time Gold has been extremely oversold in an uptrend going back to 1972.
All of this may be interesting but you still want to know: where is Gold going from here? What’s the call? What’s the target?
I don’t know and neither does anyone else. All we have is historical data, probabilities, and a range of possible outcomes. The above tables are merely average returns and do not provide any certainty as to what will actually happen. There are many, many instances where Gold was oversold and continued to fall.
The best we can say in observing Gold in an extremely oversold state is that it tends to rise on average over the next year and if it’s in an uptrend (as it is today, for now at least) it tends to rise more than other periods. Not an answer suitable for TV punditry but if you’ve read this far you likely value evidence over subjective opinion.
For our research on Gold, click here.
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.
Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.
You can follow Charlie on twitter here.
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