Gold just had its worst day since the pandemic. Where do prices go from here?
Gold crashed 5.3% this week in its steepest selloff since 2020. Historical data offers clues about what investors should expect next.
Source: Shutterstock
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KEY POINTS
- Gold's 5.3% selloff is statistically rare, occurring roughly once every 385 trading days, and historically triggers extended periods of sideways trading lasting 3 to 5 years.
- Excluding the 2008 financial crisis, gold's average returns three, six and twelve months after a 5% selloff are negative at down 1.6%, 0.7% and 1.7% respectively.
- After similar major selloffs in 2013 and 2020, gold consolidated sideways for years before resuming uptrends, suggesting the period of easy gains may be over despite bullish fundamentals.
Gold posted its steepest selloff since the pandemic earlier this week, yet despite the sharp 5.3% decline, prices only fell to a one-week low of US$4,124.
Statistically speaking, a roughly 5% one-day selloff is extremely rare. In a "normal" distribution, moves of −4.7% to −6.0% should occur once every 240,000 trading days. In reality, they've happened 34 times since 1971 across 13,088 trading days, or 0.26% of the time (roughly 1 in 385 days), according to resources investor Alexander Stahel.
The question on everyone's mind: where does gold go from here? While no crystal ball can predict prices with certainty, historical precedents offer valuable clues.
Previous selloffs
Since 1990, gold has recorded 15 instances of falling 5% or more. Here's how it performed after the selloff, across various time frames.
How gold performs after a selloff of 5% or more (Source: Author's own calculations)
The average, median and percent positive figures are somewhat skewed by the outsized moves gold experienced during the 2006-2008 period. This shows that gold tends to behave like a risk asset during periods of extreme economic turbulence (and bounces back with equal ferocity). If you exclude the 2008 period, the average returns for three, six and twelve months turn negative (down 1.6%, 0.7% and 1.7% respectively).
How gold performs after a selloff of 5% or more (Source: Author's own calculations)
After a massive win streak
Gold recorded a near-record nine-week win streak, climbing 27.4% between 18 August and 13 October. But previous rallies (including this one) have always fallen short of 10 weeks.
The forward-looking performance after such a win streak appears overwhelmingly bearish, according to SubuTrade.
Source: SubuTrade
Sideways trade
The last three major one-day selloffs (excluding the GFC) all triggered a relatively similar playbook.
In 2013, gold was experiencing a sharp pullback following a roughly 155% post-GFC rally. After suffering a 5.5% selloff on 20 July, it traded sideways for around five and a half years.
By July 2018, it finally bottomed and experienced a ~70% rally by July 2020 to fresh all-time highs of US$2,038/oz. After suffering a 5.7% selloff in August 2020, it traded sideways for three and a half years before experiencing the powerful move we've witnessed recently.
Gold price chart (Source: TradingView)
Gold prices have more than doubled since the initial breakout in January 2020 and given the above, a period of consolidation wouldn't be surprising.
While there are plenty of bullish drivers for gold (including massive ETF inflows, persistent central bank buying, retail FOMO, the debasement trade and falling interest rates), I think we can agree that the period of easy money is likely behind us and more volatile price action lies ahead.
