Financial media loves sensationalism when there is a selloff in the markets, but the data often refutes it.
Yesterday, there was a selloff in the precious metals markets following a strong rally. Gold (GLD) fell 2.2%, and silver (SLV) lost 3.7%. Immediately, there was a flood of sensational headlines on financial social media in a race to front-run clicks. Usually, the content is not important, as is the timing of the headline
In the case of gold (GLD), which has had a good run since October of this year, it is important to realize that this market has traded sideways after it peaked on August 6, 2020, in a range between 192 and 151.
More importantly, a daily 2.2% drop is a little less than two standard deviations based on the available sample since GLD inception.
A daily drop of more than 2% has occurred 172 times, or about 3.6% of the time. In addition, as may be seen from the above chart, volatility has remained subdued.
Falling yields are positive for gold, but they are not the only parameter that determines the trend. Demand and supply are critical factors, as is the activity of central banks, which are the major investors in this precious metal. Geopolitical developments also matter. All in all, analyzing this market from a fundamental point of view is much more difficult than is usually presented in financial media articles.
The gold drop yesterday could be attributed to profit-taking after a good run. Gold (GLD) has gained nearly 10% since last year, due to the perception that it is an inflation hedge. Regardless of whether this perception is right or wrong, if disinflation continues, there are higher odds of continuing profit-taking in gold. At the same time, geopolitical uncertainty could provide support, and if it rises, it could even drive prices to new all-time highs.
Price Action Lab Blog Premium Content
Subscribe for immediate access to hundreds of articles. Premium Articles subscribers have immediate access to more than two hundred articles, and All in One subscribers have access to all premium articles, books, premium insights, and market signal content. NEW! Hybrid Asset Allocation Signals
Disclaimer: No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.
Charting and backtesting program: Amibroker. Data provider: Norgate Data