Gold has had a tremendous 10 years rising from around $270 per ounce in 2001 all the way up to $1,900/oz earlier this month, a gain of over 600%. Since topping out at $1,900/oz gold has pulled back over 15% in the last few weeks to around $1,600/oz, but does this mean the “gold bubble” has burst?
For those of us that already own gold it is comforting to know that this type of sell-off has happened before, multiple times. During the last bull market for gold (1970-1980) gold fell over 40% in 1975 and 1976 ($180/oz to around $100/oz) before surging up over 700% until 1980. During this bull market gold pulled back 25% in May and June of 2006 and 32% between March and October of 2008, and we all know that gold has steadily risen since these two events.
So why has gold sold-off so much in the past few weeks? First, any asset that rises dramatically in a few months will typically be overbought and will correct. Gold rose from around $1,300/oz in February of this year to $1,900/oz, a 46% gain. Naturally one would expect it to correct some. At one point gold was trading 24% above its 200 moving average, which in the technical world shows overbought. It is now trading roughly 5% over it 200 day moving average so we could start to see some stability at these levels.
In addition to a natural correction, another reason for the sell-off is due to a rush to liquidity, much like the Lehman sell-off in 2008. “For now, investors are only finding comfort in the relative safety of cash,” said UBS analyst Edel Tully. Many analysts are saying that much of the sell-off is due to large institutional buyers, i.e. hedge funds, repositioning their assets to cash.
The sell-off is likely to be temporary if history is an example. But more importantly, the concern over inflation, the European debt crisis, poor economic recovery in the US amongst many other uncertainties is likely to continue to fuel gold prices breaking new highs in the near future.
This recent move shows that gold has risks like any other investment and that is why we always say that it is a long-term hold. Holding it over the long-term, not trading it frequently, averages out the run-ups and sell-offs. Gold is still up over 14% on the year. It will be interesting to see where we finish the year for gold.