A historic decline in gold from a multi-year high

Key points:

• Gold futures declined over 7% in ten sessions from a 3-year high
• Following similar pullbacks, the precious metal rallied 80% of the time over the next two weeks 
• Despite the sharp decline, long-term trend-following indicators remain in a favorable position

Should we be concerned about the swift decline in Gold?

In the past ten sessions, gold has fallen by over 7%, a decline that has occurred 51 times since 1975. However, when measured from a 3-year high to capture precedents similar to now, the number of instances drops to 11, a rare event.

With the precious metal firmly in an uptrend, having reached a 3-year high on 43 separate occasions over the last year, investors now face a crucial question: is the recent pullback an early warning of an impending trend change, or just a healthy pause in a bull market?

Similar declines from a 3-year high preceded a near-term bounce

Whenever gold declined 7% in ten sessions from a 3-year high, the precious metal tended to bounce back in the near term, rising 80% of the time over the subsequent two weeks. However, from one to three months later, the rally stalled and, in some cases, saw further downside price action. That was especially the case since 2003. 

Gold futures rose 70% of the time a year later, with a median gain of 16.5%, outpacing the 59% win rate and 8.9% return over the study period for that interval. In two cases, 1975 and 1980, the swift decline marked a significant top.

Since 2003, gold has recorded a gain in four out of five instances at the two-week mark. However, the max loss exceeded the max gain in the last four cases, indicating that the precious metal could experience further downside before rallying should price action mirror more recent events.

Don't rule out sideways price action

Although a new one-year high precedes a one-year low in 70% of cases, an immediate rebound to fresh highs appears unlikely. In similar scenarios, the time to reach a new high averaged 95 days, with a median of 61 days. 

Trend Scores

Subscribers can now review trend and relative trend scores for gold and other assets on the website. Click here to explore.

The gold ETF (GLD) currently displays 9 out of 10 trend-following indicators in favorable conditions. So, despite the recent swoon, gold remains constructive from a long-term trend-following perspective. 

What the research tells us...

Gold recently saw a notable decline, dropping over 7% from a multi-year high, potentially as a delayed reaction to rising Treasury yields or a stronger U.S. dollar. After similar declines, gold rebounded 80% of the time over the following two weeks. Despite this initial bounce, gold tended to stall, often consolidating from one to three months. A year later, the precious metal was higher 70% of the time, and it was likely to hit a 1-year high before a 1-year low. However, it required some patience, as new highs were months away. I encourage subscribers to monitor the new trend score page to keep abreast of the latest developments in gold.

As Ed Seykota was found of saying "The trend is your friend until the end when it bends."