With a “perfect storm” of surging government debt levels, plunging real bond yields, rising coronavirus cases, a collapsing US dollar and deteriorating economic forecasts at its back, the nominal price of gold has not only exploded above its prior all-time closing high from August '11 in recent days, it also reached 20% above its exponential 200-day moving average on Thursday. Interestingly, the last time gold stretched this far above this widely followed longterm smoothing line was just prior to the August '11 top.
Retail sentiment is near an all-time extreme and momentum (14-day RSI) is now the most extended it's been since February '06. While this certainly suggests that the price of gold has become stretched, history shows that, when such an upside price extension is confirmed by momentum (as this one was), returns only become muted over a tactical 1 - 4-week forward period, ahead of a resumption of the uptrend looking out 12 weeks. Perhaps most interestingly, the average drawdown during the entire 12-week forward period is just -5.5%.
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