According to at least one technical indicator, Gold is now most oversold since 1985. The indicator I am tracking here is the simple yearly rolling performance, also known as 52 week rate of change. Essentially we are looking at the performance of an asset over the last 12 months – and Gold is having one of the worst ones ever.
With such a strong run up, a possibility of a proper mean reversion was always in the cards. And mean reversion is what we are getting right now. Looking at the chart above, Gold is now down over 27% (including today’s decline) over the last 52 weeks, which is the worst annualised performance since 1985.
However, do note that this type of oversold level can persist for awhile longer, because the anomaly was how hard Gold rallied throughout the 2000s. Mean reversions don’t stop at equilibriums, as the markets always overshoot or undershoot. Having said that, these types of oversold conditions are over 2 standard deviations away from the multi-decade mean and rarely continue for a prolonged period. Usually the mean reversion occurs in the opposite direction as a major rallies occur from oversold levels.
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