Email of the day on mean reversion risk in precious metals:
Comment of the Day

April 20 2020

Commentary by Eoin Treacy

Email of the day on mean reversion risk in precious metals:

Good afternoon Eoin, I am enjoying the daily video and the written commentaries. Regarding your medium and long-term view that the price of gold is and will be reflecting the increasing and competitive debasement of currencies, but that presently gold is in an overbought phase, please explain what you would consider the maximum drawdown in gold to undo the overbought situation.

Would that imply that gold should e.g., give up about $170 (10%) and reach approximately $1530 which I believe is the 200 SMA? Same question for silver. In what time frame do you expect the undoing of the overbought situation for gold (and silver) to happen? Days, weeks, months? How quickly would the bull market resume?

It seems that the script of the last financial crisis is happening at 4-5 times the speed of 2008/2009...) What likelihood do you see that governments and central banks in the end will intervene (on an international scale) to either confiscate or prohibit the private holding of gold and silver and/or otherwise make sure that the nuisance of gold and silver as uncontrolled non-fiat money disappears? Roosevelt and others like Hitler, Soviet Union already proved that this can be successfully implemented ...Second addition to my first message/questions: To what extent did the rally in stocks trigger yesterday's and today's downdraft in the PM sector? Thank you!

Eoin Treacy's view

Thank you for this series of questions which may be of interest to subscribers. The mantra that delivers the best returns is “don’t pay up for commodities” and that applies even in a bull market. Gold and the precious metals generally are prone to volatility and often posted failed upside breaks. Chasing the market higher will only work on the relatively rare occasions when the trend accelerates; whereas more often than not precious metals trends adopt a sawtooth profile.

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