Gold: How Much Lower Will It Go?

Includes: GLD
by: Doug Short

By Georg Vrba

Gold has declined substantially and many commentators believe that the price will go much lower. But will it? The chart below shows the price of gold plotted on a semi-log scale from 1968 to 2013, and the year-on-year percentage change of the price expressed in standard deviation terms for a rolling 10-year sample period. What strikes one is that the recent decline is not particularly spectacular in comparison to previous declines, and that the year-over-year percentage change of the price is now minus 2.67 standard deviations (sigma) away from the mean, the lowest that it ever got.

The population within a deviation of 2.67 sigma, using excel functions, is p = ERF(2.67/SQRT(2)) = 0.992415. Thus the population within the one outer extreme of the normal distribution curve is (1-p)/2 = 0.38% of the total population. So if you are betting on a further decline of the deviation (and gold price), then your chance of winning is 1/0.38%, or 1:263. Good luck to you.

It is also evident from the chart that whenever the year-over-year percentage price change reached a level near minus 2 sigma, then invariably gold began an upward move fairly soon thereafter. A bounce of the gold price is now overdue.

The current state of affairs calls to mind the first three of Bob Farrell's rules:

  1. Markets tend to return to the mean over time.
  2. Excesses in one direction will lead to an opposite excess in the other direction.
  3. There are no new eras -- excesses are never permanent.