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How Far Is Gold Off Course?

Gold has been in extremely oversold territory lately despite drivers for the metal remaining in place.

Here's a different way to look at how far gold has been off course. The chart below tracks the correlation of the price of an ounce of gold to global liquidity, with global liquidity defined as the sum of the U.S. monetary base and the foreign holdings of U.S. Treasuries. Since June 2000, as the U.S.'s monetary base and foreign holdings increased, so did the price of gold.

The correlation suggests the current level of liquidity supports a gold price of $1,780 per ounce, well above the current spot price around $1,300.

According to Canaccord Genuity, the U.S. economy is "growing at lower than targeted rates," which means that further quantitative easing will likely be required. In addition, citing a recent White House Office of Management study, Canaccord says that over the next decade, a tremendous $6.6 trillion will be added to the federal debt. "We estimate that the only way to fund the current QE3 program (as well as future government spending) is through the printing of money, therefore further increasing global liquidity," writes Canaccord.

To the research firm, this correlation trend points to "a greater potential for an increase in gold price versus a further decline."

Compounding the extraordinary debt in the U.S. is Europe. Government debt-to-GDP across 17 European countries climbed to 92.2 percent, hitting "all-time highs in the first quarter of 2013 even after austerity measures were introduced to rebalance the governments' books," reported CBS News.

While government liquidity and debt will likely drive the Fear Trade for gold, here are other gold drivers to watch for in the coming months.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.