200-Day Moving Average

This chart shows how extended the Gold price is relative to its 200-Day Moving Average:

Typically, when the price gets too far away from its 200-DMA, it corrects lower. You can see this on the chart below from 2009 to the peak in 2011:

Notice that the 200-DMA was never broken the whole way up! It finally broke down after Gold peaked at its record high of $1923. But there were some big pullbacks along the way when Gold became stretched relative to the 200-DMA:  

The table above shows the biggest % gaps to the 200-DMA from 2009-2011 and the subsequent pullbacks in dollars and percentages.

At the bottom, I show the peak gap to the 200-DMA as of April 11th, which was $370 or 18%. This matches the extension of 18% on Feb. 20, 2009. Back then, Gold proceeded to fall 16%. Applying that to the peak of $2384 on April 11, we could see a drop to as much as $1991.  Using the minimum pullback percentage today of -6%, Gold would target $2253 at a minimum on the downside.

Now, this does not mean Gold is going down imminently. It could reach a 26% or 29% extension relative to the 200-DMA before turning down, but Gold is becoming more stretched by the day.

There will be a significant pullback at some point, perhaps driven by a stock market crash or another event, but the risk is growing that Gold will correct sooner rather than later and it could be scary for some.

In the meantime, the trend remains your friend and the trend is up. Only a drop below $2286 in Gold would turn the trend down and only in the short term. The medium-/long-term trend remains definitively UP!

This post is to remind everyone that while the rally is nowhere near done, the risk of a meaningful reversal is rising as Gold continues higher. Just look at how extreme overbought and bullish it is. If Gold does dump at some point, Silver and the miners are likely to get hit even harder in percentage terms.

Until then, enjoy the ride.