Few analysts would argue that gold peaked in a bubble in 2011. As gold approached $2,000 an ounce at the peak, investors were buying because they were afraid of missing out on additional gains. Bubbles always end with a crash and gold has come crashing back to earth with a loss of more than 40 percent since September 2011.
Bubbles can be objectively defined as times when the rate of change in price is unreasonable. Using an annual rate of change of 40 percent has identified bubbles in many markets in the past, including the most recent one in Chinese stocks. Gold entered a bubble under this definition in October 2009.
Bubbles allow us to define a minimum downside objective. While gold or any other market could overshoot to the downside, history shows there is usually relatively little risk buying after the bubble has been completely retraced.
For gold, the bubble began when prices were near $1,090 an ounce. With prices having returned to that level, it’s time to look for a buying opportunity.
It could be years before a new bull market develops in gold but the worst of the bear market is probably over. Long-term investors should consider begin accumulating gold at the current price. Short-term traders should be looking for bounces as gold consolidates near the recent lows.
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