Ah, the Power of Mean Reversion
By GCRU Gold News on Saturday, June 21 2014, 02:37 - Permalink
The chatter this week has been gold. The precious metal flew up $45 an ounce on Thursday, surprising investors, the media and markets alike.
If we look back just six months ago, gold was sitting at record lows, signaling that it was in extremely oversold territory. This was the time that many investors let fear take over and dismissed the fundamental reasons for owning gold: as a portfolio diversifier and store of value.
With the price spike this week, however, some of the perpetual gold naysayers suggested the metal had shifted to overbought status. Spot gold is up nearly 3 percent for the week, while gold stocks are up around 7 percent. So is gold overbought?
Some see gloom and doom. We see the bounce we said was coming. Based on our historical observations and the math of the markets, gold is not overbought, in our opinion, but is simply reverting to its mean. This mean reversion has shown that eventually, both gold stocks and gold bullion will move back to their historical averages.