Why did the gold price crash, and will it happen again?
Gold prices saw their worst daily drop since 2013 on Tuesday. This sharp pullback was due to profit taking and did not detract from the long-term bullish picture, said Gary Wagner, editor of TheGoldForecast.com.
“Personally, I do not believe it’s the end of a bull rally. We have entered some sort of a correction. The question I’m asking myself and the technical studies I’m looking at for the answers is whether or not this will be a shallow or short correction, or an extended correction,” Wagner told Kitco News Wednesday.
Gold fell nearly 6% on Tuesday; a single-day move of this magnitude has not always been possible, Wagner noted.
“Back in the early 1980’s when I began as a commodity broker, they had limit moves on gold, platinum, and palladium. They could only move so much, kind of like the S&P now with the circuit breakers, and they would stop trading for the day,” he said.
While the rally we saw in gold had macroeconomic undertones, like a weakening U.S. dollar and an accommodative Federal Reserve, but the correction this week was due mainly to profit taking and not to any fundamental shifts in the economy, Wagner noted.
“My sentiment is that it wasn’t a macro event, but rather the market getting too crowded,” he said. “I think the reason for the selloff yesterday was pure and simple market taking.”
Wagner added that many of his personal friends who are generalist investors have been inquiring about gold, signaling to him that we may have already seen a herd mentality in the space.
The charts, however, still tell a long-term bullish story.
“On a technical basis, even yesterday’s exaggerated move did not cause any extended chart damage,” he said.
Trading activity has indicated to Wagner that this correction is likely going to be short-lived.
“What I’m seeing is even with a strong correction, and a really, really massive price decline, there were buyers willing to buy the dip, and that is what will make this correction short-lived,” he said.