By Monish Chhabra ǀ December 1, 2020

Gold prices hit a high in early August this year. Since then, they have been inching down gradually. And took a big blow over the last two weeks. In this article, we take a look at how good or bad can things get for gold.

The following graph shows the trends in gold over the last 2 years. The longer-term trend is in blue, and the more recent rally that started in March this year is in orange.

Gold 2-year trends

The dotted-blue lines indicate the band for the longer-term trend, within which gold prices have a high probability of fluctuating. And similarly, the orange band for the shorter-term trend.

Statistically,

o The longer-term blue trend is already broken.

o Gold is now at the bottom of the shorter-term orange trend.

If these trends are to hold, the price would bottom somewhere around here, and right now would be a good time to buy gold.

However, if gold continues to fall from here, all the above trends become meaningless. We then have to look at much longer trends.

How bad can gold get?

The following graph shows the trends in gold over the last 20 years. The longer-term trend is in blue, and the more recent rally that started in the year 2015 is in orange.

Gold 20-year trends

The blue band indicates the high-probability area within which gold prices are expected to fluctuate over the longer-term trend. And similarly, the orange band indicates the same for the shorter-term trend.

Statistically,

o Gold is less than 5% away from the bottom of its longer-term blue trend.

o It is about 20% away from the bottom of its shorter-term orange trend.

As of now, the worst-case scenario for gold is about 20% fall from the current prices. Taking that as the possible downside, we compare it to the probable upside.

How good can gold get?

Using the same two models above, here is what statistics tells us:

o If the 2-year trends hold, there is a good chance gold would be 50% higher than the current prices over the next two years.

o If the 20-year trends hold, there is just as much probability that gold would be 80% higher than the current prices over the next five years.

There are plenty of narratives floating around about gold. We keep them all aside. And look at things strictly from the view of statistical probability.

If past cycles are to hold, this is the risk-reward we find in gold today; worst-case of 20% fall from the current prices, and possible upside of 50% to 80% over the next 2 to 5 years.

As we see it, there seems plenty of shine left in gold.