Gold was sold off mercilessly, as wave after wave of declines relentlessly pushed the price down all day. The price hit a low of 1336 in the evening, an astonishing $136 down on the day and well over $200 down since Friday morning. Gold fell further overnight, hitting a low of 1320 before recovering and is currently trading around 1370.
We have just witnessed the largest 2 day decline in 30 years that has taken the daily and weekly RSI levels to historically low levels. Clearly this is no ordinary correction and, regardless of what the conspiracy theorists come up with to explain the severity of the crash, this signals one thing to us - deflation.
The prospect of deflation after many years of ultra low interest rates and trillions of dollars pumped into the economy through quantitative easing is frightening - what else can central banks do, all of their big guns have been deployed and still we appear to be facing a deflationary crash. Other commodities are suggesting this is the case and equities joined the bloodbath yesterday as well.
Our strategy in gold has now changed - for the past decade our overriding bias was to buy the dips and tend to favour the long side of the trade - we will now favour selling the rallies until such time as the bull trend can re-establish itself.
However, "extremely oversold" doesn't begin to describe gold at current levels, so a recovery rally of some sort is highly likely here. Any strength will be seen as an opportunity for market participants to close out their longs or open new short positions and we are sure that the selling has not finished yet.
Today's video for subscribers looks at the historic action of the past two days in more detail, some important long term Fibonacci retracements and our strategy for our next trade.