Gold Prices Face 25% Correction as Key Indicators Flash Warning

Gold prices have recently surged past $3,500, attracting global investors. However, a new report from a prominent financial institution suggests that three key indicators are signaling a potential technical correction in the gold market, with the adjustment potentially being significant.

The first indicator is the economic slowdown signal. The "Federal Reserve Composite Regional Planned Capex Index" has recently fallen below -4. This index aggregates data from various regional Federal Reserve surveys, weighted by economic contribution. Historically, when this index drops sharply into negative territory, "actual core capital goods orders" tend to experience a steep decline, indicating that tariff policies have had a substantial drag on the real economy. The report highlights that this indicator has a strong predictive power—out of the six times it has been triggered in the past, five times it successfully foreshadowed an economic recession. Additionally, the Russell Index, which represents economically sensitive and cyclical industries, typically shows extreme negative performance over the next three months, while the 10-year Treasury yield initially rises and then falls within two weeks to a month. More directly relevant to gold, when this index drops below -4, gold prices often perform poorly in the subsequent two months. The report predicts that this index will further decline to -6 by April, reinforcing the credibility of the warning signal.

The second indicator is the abnormal flow of funds. The market has shown signs of "excessive gold frenzy," with data indicating that the SPDR Gold ETF experienced over 95% of historical fund inflows in just two weeks, followed by a similar level of single-day fund outflows. This pattern suggests that latecomer investors or weak holders are starting to liquidate their positions, potentially triggering a larger sell-off. Historical data shows that this "in and out" pattern has occurred nine times, with eight of those instances accurately predicting a gold correction, with the worst performance typically occurring within the next two months. Notably, earlier this week, investors withdrew $1.27 billion from the SPDR Gold ETF, marking the largest single-day outflow since 2011, coinciding with gold prices reaching a historical high above $3,500. This historical context provides a relevant reference for the current market situation.

Ask Aime: How will the Fed's warning signal affect gold prices?

The third indicator is based on technical analysis. Over the weekend, gold trading prices were more than 25% above the 200-day moving average, a level described as "pretty absurd" by the report. Such a significant deviation from the long-term trend line historically indicates that the market needs correction. The report's historical data analysis shows that whenever gold prices deviate this much from the 200-day moving average, they tend to experience a noticeable correction within the next two months.

Investors are advised to exercise caution as the market carries risks. This article does not constitute personal investment advice and does not consider individual users' specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investing based on this information is at the user's own risk.