Gold Technically Oversold as the Debasement Trade Remains Alive and Well

When gold peaked at $5,500 in January, the market was technically overbought. The dynamics have since reversed, with gold now described as "massively" oversold.

In technical analysis, "oversold" refers to an asset that has declined so rapidly or so far that momentum indicators suggest selling pressure may be exhausted, making a near-term rebound likely. The 200-day moving average (200 DMA) currently signals an oversold gold market. Gold typically finds support when the price falls to 90 percent of the 200 DMA. At present, the price sits well below that threshold, with the 200 DMA at approximately $4,559.

In an interview with Kitco News, Paul Wong, managing partner and market strategist at Sprott — a firm specializing in precious metals and real assets investing — pointed to the 200-day moving average and noted that current charts look remarkably similar to previous pullbacks.

"The percentage below the 200-day moving average, that's just a technical measure. Internally, I have five or six other measures that show minus two or minus three standard deviations oversold. I tend to think about things more in terms of probabilities: where are you on the distribution curve probabilities? Are you oversold? Give me a number. According to this measure, it's minus two standard deviations. According to this measure, it's minus two and a half, minus three, whatever. Add them all up, and what does it mean? It means that it's harder and harder to push down the price of gold. That's what the probability says."

Wong stressed that it is not just one metric flashing an oversold signal.

"I've built up all these indicators over the years, so I fire them all up, and if all of them are saying minus two standard deviations or lower, then chances are it's oversold. It doesn't mean it's the low; it just means the bulk of the selling is probably done. And now you're switching to look for an entry point, or if you're a massive fund, you just start buying, and on down-dip days when it drops 1 percent or 2 percent on some news or whatever, you just buy a little bit more."

"What is it going to get to spark it back up? That's the whole thing."

Gold is also contending with seasonal weakness, as the yearly low historically arrives in August. Wong suggested that the historic summertime bottom could serve as an entry point. Last year, gold fell to approximately $3,300 in late August, coinciding with Federal Reserve Chair Jerome Powell's Jackson Hole speech — the central bank's closely watched annual economic symposium — before rallying to around $4,500 by October. Wong said he expects a similar price trajectory this year.

"Probably sometime in August, whether it's Jackson Hole or something sooner, or something blows up in the Middle East, or the bond market goes bonkers. There'll be some sort of event, a catalyst, that all of a sudden sparks gold up again."

The Debasement Trade: Bonds Are the Battlefield

Wong emphasized that the debasement trade — the dynamic that propelled gold to record highs — remains firmly in play despite gold's recent correction and sideways trading. Gold has historically served as a store of value because, unlike fiat currencies, its supply cannot be expanded at will by governments or central banks. Rising bond yields reflect this pressure. Wong characterized the situation as "a grumpy bond market," and many analysts believe the world is in the early stages of a secular bond bear market.

"Anywhere in the world, bond markets are not happy," Wong said.

Governments continue to borrow at escalating rates. As debt levels climb, investors may eventually refuse to lend, perceiving the risk as too great. Wong noted that the U.S. national debt has grown by approximately $3.8 trillion over the past year — a nearly 10 percent increase.

"Rates are rising. Your interest expense is now greater than your military. Those are deficit-busting numbers. You can see that there's absolutely zero desire from any party in the U.S. to address debt."

Wong pointed out that debt problems extend well beyond the United States. Layered on top of fiscal imbalances, a broader "de-globalization" trend is intensifying debt growth.

"That means duplication of everything. You're reshoring everything; that's duplication of supply chains. It's duplication of demand for commodities across the board. You're building inventories because nothing is safe anymore. After this Iran war, everyone's going to be stockpiling energy. Storage is going to go up. You're going to build more [nuclear plants], you're going to build more solar, because those are renewables, and those are secure. Even metals, they're going to be stockpiling more. Meanwhile, governments around the world are changing. They're charging more, they're taxing more, they have more export controls. Everything is going to go up in price."

For the past several years, the Federal Reserve has faced a Catch-22: it needs to keep rates elevated to combat persistent inflation while simultaneously lowering them to support a debt-laden economy. It cannot accomplish both objectives simultaneously.

Wong acknowledged this dilemma, stating there is little the central bank can do in the current environment.

"What can the Fed do? Not a lot. They can talk a lot. They can try and give confidence, which is what I think Warsh accomplished in June — which sank gold markets — he came out quite forcefully saying sustainable inflation is not going to happen."

However, Wong underscored the mounting pressure in the bond market, asserting that policymakers will eventually be forced to make a "clear choice."

"You're going to have to give up something. Either you lose control of the bond market — but you can't because you have to keep financing the debt — or you debase the currency. That's the heart of the debasement trade. It's still on, it's still there, and the pressure's still building."

Wong clarified that his bullish outlook on gold is not driven by the metal being a fashionable investment trend. Rather, he believes gold is destined to continue climbing because governments have no alternative but to keep debasing their currencies to maintain fiscal stability.

"Inflation is rising, your debt and deficits are rising, yields are going to go up. You're moving closer and closer to the tipping point in terms of what the bond market will allow. You're going to get a rebellion in the bond market, and you've got to keep the bond market happy. And [currency debasement] is your only release valve. Really, that's the bottom line."