Although gold prices have surged to levels not seen in nearly two decades, surpassing $4,000, Bloomberg Intelligence commodity strategist Mike McGlone believes a significant correction may be on the horizon.

McGlone highlighted that gold’s current rally, which has pushed it to a 33% premium over its 200-day moving average, mirrors past instances when the precious metal experienced sharp declines following similar overextensions, as he mentioned in an X post on October 26.

Based on his outlook, gold is currently the most overextended it has been since 2006, showing extreme deviation. 

McGlone suggested that a correction of 20-30% could be imminent, especially considering the historical pattern following sharp price increases.

Looking back, McGlone pointed to a similar scenario in the mid-2000s when gold peaked above $700 an ounce, followed by a more than 20% drop. 

“A drawdown is a typical outcome, and after hitting this threshold about 19 years ago, the metal dropped a bit over 20% from its high,” McGlone said. 

The precious metal remained below that level for over a year, with recovery taking nearly 16 months. Now, gold prices have surged past the critical threshold of 33% above the 200-day moving average, a level not seen since 2006.

More caution on gold 

Adding to this cautious outlook, as reported by Finbold, Chris Vermeulen, Chief Market Strategist at The Technical Traders, expressed concerns about gold’s future trajectory. 

Vermeulen compared the current market conditions to the run-up to the 2008 financial crisis, warning that gold could face a dramatic correction ranging from 30% to 35%, with certain scenarios suggesting a more severe decline of up to 45%.

He cautioned that the peak for gold has not yet been clearly established, and investors should brace for a potential downturn once the metal reaches its top. 

These concerns merged as gold showed weakness last week above the $4,000 mark after days of sustained gains.

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