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Gold Bugs Infiltrate Central Banks

Commodities / Gold and Silver 2010 Sep 28, 2010 - 02:36 PM GMT

By: Ned_W_Schmidt


Best Financial Markets Analysis ArticleHave Gold Bugs managed to infiltrate the central banks? Or, do we have another indicator of the frothiness of the current Gold market? From and Financial Times we read, “In the CBGA’s(Central Bank Gold Agreement) year to September, which expired on Sunday, the signatories sold 6.2 tonnes, down 96 per cent, according to provisional data. The sales are the lowest since the agreement was signed in 1999, and well below the peak of 497 tonnes in 2004-5.(27 Sep 2010)”

In 1999, at near the bottom, the central banks were selling Gold. Now, with Gold at a record high, the central banks are hoarding their Gold. In recent times they have actually been buying. Have we found an investor’s dream, someone who is always wrong? That may be more valuable than someone occasionally right. One would have to conclude that the Central Bank Gold Indicator is flashing a do not buy signal.

Enthusiasm of speculators for Gold has helped to create the beautiful pattern in the above chart. That pattern is a classic parabolic curve. Such formations are important as they are totally unnatural. They defy financial gravity, for a short time. Ultimately, financial gravity regains control, causing speculators to crash. Margin calls can be stronger than any widely accepted fundamentals.

Parabolic curves work just the opposite of the way nature intended. When we toss a ball into the air, the momentum of that ball slows until gravity becomes the dominant force. The ball then falls to the earth. In a parabolic move, the “ball” actually rises faster as it rises. The slope of the curve becomes steeper. It does so until the speculators are exhausted, and then it falls to earth.

The penalty phase of a parabolic curve is not enjoyable. When the end arrives, and they all do end, the discomfort can be down to 40-60% of the high achieved. Some may actually exceed that depending on the nature of the speculation. Gold, with much of it held in strong hands, may only decline 30-50% from the high.

A characteristic of the late stages of a parabolic move is the widespread discovery and fanciful creation of fundamentals and outrageous forecasts. Analysts begin to create price forecasts in a race to grab headlines, and spur speculators on. Am still waiting for oil to reach, what was it, $250.

One particularly false fundamental tossed around with abandon is that “they are running the printing press.” As the above chart shows, no one is running the U.S. dollar printing press. They may do so in the future, but at this time the printing press throttle is closer to being on idle.

One need only look at the charts of Silver and the MVDXJ to observe the level of speculative fervor being expended. While the long-term case for Gold rests on the intellectual bankruptcy of Keynesian economics and politicians, when the Street discovers an investment with gusto caution should be exercised. Gold Bugs have lived through price troughs before, and survived. They may have to again do so.

“What about fear?”, an email asked this morning. What fear? Anyone buying $Gold at more than $1,300 has no fear at all. If they have fear, it is fear of being left out, of not being part of the locust swarm.  When one looks at Silver and small mining companies the conclusion must be that no fear exists at all. If anything, we should fear the lack of fear.
Do not disturb your Gold holdings, but sit on your wallet. Buying is not appropriate at this time. Those that have speculative trading positions in Silver and small mining stocks should be booking profits. Better to take profits early, perhaps leaving some on the table, than taking losses later.  

By Ned W Schmidt CFA, CEBS

GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report , monthly, and Trading Thoughts , weekly. To receive copies of recent reports, go to

Copyright © 2010 Ned W. Schmidt - All Rights Reserved

Ned W Schmidt Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


28 Sep 10, 18:53
I do not trust you

In spring 2008, these same men were drawing "the parabolic curve" tangent to the point where gold broke out in July-August 2007 when FED began easing. When it declined to $680 in October 2008, these men said it broke down the "rising bowl formation". Again gold broke out $1,000 decisively and these men re-drew "the parabolic curve" tangent to October 2008 lows. And claimed it is a bubble. Probably if gold falls to $1,300 from as high as $1,500 they will again re-draw "the parabolic curve" this time tangent to $1,300 and recklessly will claim it went too much. I do not trust these pundits.

The most important thing to remember is that "unlike oil, gold is a physically demanded asset and physical gold ($6 trillion) is extremely scarce when compared to total paper financial assets (over $200 trillion)"

29 Sep 10, 05:46
what is parabolic?

with charts, as with statistics, one can bend and twist them to make it look anyway we want them to look.

You can make a trend look parabolic in any chart, depending on the time scale used. And probably depending on your imagination.

As you have already noticed, dincer, there are some snake-oil men out there perpetually selling a story of a collapse. Just as there are snake-oil men selling the story of perpetual rocket launch.

If I were you, I would use them as a contrian indicator.

From a psychology point of view, it is easy to understand why some people keep calling for a collapse from some point onwards. It is because they had either missed the big move or had gotton out of their long position way too early. So psychologically, they have to keep imagining a collapse coming in order to keep their sanity and alleviate their pain of having missed the big move.

Seth Barani
29 Sep 10, 07:00
it is statistics

The author makes a good point, parabolic trajectories have historically shown to reach unstable peak. Further, the relative strength indices of gold, silver are knocking at 90% mark, which is a huge red flag. These are from financial mathematics, not any psychological projections. Besides, money making isn't always by going long (which is your assumption that 'people missed the wave'). In derivative market you can make money when a price falls down!

Again, there are no such things as right and wrong in market predictions. Everything has to do with the time intervals within which a prediction is highly probable.

29 Sep 10, 09:04
it is statistics?

Seth, I did not say what is right and what is wrong. You are missing the point.

For me I am very comfortable shorting the gold market when I think the time is right for it. Just as I am comfortable being long in gold. I have done both in this big bull market. But I must tell you that until the major trend turns down, it is easier generally making money being long then being short in gold. The day will come when it will then be easier making money shorting the market than buying it.

That being said, you missed the point that pincer and I were making. And that is that in a big bull market like gold for the past 10 years or so, if you have been calling for collapses so many times and for so long(think EWI and some other Elliot wave practitioners too) and THEY didn't happen, I think you are a peddler of snake-oil if you keep calling for it yet again. This is the whole point of the message.

What did Einstein said about insanity? And what about the saying that "even a broken clock can tell the time correct twice a day". And in case you do not know the meaning, it means that if you call for a scenario(a collapse in this case) many times too often, one day you are bound to get it right. And this is not a complimentary saying if you don't get it.

Of course one is entitled to be wrong once in a while, being human. But there is a BIG difference being stubborn and being wrong. And many a times, besides pyschology, ego is the reason for the stubbornness.

And by the way, although you hide behind your invocation of mathematics, you don't seem to realise that although rsi(or stocastics or whatever indicators) may be at 90%, or even 99%, that doesn't mean that a market will collapse. Of course that market will eventally correct but it may not necessarily mean the end of a trend and a collapse. It is too lengthy and will take many pages to debate you about the merits of indicators and I will leave it at that.

And the pyschology of missing a move(or wave as you call it)

can apply equally to a big bear market, by the way. A point you missed again.

Shelby Moore
29 Sep 10, 16:12

Everything in nature is logarithmic, because entropy has a logarithm in it. Logarithmic means something is changing with constant percentage change per unit of time. Everything logarithmic has a parabolic shape, but the key point is if you plot the part that looks flat by zooming in on it, it will also look like a parabola too. So a parabola is not an indication of the end of a trend, because every trend is a parabola from its inception until its end.

What causes the end of a trend is when the nominal change becomes significant and outpaces some other nominal change that sustains the trend, i.e. the amount of cash the public has to spend on gold.

If Schmidt were to redraw his gold chart using a logarithmic scale for the gold price axis, the parabola trend would become line trend.

It is more correct to draw charts using logarithmically scaled axis, because investors are interested in percentage gains, not nominal gains. For example, if you bought gold at $250 and you sold at $500, that is the same percentage gain as if you bought at $500 and sold at $1000. But on Schmidt's non-logarithmic chart, the latter has 2x more height than the former. Thus the non-logarithmic chart lies to the eyes.

I highly suggest that everyone watch this YouTube video: (1.8 million views!)

I suggest you make that video required reading in an introduction to investing.

I recently wrote about entropy, some readers might find it interesting:

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