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Gold Extremely Dangerous Parabolic Curve as Speculators Build Massive Positions

Commodities / Gold and Silver 2011 Aug 22, 2011 - 11:51 AM GMT

By: Ned_W_Schmidt


Best Financial Markets Analysis ArticleNear the end of any investment cycle a transfer of ownership normally occurs, from investors to speculators. The asset moves from strong hands to weak hands, from real ownership to fictional ownership in the market for contracts for future delivery. That usually set up conditions for the penalty phase, as those still bleeding from the Silver bear market fully understand.

As we learn from Japan, owners of physical Gold in all forms are aggressively liquidating. From "Tokyo struggles to keep pace with gold rush" by L. Whipp from Financial Times, 20 August,

"Japanese families are rushing to sell gold jewelry, sake cups and even teeth to cash in on surging gold prices. The stampede to sell gold is so intense that shops buying the precious metal are struggling to cope and are even having to turn some disappointed customers away."

"In the past week, Goldplaza, which buys and melts down gold for resale, has been handling about Y100m($1.32m) of gold every day - about 15 times its daily average in July. The craze began in earnest on August 11 . . ." [Emphasis added.]

At same time, speculators are building massive positions. CME has been reporting record open interest for options on Gold futures. At one point last week those speculative trading positions represented ~126 million ounces, or ~3,900 tonnes. That is indeed speculation of size, and that activity has been the driving force for creating a speculative bubble in $Gold, and the parabolic curve shown in the chart below. Left axis is dollars while the right axis is percentage of 1999 low, the beginning of this market move.

A parabolic curve is a formation that is extremely dangerous as it is inherently unstable. As price rises, the slope of the price line becomes steeper in defiance of financial gravity. Imagine throwing a ball into the air and it rises faster the further it rises. This curve suggests that as price rises demand is rising, a wholly unnatural state of events.

We know two things about parabolic formations.

One, they always end in pain. Two, we never know when they will end, due to the unnatural conditions for demand.

All this might not be so worrisome if $Gold were not so over valued relative to financial assets, as shown in the graph below.

This graph is interesting as it allows us to answer "what if" questions. Take the nonsensical forecast of $5,000 Gold. That value translates into a ratio of ~4.5 in the graph above. Based on the data presented in that chart, the probability of that occurring is approaching zero.

What if we assume that $Gold is priced correctly. What does that suggest for the U.S. stock market? Answer to that question is in the chart to the right. What if the stock market is now priced properly. What does that imply for $Gold? That is also in the chart. Reality will obviously be somewhere in between.

With Henny Penny now the chief investment strategist for the Street, remember that Foxy Loxy was the only winner, of a full meal of poultry.

Gold investors may want to just hold, despite the over valued condition and vulnerable pricing. Adding Rhodium to such portfolios makes sense for diversification purposes and exposure to growth in China and India. Another alternative is to add Chinese Renminbi denominated bank deposits.

Silver investors should be aggressively selling Silver. Rarely does a bear market give one a second chance to get out. Rhodium should be considered as an investment with proceeds from selling Silver. This situation is a real life version of old story of the farmer and mule, when he said, "That's twice."

Do not forget, the margin clerk has already spoke once. She will speak again, and arguing with a margin clerk is truly foolish.

By Ned W Schmidt CFA, CEBS

Copyright © 2011 Ned W. Schmidt - All Rights Reserved

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

Ned W Schmidt Archive

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


22 Aug 11, 18:38

Stay negative and one day you will be right. Meanwhile you said sell gold at 1200 so you missed the last 700 points. Luckily, I did not follow the advice!

22 Aug 11, 22:13
the same old story

it is the same story since 2006. Globally we have $200 TRILLIONS of paper financial assets but only $8-9 TRILLION of gold @1,900 dollars per ounce. In 1980 Volcker broke the back of gold cos he raised the real interest rates up to positive 7% per annum. Average real interest rate (3-month treasuries rate - annualized CPI) was 4% during 1980s unlike today's MINUS 3%.

22 Aug 11, 22:14
japanese gold selling

if the average japanese person was buying gold rather than running to sell (as you suggest) i would say we were getting near the top of the run in gold but the fact that there are still relatively few retail buyers tells me gold has a long way to go yet...this parabolic run is just beginning....yes there will be corrections and probably a pullback soon but as we enter the steep portion of the parabolic ascent the pullbacks get smaller and of shorter duration...don't get caught trying to trade the run just sit tight and enjoy the ride.

23 Aug 11, 14:25
The Future for Gold

I don't see any immediate end to gold's bull run. Yeah, there has been some speculative money coming in again lately and driving the price up, but that's been happening on and off for the last few years, not surprisingly. You WILL get profit-taking from time to time by these same people; it's inevitable. But the underlying driver of the gold bull run (negative real interest rates and lack of faith in other asset classes) remains the same. I anticipate some solid gains for the metal over the next few months; there's STILL nothing to mitigate against it.

10 Sep 11, 03:39
Why sell target so low?

I don't understand the rationale behind your sell target in your "Ratio Price to US$GOLD to S&P 500" chart. The last time there was a major run up in gold in the late-70's, gold spent another THREE YEARS going higher than your current target. And that was without the crippling debt issues that, in the worst case scenario, threaten to destroy the very fabric of the fiat monetary system itself. And there is no solution to those debt issues that people will upset.

Gold is not in a bubble; it is the dollar that is coming out of a bubble relative to gold.

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