Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Dow Stock Market Trend Forecast Into Mid 2022 - 4th Dec 21
INVESTING LESSON - Give your Portfolio Some Breathing Space - 4th Dec 21
Don’t Get Yourself Into a Bull Trap With Gold - 4th Dec 21
GOLD HAS LOTS OF POTENTIAL DOWNSIDE - 4th Dec 21
4 Tips To Help You Take Better Care Of Your Personal Finances- 4th Dec 21
What Is A Golden Cross Pattern In Trading? - 4th Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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

Commodities

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 www.valueviewgoldreport.com

Ned W Schmidt Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

khen
22 Aug 11, 18:38
gold

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!


dincer
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%.


peter
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.


Paul_B
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.


Joe
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.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in