Gold prices will become 'parabolic', says economist

Published August 24, 2011


Analysts studying technical analysis tools say that bullion prices may be set to decline after record rally

(LONDON) Gold's rally to a record above US$1,900 an ounce has pushed the metal to overbought levels according to technical analysis tools, as economist Dennis Gartman said that prices will go 'parabolic'.

Still glittering: Demand for gold pushed holdings in ETPs to a record 2,216.8 tonnes on Aug 8, data compiled by Bloomberg show
Bullion's relative strength index has topped 70 since Aug 5, a signal to some investors who study technical charts that prices may be set to decline. Gold hugged its upper Bollinger band most of this month, which may signal possible resistance, while a moving average convergence/ divergence indicator and Elliot Wave patterns suggest that prices are overextended, said Ross Norman, chief executive officer of London bullion brokerage Sharps Pixley Ltd.

Gold futures climbed as high as US$1,904 an ounce in New York yesterday and is up 16 per cent in August, set for the best monthly gain since 1999. The metal has advanced as concern about debt crises and slower economic growth spurred investors to diversify holdings away from equities and some currencies. The biggest gold-backed exchange-traded product (ETP) surpassed its equities counterpart as the largest by market value, while bullion rose to record prices in euros, British pounds and Swiss francs.

'I think we're overextended in the short term,' Axel Rudolph, a technical strategist at Commerzbank AG here, said by phone. 'I wouldn't be surprised if we were to fail around US$1,900 to US$1,922, and retrace a little bit for a few days or so. It's still very bullish longer term. Longer term, I think US$2,000 will definitely be hit.'

Prices may slip to the Aug 11 high of about US$1,815 if gold stays below US$1,925, which is near a 60-minute point-and-figure target, Mr Rudolph said. The metal may move 'sideways to up' if no decline takes place in the next couple of days, he said.

Still, a weekly close above US$1,900 may push prices to the 'psychological' level of US$2,000, near the 200 per cent extension of the rally from January's low to May's high projected from the May low, one of the levels singled out in so-called Fibonacci analysis, he said. Fibonacci analysis is based on the theory that prices tend to drop or climb by certain percentages after reaching a high or low.

Gold futures for December delivery traded at US$1,901.90 at 5.15 pm on Comex in New York. In London, bullion for immediate delivery gained 2.5 per cent at 10.17 pm, after reaching US$1,900.60. It is up 34 per cent this year and heading for an 11th straight annual gain, the longest winning streak since at least 1920. The metal has outperformed global equities, commodities and Treasuries this year.

'Gold is strong in any and all currency terms, and it is now entering that stage when prices go parabolic,' Mr Gartman said yesterday. 'This will end when it ends; there is really nothing more that can or shall or should be said.'

Speculative demand from investors has pushed the gold market into a 'bubble that is poised to burst', Wells Fargo & Co said in an Aug 15 report. Prices may climb to US$2,000 an ounce by the end of the year, according to the median forecast in a Bloomberg survey of 13 traders and analysts at a conference in Kovalam in South India on Aug 20.

The precious metal's 'rally when by rights a period of consolidation or profit-taking would be expected suggests that gold is either simply not in technical 'mode' and that other external factors are driving us higher, or that we are in a panic phase which inevitably leads to a blow-off at the top', Sharps Pixley's Mr Norman said.

Demand for gold pushed holdings in ETPs to a record 2,216.8 tonnes on Aug 8, data compiled by Bloomberg show. Investors' assets in the products were 2,211.1 tonnes on Aug 19, more than all but four central banks. Central banks are also adding to gold reserves for the first time in a generation.

The market capitalisation of the SPDR Gold Trust, the biggest gold-backed ETP, rose to US$76.7 billion on Aug 19, according to the most recent data compiled by Bloomberg. SPDR S&P 500 ETF Trust, which had been the industry's largest ETP since 1993, was at US$74.4 billion.

Bullion's 14-day relative strength index (RSI), last at 83.61, reached 84.96 on Aug 10, the highest level since October, according to data compiled by Bloomberg. Prices fell as much as 7.3 per cent in the week after the gauge was at 84.61 on April 29 and traded in a US$115 range for the next two-and-a-half months.

'You can actually make forecasts, even if it's trading at new all-time highs,' Commerzbank's Mr Rudolph said. 'The problem with gold right now is that in the last three days, it's just accelerated higher - and when it's in this sort of move, it can still continue in fast spikes. It's very difficult to know where the spikes are going to end.' - Bloomberg