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Gold Goes Parabolic Again & Again & Again




A parabolic move is defined by an accelerating rise in price over shorter time periods, culminating in a rise that is almost vertical in slope. As you can see in the charts below, each successive trend line is steeper and steeper. But while it is easy to identify this pattern in its mature state, it is still challenging to pin point the exact top because it is at this very last stage that it can be the most volatile.

While a relatively rare pattern, it is one of the most reliable because no trend can accelerate geometrically to no end. Instead, the end result is an exhaustion and a total collapse and unwinding of the trend.

Trees Growing to the Sky
I wrote about the parabolic pattern in the price of crude oil before it collapsed under its own weight: What is Really Going on with the Price of Crude Oil? And like most technical analysis patterns, turned upside down, it works just as well. Reverse Parabolic - the Philadephia Banking Index flagged the exhaustion of selling in March 2009.

Putting aside all fundamental and emotional attached to the precious metal, the recent price action in gold marks a parabolic pattern and promises the same consequences. We've already seen this pattern play out in gold several times in the past few years. Here is a chart showing the parabolic move it made in 2006:

gold parabolic top 2006

When will it hit the zenith? With a neckline at $1000 and a low made at $725, the clear head and shoulder formation in gold suggests a target of $1250. We're not far from that.

Coincidentally, if gold were to hit that target, it would be 28% above its long term moving average. Although such an extremely lofty level is rare, it has occurred in the past. The last time was in early 2008 when gold topped out at $1000 in a similar parabolic move. And before that, it was the 2006 parabolic blow off which maxed out at +36% from its 200 day moving average.

gold parabolic top 2008 and 2009

Accelerated Acceleration
Also noteworthy is that we're seeing 3 parabolic moves in this market within a short period of time. While they are too few in number to make hard inferences from, they seem to be occurring with more frequency. Especially when you consider that before the first parabolic move in 2006, we hadn't seen one for more than 20 years. But it was only 2 years later when in 2008 the pattern was played out again. And now, again in the last month of 2009 we see a parabolic pattern in gold.

CitiFX Gold Technicals
For another take on gold, a reader shared a recent research report from CitiFX which comes to much more bullish conclusions. They see gold reaching $1300 as early as the first quarter of next year and $2000 by 2012. To clarify, I'm not arguing that the gold bull is dead but that right now, right here, it has to take a rest to recuperate. It simply can not continue at the ever increasing rate of acceleration as it has.

In any case, you can download the 29 page report to read it for yourself from the Trading Resource Section (look for it in the Reports & Articles: "CitiFX Gold Technicals Nov 2009"). It is full of charts, interesting analysis and touches on the US dollar, as well as other markets.

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7 Responses to “Gold Goes Parabolic Again & Again & Again”  

  1. 1 Jay @marketfolly

    hey Babak great post detailing the potential danger lurking ahead. The technicals on this thing certainly have been astounding lately as it just keeps heading higher. I like your pointing toward the near vertical slope as that is one of the most blatant warning signs out there. Nothing goes straight up.

    I wanted to let you know also that today we highlighted hedgie John Paulson's new gold fund in an in-depth post. We outlined the fundamental reasons he is bullish on gold equities and derivatives on the price of gold as he is betting against the US dollar. Here it is Great post again and I'll be linking to it this week given its obvious tie-ins to our Paulson post.

    Jay
    @marketfolly

  2. 2 Babak

    Jay, even looking at it from a fundamental supply demand lens, gold isn't that attractive. While mines haven't come online for the past 10 years to expand production, the high price is drawing a huge amount out of the woodwork for scrap gold. Then again, I don't pretend to be as smart as a guy like John Paulson.

  3. 3 Paul

    Hi Babak, could not find this article- "the Trading Resource Section (look for it in the Reports & Articles: “CitiFX Gold Technicals Nov 2009″)." Please advise if I missed it. Thanks.

  4. 4 Babak

    Paul, it is there, I just saw it. Once in the right folder, lick on the top right corner to order by date and it should be at the top. I've also uploaded a second report: "CitiFX Eternal Allure of Gold Nov 2009". Let me know if you have any difficulty in finding it.

  5. 5 Paul

    Thank you as always Babak. I found them.

  6. 6 Babak

    glad to hear it :) let me know what you think of them

  7. 7 Goldie ( well it was my grandmother's name )

    I agree that gold was extended and recently noticed the price of the GLD was significantly above the 200 Day utilizing online premier Daily Graphs (remember the old printed weeklies?) both daily and weekly versions. However your posted charts display a currency or commodity that continues within a bull market and has outperformed most everything since 2004. While a pause is expected we are viewing a USD version and I wonder in the grander scheme if this Gold thingie may retain its longer term bullish pattern especially vs. currencies. Even the purchases of the physical metal in 2006 were a great buy despite today's "adjustment." The move in gold has been unconfirmed by the gold stocks and other precious metals, much like the 2007 DJIA yet it IS a marathon and the pullback we may have begun may have a floor where India purchased 200 "tonnes" @ 1045?.

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