-- Posted Sunday, 21 August 2011 | | Disqus

Observers are dumbfounded by the strength of the gold price last week, with a new record high of $1,876 but many are very keen to jump in to predict it will not last. Even some senior gold bugs and famous chartists are too wound-up in their own analysis of the too recent past.

To be fair lengendary gold trader Jim Sinclair absolutely hit the nail on the head with his prediction that once gold past the $1,764 mark it would head to the moon (click here). That still leaves plenty of room for volatility on the way up, and that may still be misinterpreted as confirming the skeptics, until they are proven wrong yet again.

Parabolic base only

You only have to look at the 10-year gold chart to see that the recent price action looks like the base of a parabolic price spike. It does not appear anything like the actual thing which would surely stretch much higher:

Some gold analysts have jumped on the recent sudden price movement and said it represents unsustainable levels of buying in the gold market. They reason that the gold market is simply too big for this buying to be sustained.

However, they are too focused on what lies in front of their nose. For if the equity and twice-as-big bond markets are in trouble then it is the gold market that is very small, and liable to a huge inflation as money pours away from these other very, very much larger asset classes.

True bond markets are pulling in cash and going to record highs, so precious metals are not soaking up all the cash leaving equities. That leaves room for a further spike in gold and silver when the bond markets get into trouble later.

In explaining his $1,764 tipping point for a gold parabolic upturn Jim Sinclair says this is just mathematics from observing what happens as money pours into an individual stock, namely you get a point where it heads to the sky.

And what is causing money to flood into gold – and let us not forget silver which rose three times as fast as gold on Friday? (click here) It is the fear of holding paper money in a eurozone banking crisis.

That is hardly a minor concern, and one that can quickly shift from a warning signal to a full-blown avalanche or tsunami within a very short time frame.

One very large eurozone bank last week was short of dollars because other banks will not deal with it and went to the Fed for $500 million, the first time that has happened since the freezing of inter-bank credit in the last global financial crisis. That does not sound good.

Banking crisis

A panic to exit fiat money and the European banking system would indeed drive up the price of gold and silver to parabolic levels. Some distinguished gold analysts are confused by the precedent of late 2008 when the reverse happened and the price of gold and silver collapsed (click here).

Well that happened in the 1970s too. There was a 50 per cent collapse in the gold price in 1975-6. But that did not stop the 800 per cent rise by 1980. If you obeyed the precedent of the first collapse you largely missed the second rise because you tried to be too clever with your trading analysis.

The problem is not that this time is different, it is that the times are different. The 1970s are the era that is being repeated, so this time is not different at all, but we are not following the more recent trend of the 2000s because the market has actually just started to go parabolic.

Sadly many of those who think they know a lot about gold and silver are being completely wrong-footed. Follow our actionable investment advice available only in our monthly newsletter (subscribe here). We have some original ideas on how to make money from these market predictions.

-- Posted Sunday, 21 August 2011 | Digg This Article

About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in www.ameinfo.com, which later became the Middle East's leading English language business news website.

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.

Order my book online from this link

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