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Gold prices set to fall

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Gold is back in the limelight after a stellar couple of months. As you can see from the chart above it has rose from $1000 odd levels in 2009 to above $1900 levels.

Looking at the chart above it is just unbelievable to imagine how one asset class can just rise continuously for the last 11 years.

The most interesting part about this rise is that it has managed to prove the so called “Dow Theory” correct year on year since the last decade by forming a higher high and higher low. For instance, look at blue arrows, which signify the low price in a year, for Gold, and it is just startling to know that the gap between two successive bottoms and how the gap between successive bottoms has expanded beyond proportions. What I want to emphasise is the steep increase in the price activity in the last 4-5 years, which is causing the huge gap between the subsequent lows of the candle.

Factopedia: The rise, as the chart depicts, is from a low of $253.75 to $1920.30 in a span of 11 years. This makes it a stupendous 675% rise or 7.57 times the year 2000 low.

However, I believe, that we are already too late to board the bus. The only confirmation which I am waiting for is a breach of the previous yearly low, which currently stands at $1308. It is too farfetched a stop loss, but my point is that uptrend for Gold is in jeopardy and price warrants a correction, a sharp one.

The same fate happened with Silver not too long ago, when it rose sharply to $48-49 levels in a matter of weeks and then corrected sharply to below 40$ in a matter of days.

Let us have a reality check on this, and whether the steep rise in gold is justified, and what would likely be the future course of action for the same.

I was talking to some of my friends in the last few weeks discussing about the markets and current grim situation in the equity markets. Just to give you an outlook, these friends of mine have always wanted their money safe, not to invest in equity markets, and have complete risk aversion. They were telling me that Gold is one of the safest asset classes at this point and that they have invested a good amount of their money buying gold ETF’s. Not just that, the local taxi drivers are interested in knowing the potential upside of Gold. To top that up, even a lot of local jewellers have opened various schemes on Gold investment, making it very conspicuous to every investor.

Now my only point of contention is Gold has been rising for the last 11 good years, and realising now that Gold is one of the safest asset class, I think, is clearly too late. And that too nothing has changed about Gold since the last couple of years, other than increased investor speculation and scare across the equity market investors.

The current situation is kind of “euphoria”, and hardly anyone wants to look at the downside possibilities of Gold. It is similar to any bubble in the past, be it the Tulip bubble, bubble, and the 2008 crisis, which showed how a particular asset class considered infallible, was taken apart.

The triggers for correction in Gold prices include a rally in equity markets across the world. Also, if the dollar was up versus the world and then the euro was also up against the US dollar. Supply demand factors involved with mining gold also plays a role, but the real key to use gold in a portfolio successfully is as a hedge against world stagnation in real growth accompanied by high currency growth.

Markets do not give an easy money making opportunity for investors, especially with the current aura of optimism. I believe that we are near a long term high in Gold and investors should be trimming back positions on this run. Remember Gold too has peaks and valleys, and it has moved in this pattern for years. Which is why the likely conclusion of this massive parabolic blow-off is nigh.

To give you a glimpse of history, in late 70’s and early 80’s, gold experienced a similar rise which we are seeing today. It rose from levels of $ 200 per ounce in 1978 to levels above $850 in a couple of years. Back then the economic environment was plagued with inflation and turbulent times in equities. Investors piled on to gold thinking it was a safe haven at all times. Gold corrected sharply for the next two years falling below $400 levels, a reduction of 50% from the high, and thus stalling the exponential rise.

If anyone who believes that History repeats itself, needs to be wary of Gold. Fear when everyone is greedy.

Written by Kunal Bothra

September 22, 2011 at 11:22 am

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