Gold Goes Parabolic

For those of you who have read my first couple of posts you will know that I focus primarily on fundamental analysis for my investment decisions. I have however decided to post a chart today.

Over the last couple of weeks gold (shown here in USD) has broken out of its channel which has been in place since October 2008. Now a lot of “Gold Bugs” would be rejoicing at the news and saying “I told you so”, however when prices go parabolic it can be an indication of an end to the run. This occurs because all your mum and dads, taxi drivers and work colleges have heard about the move in the stock (or in this case gold) for a number of months or years. They keep thinking that it cannot go higher, yet it still does. Eventually these people jump in because they don’t want to miss out any more. As a result they push prices even higher, however in many instances this is the last big move up before the price comes crashing back down.

That said there are strong arguments against this being the case at this point in time and I suspect that rather than gold crashing it may consolidate at this higher level some time or retrace and form a new upward channel, albeit at a steeper incline that the previous one. This would be the most positive scenario for long term holders of gold as it removes the threat of a crash in prices which typically follows these parabolic moves and creates a new uptrend that could run for a considerable amount of time.

Now what does this have to do about my investments and this blog? Well I have been examining a number of long term gold mining stocks over the last couple of months. The economics of their projects continue to improve based on the ever increasing price of gold. However many of these companies are 12 months or more away from production and I believe there is an opportunity for current gold producers to be re-rated within the short term. For those of you have followed Gold stocks on the ASX for the last year or so they have largely lagged behind the gold price. This has in part been due to the strong Aussie dollar. However now that gold has broken out of this channel people are starting to do the maths and realise that a mine that was profitable at $1,200 an oz or $1,500 an oz, will be extremely profitable at $1,700, $1,800 or perhaps even $2,000 an oz.

I will admit I may have missed the boat in regard to these shorter term opportunities (although my longer term targets are still yet to register any significant gains and remain in my sights).  I do however expect that part of this move in gold may be in response to the markets anticipation of QE3 from the US Federal Reserve who meet on Friday. At this stage I don’t think they will come out with a full blown government debt/bond buying program like they did with QE2 and are more likely to tinker at the edges or put in place some alternative measure. As a result I suspect some traders may be disappointed with the news and sell off gold in the short term.  On the other hand if they do fire up the printing presses there could be a short term pull back anyway as traders sell to lock in their profits (much like the old buy on rumour, sell on fact).

This could provide a good short term entry point for a couple of gold plays I am looking at on Monday or Tuesday next week. At this stage I don’t think the US stock market is pricing in a full blown QE3 program either so I don’t expect there to be massive disappointment if it doesn’t eventuate. This could result in an ideal situation (in the short term at least) with a decreasing gold price and some stability in the stock market.

EDIT: 24/08/201 - After making this post yesterday the DOW closed up 2.97% with the majority of commentators attributing this to the Feds meeting and potentially QE3. Gold has also pulled back below $1,900 USD/oz. As a result I do expect that my prediction above of buying opportunities early next week could still eventuate, however that now needs to be mixed with some caution incase the markets have gotten ahead of themselves with their expectation of QE3.