This month's jump in Gold Prices might remind you of April's big top in silver...
THE RECENT spike in Gold Prices has many parallels with silver's rise earlier this year, reckons Sumit Roy at Hard Assets Investor.
With gold's rally extending into a seventh week, this relentless move in prices has made it folly to try to time a top in the metal. Betting on gold downside through a short position has been a fool's game for the past 11 years, but it is especially dangerous now. At the same time, taking a long position is also risky given how far and fast prices have risen.
Specifically, gold is up 28% over the past seven weeks and we have yet to see any meaningful correction in prices in that period. In market jargon, prices seem to be "going parabolic".
For those who have been watching precious metals over the past year, this move may seem somewhat familiar. That's because we witnessed a similar situation in Silver Prices earlier this year. Between Jan. 22 and April 25, the white metal rose a whopping 54%. Moreover, in that period, prices rose in 13 of the 14 weeks.
In comparison, this summer's move in Gold Prices has put the yellow metal up 28% from July 1 to Aug. 22, and the metal has risen in each of the past seven weeks.
Those are very interesting numbers, for they suggest that gold has risen about half of what silver rose (28% vs. 54%) in half the period of time (7 weeks vs. 14 weeks). Thus, gold seems to be climbing at the same pace silver did earlier this year.
But that doesn't mean gold is set to necessarily rally another 25% from here over the next several weeks. Indeed, the fact that gold is rising at the same rate silver did is an indication of this rally's uncharacteristic nature.
Silver is typically much more volatile than gold, with the metal having exhibited an annualized weekly volatility of 45% over the past year. In contrast, gold's volatility has been 15% in that same time period. In other words, silver is almost three times as volatile as gold.
Yet gold has been rising as if it were silver. A perfect storm of sovereign debt and economic concerns was the catalyst for this latest rise. Sheer momentum and a growing acceptance of gold as an alternative reserve currency have kept prices spiraling higher in the face of developments that might have normally put the brakes on the metal's ascent.
The resolution of the US debt ceiling debacle; a decline in Italian and Spanish sovereign yields on the back of European Central Bank purchases; and the Federal Reserve's failure to initiate a third round of quantitative easing (QE3) have done nothing to halt gold's rise.
This is largely because the long-term bullish fundamentals for gold remain unchanged. The US and Europe may be experiencing a temporary respite from sovereign debt troubles, but we've yet to see anything close to a long-term solution to these problems.
At the same time, it has never been easier for investors to Buy Gold. Exchange-traded fund holdings of gold have exploded in recent weeks as investors and traders pile into the metal with ease.
In the short term, it's hard to imagine any exogenous factors that will be the catalyst for a top in gold. Rather, gold's top in the short term will likely take place once buying interest reaches a saturation point. In silver's case earlier this year, that saturation point was reached after prices surpassed their 1980 record of $49.45/oz by a hair at $49.79. Prices subsequently fell 35%.
For gold, there is obviously no way to know when such a saturation point will be reached – perhaps at $2000 per ounce or at the $2400 inflation-adjusted high reached in January 1980. But just as Gold Prices are not likely to rally as much as silver did, they are not likely to fall as much as gold's more volatile cousin.
For long-term investors, the best course of action may be to wait for the inevitable correction in gold and watch for signs of bottoming before accumulating positions.
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