Strong case for gold prices topping

Exponentiality is associated with herding, not with value. Exponentiality can be defined as rising inclination in prices — larger gains in small periods of time that resemble a rocket shooting off into the sky or a bottomless pit. A look at gold prices suggests the positive exponentiality.

Look at platinum (in 1999-2008), zinc (2003-2006) and Dow (1974 – 2007). Just to make the case clearer we have juxtaposed Dow (1974-2007) with gold (1999-2010), they look similar. Now this is not the classic inter-market chart we see every day, as gold is considered an asset of bad times, while Dow is for good times. Gold is also known as the crisis commodity that prospers in tough times. So, the important questions one can ask is that are we in an ongoing crisis as rising gold prices suggest? Or are we looking at an ending crisis as exponentiality and topping of gold suggests?

If we look at the element of time, gold has been rising for a record 10 years without a retracement of more than 38.2 per cent. The metal has not witnessed a fall bigger than nine months in time. While the Dow price exponential structure (1974-2007) topped in October 2007 and crashed 50 per cent. Building on the case, we have more of a topping case for gold here and an easing crisis rather than what seems to be out there.

Out there we have sovereign risk, euro under attack, more than 12-month old recovery and if we look at the sentiment indicator, all-time historical highs on gold will generate bullish sentiment extremes. To understand gold further we also plotted the precious metals against the euro and the Japanese yen. The aim was to take out the dollar bias. Gold denominated in the euro and the yen, both were at weekly momentum extremes. Gold in yen was still below 1980’s high and gold denominated in euro was gapping in the Reuters 3000Xtra charts. Considering EUR-USD has also gapped recently on daily data, we are not surprised that price gaps on gold euro are conspicuous.

A closer look at industrial metals also suggest down structures. How can industrial metals correct while gold and silver push higher? Is this not a non confirmation? Even now things don’t add up if you are expecting a primary (more than nine months) degree crisis. Things add up, if we assume intermediate negativity on equity markets not heading into Q4 followed by a global recovery. We will have to wait and see how the respective picture unfolds.

(The author is CMT, and CEO, Orpheus CAPITALS, a global alternative research firm)