At what point does gold go from being simply overbought and actually into a bubble phase ? It's a question well worth pondering as we seem to be on the cusp of both.
Technically gold is in overbought territory by any number of technical measures on the charts - be they bollinger bands, RSI (Relative Strength Indicator), MACD Indicator, Fibonacci extensions or Elliot Waves. Gold's failure to adhere to what chartists would tell us is reasonable behaviour - that is continue to rally when by rights a period of consolidation or profit-taking would be expected suggests that gold is either simply not in technical "mode" and that other external factors are driving us higher or that we are in a panic phase which inevitably leads to a blow-off at the top.
There is not a particular price point at which we could say that we are in a bubble - it is the manner - or speed - of getting there that defines it. This bull run has been 11 years in the making, it has been founded upon solid supply/demand fundamentals - it has been accelerated by innovation on the demand side and some extreme macroeconomic factors which to our minds justifies the current price; as such, the gold price is inherently strong and has resilience.
In most of the last 11 years we have seen gains in gold prices of between 18% and 22% - this year we have seen 32% and we are yet to enjoy the fourth quarter which is traditionally the strongest quarter for seasonal factors.
It is tough determining the level or price which represents 'fair value' and when one has moved well beyond it. That said, the parabolic nature of the gold price chart in the last few weeks suggests to us that we are ahead of ourselves and that a pull back or correction would be a healthy one. The Fibonacci Extensions suggest that $1915, $2111 and $2232 are top price projections - take your pick.
In short, long gold has been a wondrously profitable position to hold but a degree of caution is now in order. We are preparing levels at which to sell our gold positions - until it returns to a more sensible level... and then get back in. Let's not be too greedy.
Jackson Hole this Friday MIGHT just provide that turning point.
Ross Norman
Sharps Pixley, London-Based Bullion Brokers
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