Are gold and silver prices set to go parabolic this year?

One of the graphs we shared with subscribers in the last ArabianMoney newsletter (click here to sign-up and we will send you this issue for free) at the end of 2010 impressed them more than any other; and that was a graph overlaying the 1980 parabolic gold price increase on top of recent price trends.

This puts the gold price around $2,500 by late May 2011. Perhaps it is no coincidence that the greatest gold bug Jim Sinclair has reached a similar conclusion now that his mid-January target of $1,650 looks unlikely to be reached; indeed a temporary correction in the gold price is now forecast by the usually reliable Clive Maund from his charts, and we have looked at this in another article (click here).

Parabolic or not?

Of course, what is very hard to call is whether gold will put in another reliable year of price gains or something much more spectacular. After 10 years of outperforming the Dow every year it is a simple matter of inductive, and not even deductive, logic to expect the same sun to rise again this year.

For the bigger performance something would have to go drastically wrong in the bond markets – probably driven by more problems with derivatives like mortgage backed securities – and for fear and greed to then send investors rushing into precious metals as an alternative.

We certainly do have the circumstances that could make this happen. The legality of repossessions is being challenged in the US and could undermine the value of all MBSs. The euro zone sovereign debt crisis could produce defaults that would undermine the global banking system in a Lehman style panic.

Fed street cred

But these are known knowns and many still have faith in the Federal Reserve as the borrower of last resort. Yet if a true tipping point came in the bond market then even the Fed would not be able to buy up all the debt, and the value of money would collapse.

Quite whether it would come to that is far from predictable but even the fear of it happening would be more than enough to fuel up gold prices again, and silver would follow though higher still (click here). If that fear was then compounded by greed as investors thought they were missing out, up would shoot precious metal prices.

Robin Griffiths of Cazenove Capital is quite right to say that the gains in the final or parabolic stage of a bull market in precious metals would be bigger than all the gains in the past 10 years (click here). This is typical of investment manias.

For instance in the last year of the Dubai property boom in 2007-8 prices doubled, or you could look at oil in 2008. So to see 2011 as gold and silver’s year of bumper performance is far from unrealistic, but watch out for the downside when everybody gets carried away. Of course, if gold just manages a 25-30 per cent rise you will not finish the year too disappointed.