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Gold Will Collapse Like Oil Did in 2008: Charts

The gold price has moved quickly and it has developed an important new uptrend characteristic. This so-called 'parabolic' trend is a dangerous type with a high probability of a sudden collapse.

Gold Bars
AP
Gold Bars

The original breakout above the psychological resistance level near $1,000 was a breakout from a trading band. Using the trading band the first price target projection was near $1,080. This was achieved quickly.

The same trading and projection method is used to set the next higher target. This target is near $1,160. This target has a high probability it will be achieved.

The breakout above $1,000 started with the characteristics of a rally. The rally has been fulled by a number of reasons: large buying activity of central banks in particular India's Central bank, the decline in the US Dollar, and the anticipation of continued low interest rates in the U.S. among them.

A strong rally breakout typically develops into a sustainable and reliable trend, characterized by retreat and rebound activity within the new up trend development.

However, in the past week, the nature of the rally breakout has changed drammatically. It's no longer a normal uptrend, but best described as a parabolic trend.

The parabolic trend is a curved trend line that captures the acceleration of price. The trend will eventually develop into a vertical line, which is used to define the end of the rising trend.

The characteristic of the parabolic trend is that the trend collapses very rapidly when price moves to the right of the trend line.

The parabolic trend line is divided into three sections:

In the first section the parabolic trend is difficult to recognize. In the second section of the parabolic trend the exit signal is a close below the value of the trend line.

The second section of this parabolic trend is currently developing.

The third section of the parabolic trend is more dangerous. Here the exit signal is a move below the value of the parabolic trend line. Additionally, there is always a time when the price has no choice. Price will automatically move to the right of the trend line and signal the end of the trend.

When this develops, the trend collapses very quickly. The plunge in the oil in 2008 after prices reached $140 was characteristic of this parabolic trend collapse.

This is the risk with the gold trend. When the parabolic trend ends the gold price can move quickly towards support at $1,000.

Generally the leverage impact with gold producers and explorers is about 3 to 1. This is an advantage when the gold price goes up. When the price falls this leverage works in the opposite direction and causes a substantial and rapid decline in the price of gold producers and explorers. Our most recent trading DVD examines the methods applied to trading gold, gold stocks and gold derivatives.

If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.

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  • Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.

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