Log - Periodic Oscillation Analysis and Possible Burst of the “ Gold Bubble ” in April – June 2011

This working paper analyzes the gold price dynamics on the basis of methodology developed by Didier Sornette. Our calculations indicate that this dynamics is close to the one of the " bubbles " studied by Sornette and that the most probable timing of the " burst of the gold bubble " is April – June 2011. The obtained result has been additionally checked with two different methods. First of all, we have compared the pattern of changes of the forecasted timing of the gold bubble crash with the retrospective changes of forecasts of the oil bubble crash (that took place in July 2008). This comparison indicates that the period when the timing of the crash tended to change is close to the end, and the burst of the gold bubble is the most probable in May or June 2011. Secondly, we used the estimates of critical time for the hyperbolic trend (that has been shown in our previous publications to be typical for many socioeconomic processes). Our calculations with this method also indicate May – June 2011 as the most probable time of the burst of the gold bubble. Naturally, this forecast should not be regarded as an exact prediction as this implies the stability of the finance policies of the USA, European Union, and China, whereas a significant intervention of giant players (like the Federal Reserve System, or the Central Bank of China) could affect the course of the exchange game in a rather significant way. We also analyze possible consequences of the burst of the " gold bubble ". On the one hand, it is obvious that such a collapse leads to huge losses or even bankruptcies of many of the major participants of exchange games and their dependent firms and banks. Therefore, the immediate market reaction will be entirely negative. Negative impact on the market will be amplified by numerous publications in the media and business press, drawing analogies with the events of the early 1980s and earlier similar events, as well as by losses of the shareholders of bankrupt companies. The current instability of major world currencies and the most powerful world economies, unfortunately, does not preclude the escalation of a short-term downswing into the second wave of economic and financial crisis. On the other hand, investments in gold, which caused the very " gold rush " , also lead to the diversion of funds from …