Cycles of Gold

 Elliot Wave Principles & the Price of Gold

excerpted from various

articles

by

Alf Field

edited by

Norman Scherer

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I have drawn a 5-wave upward zigzag followed by a 3-wave downward zigzag in red lines on Chart #1. This is the typical shape of an Elliott Wave Principle (EWP) bull move followed by a bull market correction. These in turn represent just the first two waves in the next wave of a greater order of magnitude.

 

CHART #1

Some rhythmic proportions have begun to appear in the gold market. These are similar to those that were evident in the 1970's gold bull market and which have been missing since the gold bear market started in 1980. The EWP analysis on this page illustrates some of these relationships. This is an analysis of the 5 minor waves of Major Wave One starting from the April 2001 low point of $256, which is where I believe the new gold bull market started:

Elliott WAVES of

GOLD

[I have summarized Alf Field's gold wave counts in the table above. All the gold prices are from The London Bullion Market Association, London Gold Fixings PM price, priced in US Dollars and rounded off to the nearest dollar.....ed.]

Here is the above table in chart form showing the first two Major Waves and the start of Major Wave III:

Notice the support the 300 day Simple Moving Average provides (blue line). This support line has never been violated to the downside since August 2001. As shown above, this support line just penetrated $600 in February 2007.

*One major flaw developed in the forecast and this needs to be examined. In a second article, dated 23 September 2004 when the gold price was $405 ("Elliott Wave Gold price Update II"), my expectation then was for gold to rise rapidly to $500 without a serious correction. This rise was expected to be followed by a 16% decline to $420. The final up-leg to $630 was anticipated to follow the correction to $420.

By early November 2004 the gold price had risen above $430, making a new 16 year high in the process. Immediately the gold market gathered a head of steam and by 2 December 2004 had reached a PM Fixing of $454.2. The market looked set to rocket straight up to $500 but instead was hit by an avalanche of selling that stopped the rise in its tracks. The dashed lines on the chart below depict the forecast rise to $500 and the subsequent sharp decline that never happened.

Chart #2

Wave 4 Triangle

updated to 21 October 2005

It is all very well to speculate on the source of the large selling in early December 2004 and to say that the gold price "should" have risen to $500. The fact is that it did not rise to $500. What is important now is to determine whether the correction from $454.2 on 2 Dec 2004 was of the correct order of magnitude to be classified as Wave IV in my original forecast, i.e. the 16% decline anticipated from the peak of Wave III. For the following reasons I believe that we can conclude that Wave IV is of the correct magnitude and was completed some months ago:

1) With the price amplitude of Wave III being sub-normal, it is reasonable to expect that the price amplitude of Wave IV would also be sub-normal;

 
2) The length of time covered by the Wave IV correction, 7.5 months from early December 2004 to 15 July 2005, is the longest correction in the bull market;

 
3) The correction has taken the form of a triangle which is often the shape of fourth waves, and this is Wave IV;

 
4) The rule of alternation has been observed as Wave II was a quick zigzag while Wave IV is a long drawn-out triangle;

 
5) The lowest price reached during the correction was $411.1 on 9 February 2005, only $9 from the forecast target low of $420;

 
6) The low point of the fifth wave in the triangle, which marked the end of the triangle and which is also the point from where the next up-leg would be measured, was $418.3 on 15 July 2005, less than $2 from the ideal forecast target low of $420.
 

* The initial forecast for the first up wave (i) of Wave 5 was for $490. The gold price paused briefly at $490 and then continued to power upwards in a straight line, finally peaking at $536.5 on 12 December 2005. There is no doubt in my mind that this stunning move beyond the forecast $490 peak was a 5th wave extension, a rare event and generally incapable of being forecast.

Extended waves do provide us with other forecasting tools. Firstly the price invariably retraces the entire magnitude of the extension and, secondly, often has a double retracement. In view of the fact that wave (i) of (5) was expected to peak at $490, I concluded that this was where the extension started from. Thus to retrace the entire length of the extension, the gold price had to correct from $536.5 to $490.

It was satisfying to see the correction finish at $489 on 21 December 2005, exactly retracing the full extent of the 5th wave extension. At the same time the correction amounted to $47.5 ($536.5-$489), a magnitude of 8.8%. Thus the 8.1% correction originally anticipated from $490 actually commenced from $536.5 due to the extension and helped to confirm that this decline was indeed wave (ii) of wave V.

 

Turning to the comparison of wave V with wave I (see above), it is interesting to note that wave (ii) of wave V, shown in the paragraph above as a magnitude of -8.8%, was almost identical to wave (ii) of wave I, which was a magnitude of -8.9%.

Despite this remarkable similarity in the magnitudes of the wave (ii) corrections, impulse up-wave (i) of wave V was massively larger at +28.1% (see the analysis below) than the magnitude of wave (i) of wave I, which was +13.7%, as depicted in quote from "Update III", shown above.
 

In these circumstances it was necessary to conclude that wave V is not going to be similar to wave I. Thus far, wave V shows every sign of being  much larger than wave I. The previous forecast of a $630 peak for the first major wave of the new gold bull market, which was based on the assumption of wave V being similar to wave I, thus had to be jettisoned forthwith.

Before getting into a new detailed forecast, I need to explain that I use the magnitude of the corrective waves to determine where we are in an Elliott Wave pattern. The rhythm in the gold bull market to date has seen minuet corrections in the 4%-5% range. The corrections of one larger degree of magnitude have been in the 8%-9% range. The next higher degree of correction has been about 16%-18%.

Now that we appear to have reached the peak of major wave ONE at $725 we can make some guesses as to the peak of the big major Wave THREE which will follow once the current Wave TWO correction is completed. We now know that the $725 level is 2.83 times the $256 start of the bull market. We can project that the peak of Wave THREE will be at least 2.83 times the low point of this correction. As Wave THREE could be the strongest of the bull market, it is possible that the multiple could be higher, possibly 1.618 x 2.83 = 4.58.

If the low of Wave TWO is in the region of $545, possible targets for the peak of the strong Wave THREE to follow could be of the order of $1,542 or possibly even as high as $2,496.

 
Wave TWO may have covered an adequate number of dollars to the downside, but the initial down wave may only be the a-wave of an a-b-c or more complex wave sequence. If so, Wave TWO will absorb several more weeks or months and may exceed the 20%-25% size expected for the current correction. 

The initial decline to $540 was of sufficient magnitude to satisfy the dollar amount required for the Wave TWO decline, but it had happened too quickly. Not enough time had elapsed to allow for all the profit takers to get out and new long term buyers to come in and take their place, thus building up a solid base of holders with a cost entry in the $540-$730 range. This is a necessary building block in the market to provide the support for higher prices to come.

I surmised that the decline was only the A wave of a bigger A-B-C correction which would absorb several more weeks or months. We are now four months into the correction and possibly coming to the end of the corrective period. This is the graph of Comex Gold now:



Data updated to Friday 8 September 2006.

There are a couple of interesting points on this graph. The Island Reversal formation in June is a fairly reliable indicator of a change of trend and it worked, at least for the moment. Gold gapped up above $600 and quickly moved to $660 plus at which point those people who had missed out selling the first time around came in saying that this time they were not waiting for $700 and dumped their positions.

The second interesting observation is the strong support line just above $600 which has contained the 3 declines over the past couple of months, a level reached again last Friday, 8 September. The question is whether this level will hold again. If it does hold then there is the potential for gold to move rapidly above $700 in the near future. If this is the case we could label the peak at $674 on 14 July 2006 (Comex) as the peak of wave (i), the first upwave in the new bull leg and the correction to the recent $608 level as wave (ii).

If this support level just above $600 gives way, then we should expect another visit to the lower $500 regions. That would then confirm that the 14 July $674 peak was the end of the B-Wave and that the decline to test the lows above $500+ would complete the C-Wave. That would also complete Major Wave TWO, the biggest correction in the gold market to date.

There is a high probability that the 5 month correction in the gold price has ended. Often there is a relationship between the lengths of the A and C waves of a correction, sometimes C equals A and at other times C is only 61.8% of A.

At the low prices on both COMEX and the London PM fixings last Friday (6 October), the C wave of the correction was almost precisely 61.8% of the A wave. Equally important, the minor waves in wave C have completed a full Elliott Wave sequence.

The picture can be seen most clearly in the following chart of the London PM gold fixings:

Just to run through the numbers, wave A declined from $725 to $567, a total drop of $158. Wave B rallied to $663.2. If wave C is 61.8% of the A wave decline of $158, wave C would extend for $97.6 (61.8% of $158) from the B wave peak of $663.2. This gives a target for the end of wave C of $565.4 ($663.2 - $97.6). The London PM fixing on 6 October 2006 was $560.7.

On the COMEX gold futures, the corresponding figures are an A wave decline of $171.3 from the May peak of $733 to the June low of $562. Taking 61.8% of the wave A decline of $171.3 produces a figure of $105.9 as the potential magnitude of the wave C decline. Wave C commenced at $674 on the COMEX futures, implying a potential low of $568.1 ($674 - $105.9).

The low price on the COMEX gold futures on Friday 6 October was $567.0, slightly higher than the low on 4 October of $563.6. Both these lows are within a few dollars of the $568.1 figure calculated above as the target low point. While these numbers are close to the target, they take on added importance when cognizance is taken of the fact that the minor waves in the correction have completed an adequate Elliott Wave corrective sequence.

I recently calculated a figure of $562.5 as a possible London PM fixing low for wave C by utilizing an analysis of the minor waves in wave c of wave C. These minor waves are marked (i) to (v) in the above chart. The analysis of wave c of C is as follows:

Analysis of minor wave c within corrective wave C:

Wave (i) $654.4 (2 Aug) to $613.9 (18 Aug) - -$40.5
(ii) $613.9 (18 Aug) to $637.7 (5 Sep) - +$23.8
(iii) $637.7 (5 Sep) to $573.6 (15 Sep) - -$64.1 (largest wave in sequence)
(iv) $573.6 (15 Sep) to $603.0 (28 Sep) - +$29.4
(v)* $603.0 (28 Sep) to $562.5 ( ? ) - -$40.5 (same decline as wave (i))

* Forecast assuming wave (v) is the same size as (i) at - $40.5

This target of $562.5, determined by a different method involving minor wave forecasts, is also exactly in the range of lows seen in the past few days on both COMEX and the London PM fixing on 6 October. The $562.5 target is exactly $1.80 from the PM fix on Friday 6 October of $560.7. It would thus not be a surprise if the 6 Oct PM fix of $560.7 was the actual low.

The confluence of targets in the $560 to $568 range suggests that the gold price lows on 6 October 2006 marked the end of wave C and also the end of the first major correction (wave TWO) of this gold bull market. If this is so, we should see the gold price move rapidly upwards in a strong impulse move, starting almost immediately. The next major wave is wave THREE, the strongest of the upward waves, implying some dramatic action on the upside.

Targets for the end of major wave THREE are vastly higher than the current gold price. We should wait for confirmation that we are actually in wave THREE before calculating the upside potential for this wave. What we are looking for is:

1) immediate strong upside impulsive action and,
2) a breakout from downtrend from the May peak. This will probably be evidenced by the gold price knifing upward through $610.
 

Gold Update IX indicated that there was a high probability that the 5 month correction in the gold price finished at the $560.7 London PM fixing on Friday 6 October 2006. That is exactly what happened.

Update IX was written over the weekend following the $560.7 London PM fixing and that article was published before the markets opened on Monday, 9 October. The forecast of the exact low of the correction, literally to the day, was thus produced in real time. This accurate call once again confirms the efficacy of the Elliott Wave technique as applied to the gold price.

The chart below shows the gold price action since the $560.7 low point of Wave TWO. The twin requirements of immediate upside action followed by a break through the downward trend-line from the May 2006 peak have both occurred. Even the requirement for "knifing upward through $610" has been achieved.

Data updated to 24 November 2006

As promised, we can now allow ourselves the luxury of speculating on the heights to which major wave THREE might soar and, perhaps more importantly, the shape and structure of wave THREE. Fortunately we have a lot of useful information that can be gleaned from the rhythms and structure of major wave ONE that can assist in formulating this template.

We know that wave THREE cannot be the shortest wave in the sequence. We also know that third waves are typically the longest and strongest in a sequence. Thus major wave THREE should be at least as large as major wave ONE in terms of magnitude and will probably be much larger than wave ONE.

In this forecast template it is assumed that wave THREE will achieve the minimum requirement which is to be equal in magnitude to wave ONE. Wave ONE commenced in April 2001 at a PM fixing of $255.9 and finished on 12 May 2006 at $725. Thus the peak of wave ONE was 2.83 times the staring level. ($725 divided by $255.9).

Assuming that it is merely the same magnitude as wave ONE, the minimum peak for wave THREE should thus be 2.83 x $560.7, the latter price being the starting level of wave THREE. This gives a target for the template peak of wave THREE of $1,586, which could perhaps be rounded off to $1,600.

We also know that wave THREE will consist of three separate but smaller upward waves separated by two corrections of about 16% each. This magnitude of correction is derived from wave ONE. Using conventional technical analysis, the likely point of first major resistance in wave THREE should be at the 1980 peak level of around $870. A 16% correction from $870 would cause a decline to $730, a typical support level under conventional technical analysis being the peak of major wave ONE. This is how the magnitudes of waves I and wave II of wave THREE have been arrived at in this template.

The other waves have been determined by assuming that wave III of wave THREE will be the strongest and will include the "Point of Recognition", i.