The Tenorio Research Letter

Gold and Kondratieff Update 2003

October 1, 2003

Gold has performed admirably since the 1999 low. Compare a portfolio consisting of gold plus cash with any general stock index since 1999 and you will see why gold should have been a part of your portfolio.

The Elliott Wave outlook presented here at Gold Eagle in 2000 and 2001 continues to unfold "as it must". Gold's bear market from the fifth wave failure top of September (under the third wave top of January 1980) followed a brutal path, destroying all hope and reason and many gold-related companies and people. "Inflation forever" gold bugs became deflationists, and an obsession with conspiracies replaced good fundamental and technical analysis.

That brutal bear market meandered in the shape of a zigzag (well-named!) with a very long B wave triangle up from the A wave of 1982 lows to the 1996 revival highs, finally bottoming in C wave ignominy in 1999 when gold was forgotten and paper assets were king. This was as classic a wave Two wipeout as you will find in Elliott Wave annals. A.J. "Jack" Frost and Robert Prechter have written very movingly of the despair of deep second wave psychology in their 1979 book and elsewhere.

That "spike from the deep" of $80 for gold in late September and early October 1999 was a very loud wakeup call for markets of every type, and the second spike upwards in February 2000 drove that fact into the consciousness of everyone. It is not farfetched at all to say that the Fall 1999 spike led to the U.S. Federal Reserve tightening (for fear of rekindling severe inflation) which punctured the NASDAQ bubble and ended the great bull market in stocks which accompanied gold's bear market. We'll return to intermarket analysis later.

From an Elliott Wave perspective that "spike from the deep" of September 1999 was wave one of the new bull market. After the second spike in February 2000, gold went back into hibernation, eventually retracing 97% of wave one, another deep and depressing wave two, this one of smaller degree. Most gold stocks actually went below the 1999 lows as they joined in the bear party in progress on the stock exchanges. Gold futures made their A wave low in late 1999, went through a sideways B wave triangle until June 2000, and then ground down in a diagonal or terminal 5 wave C crawl into the low of April Fool's Day 2001.

The chart shows my "countention" that wave three of the new bull market from 1999 ended last week, only 2 days shy of the 23rd anniversary of the orthodox top of 1980.

My view is that we are now starting wave four of the first bull market leg up from the 1999 low. Two things we know about wave four and two more are pretty good estimations. We know that wave four must intersect the line passing from O (origin) through blue wave two terminus (red line). We also know that wave four must not come below wave one's terminus (blue horizontal line).

It's a pretty good guess that wave four will be a triangle in order to be different from or alternate with wave two which was a flat. Wave four should last a Fibonacci multiple of time longer than wave two, and a common multiple is 1.618 longer. Since wave two lasted ~7 1/2 months, wave four should last ~12 months or in the vicinity of the vertical yellow line. Since wave three was over 3.5 times the length of wave one, wave three is probably going to end up as the extended wave of the five up.

This implies that if wave four is a triangle the wave five thrust will not be a huge one. this in turn suggests that the triangle will be a limiting triangle. The breakout from a limiting triangle is one which breaks out of the triangle less than 61.8% to the apex, and the thrust is normally 75-125% of the longest triangle leg. This triangle will mostly likely contract, but not sharply, and the first leg down would statistically be most likely the longest. (See the 2001 update cited above for a discussion of limiting triangles.)

Put that all together and it spells trading range, possibly for a year: fun for scalpers, a pain for investors. But that's what wave's four are all about.

If I am wrong, the blue horizontal from the wave one high should be quickly and permanently violated, certainly well before the red line up crosses it.


"The past few Long Waves have been 53-54 years peak to peak or trough to trough, and the study I have done of all potential waves since the 13th century in the West had an average of 53.6 years, with seven of twelve being 54 years +/- 4 years, but there have been a few shorter and longer periods.

The "ideal" or typical low for the Long Wave would be 2003, but I have thought that the 1998 stock market and bond deflation scare low and the wipeouts in hogs (to 1919 prices!) and nearly every other commodity, including crude oil, in 1999 may have been the corresponding low for commodities and rates."

This quote from the 2001 Gold Eagle update was both right and wrong. The interest rate drop of 1998, and the deflationary fever (magazine covers and newspaper headlines) would prove, in nearly every particular, to be identical to those of the earlier Kondratieff Wave "winters" from 1893-1896 and from 1946-1949. The Kondratieff trough low would turn out to be 2003 after all.

Not all measures of the Kondratieff Wave will have bottomed together. Just as the Kondratieff Wave top runs in a plateau topping zone for 5-10 years (1919-1929, 1974-1980), so too is the bottoming process a transitional process.

There are excellent markers to anchor the beginning and end of the topping plateau: an inflationary interest rate spike with low or negative real (inflation-adjusted) rates at the beginning (1919, 1973-74) and a rapid switch interest rate spike with very high real interest rates at the end (1931, 1981). This "regime switch" from high nominal rates to high real rates is the hallmark of the Kondratieff wave top and its most violent action. This is so because it kicks off the disinflationary bond and stock bull market along with subdued wages, prices, and GDP growth which will (and did) last several decades as in the 1930's-40's and 1980's-90's.

The Kondratieff wave trough has traditionally been schematically drawn as a V-shaped reversal, and it has not had very clear-cut specific markers like the top has. The main market components of a Kondratieff Wave low are lows in gold, commodities, interest rates, and stocks. Once one can look back and identify major lows coming after declines of several decades, especially of the first three asset classes, one can quite confidently say that the Kondratieff wave trough low is behind us. An excellent marker for the past three wave troughs has been a final deflationary stock bear market, again as from 1893-96, 1946-49, and 2000-2003.

It's now pretty clear through the "retro-spectoscope" that gold bottomed in 1999-2001, the CRB Futures Index in 1999-2001, stocks in 2002-2003, and interest rates in 2003. That means the trends of the markets have reversed for at least a decade for most assets and for two decades for some. The markets with the best potential are those which will benefit from inflation: commodity indexes such as CRB and the newer Dow Jones AIG INDEX, selected real estate, gold, and inflation-indexed bonds (TIPS in the U.S.). Both the new re-balancing commodity indexes and TIPS will provide some competition to gold for funds and individuals who prefer paper to unwieldy tons of metal. Nevertheless gold and selected blue chip gold stocks will remain the core of the inflation hedge part of any portfolio for a long time to come.

One should remember, however, that stock markets will also rally during the up cycle of Kondratieff until interest rates get "too high". After the 1896 low this inflationary weight occurred early. After 1949 this negative inflationary impact did not fatally wound the stock markets until the late 1960's and early 1970's. So it is bonds you will need to avoid (or de-emphasize), and stocks will remain an important part of a mild inflation portfolio for years to come.



China is the world’s biggest gold producer with more than 355 tons annually. Australia is second.