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Tenorio Research
Market Analysis

GOLD

Gold has not been a prominent part of my repertoire for several years. If you remember "The Gold FaxLetter", you know that it once was. This issue will bring me up to date on the longer term outlook for gold. The 1996 to 1998 plunge (in the XAU) has been followed by a trading range or bottoming attempt or whatever you wish to call it. Those of us who have sat through a 20 year bear market are numbed or immunized, inured to the worst possible outcomes, beaten. The only worse experience would be for a cocoa bull, as cocoa topped in 1977. Odd isn't it? Two of the finest commodities: beautiful gold and delicious cocoa. I want to show you a chart of cocoa as it illustrates a slightly different view from the one I'll present for gold.

Looks like the gold chart doesn't it? Since cocoa was trading in the modern US markets long before gold, we have the complete cycle showing the five wave bull market into the top. The bear market to 2000 has retraced as much as 93% of the gains of the bull market. Those are numbers of a classic wipeout bear market, like silver When you fret about gold, please do also shed a tear for the devastated cocoa farmer.

Of course there are gold stocks which have gone belly up or have become dot.coms (yes!), and decent companies like Coeur d'Alene, Bema, and all too many others which have suffered percent losses like cocoa. Those of us who learned a thing or two from Paul Sarnoff in this long bear market, stuck with some of the polymetallics like Rio Tinto or Broken Hill or even DeBeers and managed at least to preserve capital. But there cannot be any gold bug of yesteryear who has not suffered grievous losses at some time in this seemingly endless debacle. Only by assiduously writing options against a physical gold portfolio could you have made some money, or by just being short for 19 years!

The chart labels below for gold are those I have held to since the last (final?) leg of the bear market became apparent in 1996-97. I like to start analyses with Elliott.

For reasons too numerous to go into in detail, I always believed, even in 1980, that the last high in September 1980 at ~$720 was the "orthodox" or true top. Briefly, the initial drop from January was a three wave affair, and the run-up from March to September was five clear waves. A lower top for wave five is called a "fifth wave failure" and pointed to major future weakness.

In 1988 the late A.J. "Jack" Frost, earlier a colleague of Hamilton Bolton, and later a collaborator of Bob Prechter, wrote a small treatise, published by Prechter, in which he also presented this same count.

The corrective bull market has taken the form of an Elliott zigzag or 5-3-5. (Triangles are considered to be "three's" by definition, as they occur primarily in locations where three's do: waves 4 and B.) In a zigzag, the B wave terminus may not exceed 61.8% of the entire price move of wave A, and this was fulfilled by the top in February 1996.

Wave B is a contracting limiting triangle, so called by Glenn Neely to differentiate it from several other triangle types. Limiting triangles are those discovered by Elliott. Neely discovered that the apex of a contracting triangle's relationship in time to the beginning to end of the triangle itself defined limiting versus non-limiting.

To keep it brief, a limiting triangle's apex (lines drawn to a point through either AC or CE and BD) should be 20-40% beyond the end of wave E in time, and ideally 38.2%. The apex of gold's B wave triangle from 1982 to 1996 is 37% beyond January 1996. Thus the triangle count is substantiated.

Next it is possible to count the bear market from 1996-99, wave C, as a five wave post-triangular thrust with a third wave extension, thus completing a 5-3-5 zigzag. Since wave C is less than 61.8% of Wave A (September 1980- June 1982) the zigzag is a truncated zigzag. In gold's case the length of wave C is very close to the ideal 38.2% length for a truncated zigzag. (Also wave C meets the minimum requirements for a thrust out of a limiting B wave triangle at just short of 75% of the triangle's longest internal wave, 75-125% being the usual thrust as a percentage.)

Thus we have a legitimate Elliott wave count for gold from the $35 low in 1967 to a putative low in 1999. Five waves up with a fifth wave failure indicating weakness, and a zigzag with a B wave triangle which retraced 73% of that bull market. The time span of approximately 13 years up and 19 years down makes the two larger degree waves relate to the whole as ~38.2 and ~ 61.8% in time.

Having a valid Elliott wave structure is not tantamount to "a sure thing" as anyone who does Elliott work, or reads it, knows. But it's an analytical start. Most who persist in doing Elliott wave work over a longer period of time become convinced that it measures the structure of market sentiment. Long before Elliott, great traders like Jesse Livermore recognized the "three pushes to the top" and two back as something inherent in active markets. So did great theorists like Charles Dow.

The sentiment toward gold was all-encompassing bullishness in late 1979 and early 1980. I was trading in a Japanese firm in San Francisco at the time, and we used to stand in the trading room and cheer as gold went limit up ($25-50) each day. People lined up to buy gold coins, but they were also lining up to sell silver into the peak. I also remember buying incredibly wonderful complete sterling silverware lines for a few pennies on the dollar as some dealers went bankrupt in 1983-83, one of the few times my wife has been genuinely proud of me as a trader….;)

The sentiment now is much as I described on page one. Worn out, battered down, anesthetized, lethargic, comatose. There are still a few gold bugs out there, but they are so mainly in the sense of sticking to one's political party or religion through to the end, and largely without a sense of firm conviction.

Cocoa comes into this picture because its chart looks so much like gold's and because both of them and corn highlight what I think may be the ultimate reason why a bottom could be at hand, namely the Long Economic Wave of Kondratieff. (If you have never read Kondratrieff's most important paper, please take a look at it at my temporary Long Wave site: http://www.geocities.com/deuxsous/index.html. Go to the masthead bar, "Kondratrieff's Life and Works", and see the instructions, including password, for reading or downloading the short paper and its charts.)

As long term readers know, my interest in the Long Wave goes back to the 1960's. In recent years I have primarily discussed it as part of the overall background in my "Year End Review". If you have seen last year's "YER" , now available for downloading at the primary Tenorio Research website, you know that I have been looking for the bottom of the long downwave of Kondratieff possibly to have ended in 1998 (bonds) to 1999 (commodities).

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.

I decided, somewhat arbitrarily, that if GDP and the CRB Index, unemployment, and wage pressures continued through the second quarter of this year, I would be inclined to feel that the low was in. Although all the data are not yet in, nor the endless revisions, this week's second quarter GDP figure which knocked the stock market into a hat on Friday is compelling me to make the judgment that the Kondratieff wave downwave is OVER. If I am wrong, we have had or are having a last "late winter thaw" and a slide down into 2003-4.

This is not the time or place to get into the Long Wave in detail, but if interested you may want to explore the Long Wave site I gave you above, re-read the 1999 YER, or search the University of Colorado website (http://csf.colorado.edu/longwaves) under my name for a number of posts on the subject over the past 6-12 months.

If the Long Wave has bottomed, then in all probability so has gold. Before you jump up and down, if you are a surviving gold bug, let me hasten to add that this does not imply a raging bull market the day after tomorrow. If you remember or have studied the price action of the markets from 1946 to the last Long Wave low in 1949 and beyond, you will know that there were bull and bear markets for all commodities (excepting gold, of course, since it was "fixed" at the time) from 1949 until 1974-80, but the early years were only mildly inflationary (after 1950) until the 1960's.

I personally feel that the inflationary pressures will be greater in this cycle, but I cannot tell you yet whether that will be early or late. All I can tell you is that those pressures exist and will continue to exist.

A generalized outlook for markets in the upwave of any Kondratieff Long Wave is for higher GDP growth, higher wages, increased median family incomes, gradually increasing inflation, gradually increasing interest rates, a wilting dollar, and, oddly enough, a rising stock market. The stock market will become more schizophrenic in that it will have periodic inflation fear bear fits. Even though I believe stock market P/E levels will fall throughout the upwave, as happened in the comparable period of the Long Wave from 1896 to 1920, GDP and profits will grow faster for quite some time. I would not expect the annual increases seen in the recent downwave, but stocks will increasingly be a better place to be than bonds which will get destroyed. It will be a period for careful stock selection rather than index trading. You will want stocks which are either beneficiaries of inflation through their primary product (gold, lumber, real estate, etc.), or can easily raise prices and market share, or are unaffected by inflation.

Since gold's major competitor, the US dollar will be declining with inflation, gold's "exchange value" with the dollar will improve. The portion of one's portfolio which went to bonds and cash will now be better invested in gold and cash. Any cash will be best stored in very short term or demand deposits in dollars or in other stronger currencies. For US-based investors, Canadian dollar T bills or short term notes may be a good choice. It's possible that the EuroFX or Swiss franc will regain their allure of the last upwave cycle, but it is still too early to be sure of that.

Since the North American gold stocks universe is now thinner, African, Australian, and other strong markets will need to be examined. With gold stocks near all-time lows now, it's bottom fishing season. I will not be giving advice on stock picking as I am neither an investment advisor nor a gold stock analyst. Someone you should read is James Turk who has been through the cycle and knows what's good, bad, and ugly. (http://www.fgmr.com/) One conviction I have for my own portfolio is that I should balance it out with one of more of the poly-metallic stocks, such as the three on page two, to reduce volatility. Also holding gold bullion bars or coins is another way to do it. Although I will trade gold futures, I would not just trade "paper gold" any more than I would want to trade stock indexes to the exclusion of owning good individual stocks of all types. These are two very different categories of assets for different parts of an overall portfolio.

S&P 500

My sentiment measures (2C Centimeter and others) remain in bullish exuberance territory, so any bounce is suspect. Requirements for some sort of upmove starting Monday are: 1. either a gap up with a low above 1441 SPU0, or 2. a +/- unchanged to up open and higher close. Otherwise I'll stay short. (Long term I remain bullish, but I see weakness here.) I'm looking at the 7-11 August "Ganniversary" as a potential CIT time zone. Most likely a low unless we get a weak rally and send sentiment to the moon next week. The S&P COT numbers from Friday are downright scary, unless it's different this time.

30 July 2000

TENORIO RESEARCH LETTER © 2000 IS PUBLISHED BY TENORIO RESEARCH & TRADING, DR. THOMAS DRAKE, EDITOR.
Email: td@TenorioResearch.itgo.com
WebSite: http://TenorioResearch.itgo.com