Gold ready to explode?
In previous articles I have described the powerful base pattern in which the gold price has been trading for the past three years. It is time to update and review the situation.
1. In technical terms there is a huge base formation. But in addition there is the classic falling wedge pattern to which I have drawn your attention on several occasions. The gold price, as expected, catapulted out off the $252 base and out of this pattern to test the $290 level in late May, but has since consolidated by pulling back to test the $265 support level.
2. Following the burst up to $291 the gold price mapped out a clear triangular pattern with a solid support level at $265.
3. A week ago it suddenly catapulted off this base to $281 and then reacted back to $270,05, which just happens to be the 61,8% Fibonacci retracement level.
4. This implies that bullion is ready for the next upward surge in the very near future.
But the future of bullion, as far as I am concerned is inextricably linked to the fortunes of the dollar that for the past 20 years has replaced bullion as the asset of last resort. The dollar in turn is umbilically tied to the fortunes of Wall St. as the indicator of the health of the US economy. So let's look at them.
Elliott wave analysis is an extremely contentious subject. This data shows my interpretation of the Elliott configuration plus projections based upon all my other oscillator work. Effectively the Dow is a disaster waiting to happen. The Wednesday's August 29th smash under the critical 10 200 support area will have every chartist on the planet in bearish hysterics as this was a huge support level at which buyers had continuously found value. This has gone, for good!
But the most dangerous aspect of this analysis is the fact that in Elliott we have just entered the third downward leg, and that is usually both the longest and most dramatic. I am expecting a three month 2000 point sell off in the Dow to take it down to the lower 8 000 level. After this slump I expect a reaction from an oversold level, probably as we enter the New Year, after which I must look for a final sell off right back to the major support level at the 7 500 mark.
What is devastating for the Dow can only be good for gold as it implies a total lack of confidence in both the prospects for early an economic recovery plus a flight from paper as the overly optimistic US commentators realise that the anticipated U, V or even W recoveries were just pipe dreams. Greenspan will, I predict, be pariahed as the scapegoat.
The above chart is the dollar against the Swiss Franc. Whereas it is common to compare the dollar against the Euro I prefer to look at the Swiss Franc. Chartwise there is a major sell divergence for the dollar against the SF. Why should the SF suddenly outgun the dollar? It is not an economic powerhouse such as the ECU nor is it an internationally commercial currency. But it is, despite all the opinions to the contrary, still backed by substantial gold holdings.
Yes, the strength of the SF is more a function of dollar weakness, but why is there a move out of the greenback into the neutral mountain domain? Very simply it is a reflection of flight away from the US economy.
Back to gold. I am more than happy that the recent data on the dollar coupled with the impending demise of Wall St. are more than adequate portents that will not only offset any minor short selling but also serve to discourage those who remain negative on the yellow metal from taking any seriously negative action.
All my data points to a significant bull market in gold bullion and the associated shares. I am looking for an attack on $300 in the near future with a run to test the major overhead resistance at $320 by the end of the year.
Dr Clive Roffey
chartist@mweb.co.za
31 August 2001
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