A major impetus to the rise in precious metals would have been money coming out of the stock market during a crash since some of that money would be reinvested in gold and silver. In Elliot Wave Insights Part II, posted in September, it was stated that the Elliot Waves of the Dow Jones Industrial Average and the S&P 500 both showed that a "slow motion crash" was in progress, that it was likely to accelerate, and that the bottom was likely to be expected between mid-November and mid-January. In light of the comments of Ben Bernouke, who represents the Federal Reserve, it is possible that crash may not be completed as a direct result of the manipulation of the stock market by the U.S. government and their representatives. Here is a direct quote from Mr. Bernouke:
"Of course, in lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with the newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets."
Of course, this is a tacit admission that the Fed has already been manipulating the stock market. And this explains why the stock market rallied so sharply just before election time when President Bush and his administration were determined to have the Republicans gain control of Congress. While Elliot Waves can still be of assistance in a manipulated market, they are not nearly as reliable a guideline as when markets are operating under more natural circumstances. The question still remains whether or not the powers that be will sustain the stock market indefinitely or if they will drop it like a hot potato once they begin the war in Iraq. Imagine the newspaper headlines in the latter case: "Iraqi War Causes Market Crash".
The amount of money required to prevent a crash undoubtedly is enormous. Bernouke has gone on record that the Fed and Treasury are prepared to borrow and inflate the currency in an unlimited fashion in order to carry out their goals. The website The Public Debt to the Penny shows that public debt has gone ballistic since September just when the Elliot Waves showed that a crash was imminent. This shows that the Fed is pretty serious about carrying out this plan. More debt piled on top of the currently huge public debt and the inflation of the U.S. dollar via the printing press are both extremely damaging to the U.S. dollar, i.e. this policy is likely to cause the dollar to drop in value sharply. What is bad for the dollar is good for precious metals. While the Fed may theoretically be able to prevent a stock market crash, preventing a bull market in precious metals would be nigh on impossible without increasingly resorting to dirtier and dirtier tricks as the dollar sinks in value. The reserves of these metals have gradually been diminished in the manipulation game to the extent that it appears that very little silver remains above ground and those central banks which have gold left are tenaciously holding on to it and are unwilling to do more gold "leasing.
The Elliot Wave Count on the U.S. Dollar Chart
The U.S. dollar index shows it to be in the fifth sub-wave of the third wave since its peak in mid-2001. Strong resistance is to be expected when the third wave is completed around 96. After the fourth wave rebound, it should then proceed to near its all time low about 80. Considering the rapid expansion of the money supply, this fifth wave could possibly be extended and take the U.S. dollar index to a lower level than it has ever been. In all probability, however, the dollar will have a strong rebound around the 83 level. Keep an eye on precious metals at that point as it is likely to coincide with a major peak in both silver and gold. If so, be prepared to sell some of your precious metal holdings and wait until the dollar rebound has finished. After that rebound, a plunge into new lows for the dollar and higher highs for precious metals seems inevitable.
Why is the dollar in crisis, anyway? There are many factors. Here are a few:
One basic reason is the unbelievable level of debt in the United States of America. In America's Total Debt Report, author Michael Hodges reports that the total sum of government and private debt including contingent liability items amounts to approximately $49 trillion dollars or $177,000 on a per capita basis. The dollar, being a note and not a certificate for gold or silver or anything useful and tangible, is itself a liability. The M3 money supply currently amounts to some $8.5 trillion dollars (and rapidly expanding); you can add that amount to the total liabilities if America were ever to get back on a firm footing of an honest precious metals based monetary system. This brings the total liabilities to approximately $57.5 trillion dollars or about $207,000 per capita for every man, woman, and child including retirees and babies in diapers. To pay off debts requires either liquidating assets or saving money beyond what is needed for basic living expenses. How long do you think it would take the average American (including babies, students and retirees) to save $207,000? This would be difficult enough in a strong economy, but in a global depression? Clearly, this level of debt can never be repaid. The United States is a de facto bankrupt nation! There is only one way out of this situation: reduce the effective level of debt by inflating the currency.
Another reason for the dollar crisis is heavy investment in the U.S. by foreigners. When foreigners see the U.S dollar declining, compared to their own currencies, their U.S. dollar denominated investments are going down in value if they are remaining steady in dollar value. (Example: the sideways stock market) Hence, they are more likely to sell, resulting in a snowballing effect as larger and larger numbers bail out of the dollar.
A third reason for the dollar crisis is that most of the dollars (including Treasury debt paper) in existence are overseas and are held by nationals of other countries and their governments. As the dollar begins to fall seriously, how long will it be before they begin to exit the dollar en masse?
Finally, a fourth reason is the huge current account deficit. How much longer do you think it will be before the world figures out that all this U.S. government propaganda about dollar and economic strength is all done with smoke and mirrors? In fact, this has already begun. Inflows from foreign investors will soon stop and then reverse.
Make the Foreigners Pay
The current dollar policy of the Fed and the Treasury seems to be a variation of Teddy Roosevelt's foreign relations philosophy which was "Speak softly and carry a big stick." The Fed's and Treasury's is, "Speak loudly and carry a big stick." They speak loudly about U.S. dollar strength and the economic strength of the country while carrying a big stick to beat the dollar into smithereens. The idea has apparently been to run up the debt as high as possible, before the inevitable crash. So, while U.S. dollars, which are essentially IOU notes, have flowed overseas from America in a virtual tsunami, tangibles like commodities and finished products have flowed inward. The Americans have the tangibles, the foreigners have the IOUs. Now, the plan, apparently, is to keep the tribute flowing to the great American Empire by slashing the value of the IOUs by a half or more by devaluing the dollar. And when that is finished, they probably will slash it in half again and again. The solution to the crisis is just to stick it to the foreigners and make them pay. Like all empires of the past, the Anglo-American empire demands its tribute from its vassal governments and peoples.
Interestingly, the existence of this empire was foretold in the Bible. In the book of Revelation, "a seven headed wild beast" is pictured coming out of the sea of humankind. (Revelation 13:1) Beasts in Revelation and Daniel represent major empires particularly centered around the Middle East, Northern Africa and Southern Europe (Daniel 7:3-8,17; 8:3,5,20) The Apostle John plainly stated that the seven heads represented "seven kings". Five, he said, had already fallen (the Egyptian, Assyrian, Babylonian, Medo-Persian and Grecian empires), one existed at that time (the Roman Empire) and one was yet to come. (Revelation 17:10) With the advent of Christianity in the first century, the final empire would take on a truly global scope. The sixth empire gradually disintegrated and disappeared. The Western Roman Empire ceased to exist with the fall of Rome in 476 C.E. The Eastern Empire did not meet its final demise until the fall of Constantinople in 1453 C.E. A complementary prophecy in Daniel foretold three major kingdoms would become prominent as extensions of the sixth empire before the final emergence of the seventh. Those "three kings" were Spain, France and The Netherlands. (Daniel 7:20, 24. See Pay Attention to Daniel's Prophecy - www.watchtower.org/publications/publications_available.htm for more details.) Finally, with the Treaty of Paris signed in 1763, Great Britain made its appearance on the world scene as the seventh and last world power. It was later joined by a junior ally, the United States. During World War I, the United States became the dominant member of this dual world power. This alliance is still evident in the willingness of the British government to support the U.S. government's suppression of the gold price and in its desire to wage war with Iraq to gain control of its vast petroleum reserves.
The Elliot Wave Count of the Gold Charts
The gold market peaked in January 1980 and began a massive A-B-C correction with the C wave beginning in February 1996. As a basis for projecting gold's movements in the future, an examination of the gold chart during the declining years of the late 1990's shows the more or less "natural bottom" around $272 in August 1999. It was "natural" given the circumstances of the gold hedging and leasing that was going on. Prior to that time the gold chart shows an extension that inevitably occurs when the fifth wave breaks out of its trend channel to the down side. However, further extensions in a bear market are a very rare phenomenon and would only have been expected under natural circumstances if there had been a huge discovery of gold that was then coming into the market place. That "discovery" was the selling of central bank gold and the "leasing" of it at such low interest rates that no risk for an upward increase in the gold price was factored in. Clearly, the main purpose of suppressing the gold price was to foster credulity in the fiat money system.
As shown above, the "natural bottom" was about $272 dollars. For the purposes of forecasting the height of the third wave, both this bottom and the later actual bottom of $252 will be used.
Just after the Washington Agreement, gold spiked to about $339, completing Wave I. (In the U.S., the peak was only about $325, but what happens overseas counts, too.) After that initial peak, a great fall occurred taking the market back near its lowest point effectively making a double bottom which completed Wave II. Wave III has been underway since then, and recently through the autumn of 2002 a succession of peaks near the $330 mark were, in reality, a series of first and second waves, each pair one degree lower than the previous pair as illustrated on the chart below. Almost inevitably, the third sub-wave to the 4th or 5th degree affects a rapid breakout above the peak of Wave I, and this is what was witnessed in mid-December. The peak of Wave I (at $339) forms the natural "floor" below which Wave IV will not descend (unless somehow manipulated again!). Therefore probably gold will never be traded below this level again. A series of larger and larger third and fourth waves will be completed, in the coming months with each peak being higher than the previous one until Wave III is finished.
Typically, the expectations for a Wave III will be 1.618 times the percentage change in Wave I. Based on a move which is 1.618 times Wave I from its natural bottom at $272, an expectation for the third wave peak would be around $416. Using the actual bottom at $252, the third wave peak would be predicted to be around $465 or a little higher if projected off the low of $298 which is approximately a 0.618 retracement from $339 to $272. Since, all of the waves will be a reaction to previous waves until the previous absolute peak of $887 is broken (that is why trend lines work), looking at the gold chart from 1976 suggests that this latter figure is a pretty good estimate. Since a fourth wave is often a 61.8% retracement of the third wave and it will not breach the top of the first wave, this supplies another line of reasoning when estimating future market moves: A 61.8% retracement of the distance of sub-wave 3 of Wave III from $298 to $416 would take the price of gold back to about $343. So this perspective suggests that sub-wave 3 of Wave III may in fact peak around the lower figure of $416 before moving on with sub-wave 5 of Wave III that will peak near $465. I would love to see gold shoot up to $600 an ounce in 2003, but we may have to wait a bit longer to see that kind of lofty price in gold. Not to worry though, because Wave V is probably going to be the big one that ultimately takes the market to the $820 to $845 level. In a blow-out fifth wave, the length of the fifth wave may approximate 1.618 times the percentage move from the beginning of the first wave through the top of the third wave. A Wave III peak at $465, then a Wave IV trough to $350 followed by Wave V to $840 would approximate this pattern. The chart suggests that such a future for gold is probable. Based strictly on trend line analysis, the peak over $820 would not likely occur until several more years down the road. In fact, assuming that Wave III will peak in June 2003 at $465 and drawing a trend line from the peak of Wave I in October 1999, it would take another 11 years to reach $840! However, at some point, probably in Wave V, the gold market is likely to go into extension due to extreme dollar weakness and short covering. In that case the trend lines to the upside will be broken. This has already occurred in early 2002 when the trend line of the fifth sub-wave of sub-wave 1 of Wave III was broken to the upside. This not only resulted in a more rapid rise, but also a smaller sub-wave 2 of Wave III than would otherwise have been expected.
Some have predicted that the price of gold will go to $3000 an ounce. Indeed, if the value of the U.S. dollar fell to nothing, the price of gold in U.S. dollars would be infinite. This largely depends on the monetary policy of the U.S. government. Considering the enormous debts of the American populace, once the five wave sequence leading to the peak of $820 to $845 occurs, this may constitute a gigantic first wave that is part of a still larger five wave sequence that will ultimately lead to a fifth wave peak over $3000 per ounce. But, don't hold your breath. Such a move could potentially take many more years, perhaps even a couple of decades. Again, though, it is possible that an extension could result in this move much more quickly. Watch the dollar and U.S. government policies.
The Elliot Wave Count of the Silver Charts
Just a few brief comments about the silver market: In terms of Elliot Waves, silver is a very difficult market to read because it is such a small market and it is manipulated both upward and downward by government and private interests. Still, Elliot Wave analysis can be of some use. Silver is currently beginning an upward breakout. Although there will be relatively minor resistance just above its highs of 2002, I expect silver to hit the $7 mark in 2003. It seems that the disaster of 9-11 in 2001 caused a failed fifth wave on the large C wave of the A-B-C correction begun in 1998. The first wave that followed went into extension resulting than a higher than would be expected peak. Wave 2 went lower than the C wave and hit $4.00 intraday. Wave 3 went to $5.15 intraday and the Wave 4 was manipulated to lower than expected levels and would not ordinarily break below the peak of Wave 1. Wave 5 should approach but not break the highs of 1998, probably just touching $7.00 before retreating. See the charts below. Assuming that the silver chart continues to follow its general parabolic shape since 1980, by sometime in 2006, a Fibonacci number of years from its 1993 low should see some really big moves towards silver's all time high in 1980.
Most of the above is based on Elliot Wave analysis of gold and silver assuming that the market is following natural patterns. However, there are powerful interests manipulating both of these precious metal markets which could seriously alter the natural patterns. At this moment, those interests are fighting to keep gold from exceeding $355 per ounce and silver from exceeding $4.83 per ounce. In fact, the New York close of silver for the last three market days of last week was exactly $4.83. Those manipulators will eventually lose control. It will be interesting to see just how long that takes.
Elliot Wave Insights Part IV will discuss evidence that a roughly six thousand year cycle was been completed in 2000 and its implications for the future.
Denis P. Bouchard
Taiwan, 16 January 2003
Elliott Wave Insights - Part I (http://www.gold-eagle.com/editorials_02/bouchard081402.html)
Elliott Wave Insights - Part II (http://www.gold-eagle.com/editorials_02/bouchard092602.html)
All charts in this essay modified from those appearing at The Privateer.
