Elastic Bands & Fibonacci Principle Of Equality
"CAPTAINHOOK"
The purpose of this essay is to provide the average investor some insights into what is happening inside the gold market at present. My basic philosophy in life is to try and keep things as simple as possible. Along with that basic premise, I endeavour to 'not lose sight of the forest for the trees', or in other words, maintain a wide view. When you put the two together, you get the KISS approach, 'keep it simple stupid ' - as it pertains to problem solving, outlook, and behaviour. I find the KISS approach has served me well throughout my life.
So, what does this have to do with elastic bands? Well, it's important to understand that markets are very complex things. And as I stated above, I like to reduce complex matters to their simplest form whenever I can. Why are markets complex? They are complex because they are a refection of numerous factors and influences, which come together to produce a price reaction, to the net result of the aforementioned. Further to this understanding, the sum result that all of the various factors and influence produce on price movements have on going characteristics, which seem to have some basis in mathematics and physics, whilst being married to human emotion, at the same time.
Wait a minute here, now you're starting to sound complicated and confusing. Didn't you say that your basic philosophy in life was to keep things as simple as possible? Well, unfortunately that was probably the simplest manner of describing how markets really work, while still encompassing the totality of their inner characteristics. That's all fine and dandy, but why do I even want to think about this stuff, in the first place?
The simple answer to that question is that if one can come to even a rudimentary understanding of the inner workings of markets, this knowledge will help you become a better investor, and make you money. Uh, that's a really good reason, no?
So, now that I have your full attention, let's step up the complexity of this discussion for a minute again, before we put things together for you, in a simple and easily understandable format, as it pertains to the inner workings of markets. As I alluded to above, price movements in markets are a result of numerous complex factors and influences, the least of which not being human emotion, that come together to produce a net outcome in degree and duration within an ongoing trend, and seem to have some basis in mathematics and physics. In this regard, Fibonacci's work has rightfully been deemed the definitive purveyor of bringing together a quantifiable understanding of how prices will react to all of the various factors and influences affecting market behaviour, including human emotion. A good understanding of the entirety of his genius can be found at the following link. www.mcs.surrey.ac.uk/Personal/R.Knott/Fibonacci/fib.html
In maintaining the primary purpose of this essay, we will not delve into the complex workings of Fibonacci's full spectrum mathematical relationships outlined in the above. On the contrary, we are only going to deal with two of his numbers that should be very familiar to you, 0 and 1. The first number, 0, is very easy to deal with in the basic sense that we are going to discard it, because we will assume that every action, as it pertains to price movements in markets, is going to have a reaction, and that reaction is going to be at least equal to the initial action, mathematically represented by the number one.
Now that we have established the premis of this discussion, it's time to get to the heart of the matter, and why you are viewing this essay in the first place, i.e. the gold market.
The combined factors and influences in the gold market have come together over the past 23-years to produce a 21-year bear market, the latter a Fibonacci number by the way, to be followed by a bottoming and initialization of a bull market, over the past two years. The gold market's entire 23-year price history may be viewed at the following link, and I will bring you back to this chart later. www.gold-eagle.com/charts/35yeargold.html
To start our simple, but in-depth examination, into how we can use the wonderful concepts Fibonnaci provided to predict the impeding price reaction to the gold market's 21-year bear market, let us first look what has happened over the past ten years. The chart below provides you with a very basic assumptive proposition. If we assume that over the past ten years that gold 's equilibrium price was $400, you get what is termed amongst professional traders a 'swing line' -- and once this line is penetrated, subsequently held in trade for a considerable period, and then pulled away from, traders then assume that the future trend, both short and long, lie in favour of that trend.
For expediency purposes, I am not going to cover technical backdrop of gold's fall through the $400 level, other than to note that it fell approximately $150, rather I am going to focus on the implications of it's penetration through this level to the upside. If we take the $150 drop in the price of gold from 1996 to 1999, and apply the Fibonacci principle that at the least, an equal reaction will be experienced once we surpass the $400 watermark, we get a price projection target of US$550.
Consistent with the title of this essay, and with a view to my KISS focus for those who are not technically inclined, one should think of the above chart as a 'rubber band'. Now think of that rubber band being stretched to it's maximum tolerance to the downside, and what would be the resulting (opposite) reaction to it's release. Based on Fibonacci's primary principle, it would result in a reaction of one, or in dollar terms $150. On this basis, and depicted superbly in the perfectly symmetrical gold bowl plotted over the past seven years or so, one would then have to expect that the price of gold is heading to no less than the $550 mark.
The following chart is a plausible path for gold with regard to achieving the intermediate term target per our TA rationale.
You may be saying to yourself that this guy is assuming an awful lot tagging the swing line at $400. But I do not think so as it is a very important psychological level. It is imperative to remember that the $400 watermark may be penetrated, with considerable consolidation taking place back below this level, and not hurt the bull case whatsoever, as this is a long-term process. As well, you may also be saying to yourself all this theory is one thing, but what is going to cause this to happen? After all, this is going to make a lot of very powerful people quite unhappy. The best answer I can give to that question is
'maybe those people aren't as powerful as you think anymore.'
Who am I referring to? Why the good old US of A of course, and it's global dominance of the currency markets. Presently, the US dollar still comprises upwards of 60% of all foreign currency reserves in the world. How much longer can this kind of imbalance continue, considering that at best the US represents only 25% of the global economy? Well, in actuality, it looks like that dominance has already ended. In fact US greenback dominance is getting ready to really fall off it's rails, which will initiate an equal reaction to the downside…thus bursting the bubble created in the ill conceived move from the 100 area up to 120, basis US Dollar Index.
Indeed, just a cursory glance of the above should suggest to the observer that the laws of gravity is bearing down on the dollar. Consequently and per Fibonacci theory the least reaction one can expect will bring the dollar crashing down to the 80 level in the coming year(s).
Again, I've put a lot of information out that in reality may appear to have no basis in fact. I offer the following chart as absolute proof that I am on to something very real here.
Is a picture worth a 1,000 words? I believe the above chart speaks volumes regarding the thesis behind this essay. It is very easy to observe the action - gold's move below $317 all the way down to $255 - and the equal reaction - gold's relatively swift ascent up to $379, once the move above the swing line had been sufficiently tested. If historical gold action is prologue to its future trend, I believe we will see the same type of price action associated with gold's penetration of the $400 mark. However, we won't know until later, if $400 was even the real swing line associated with this leg of the move to far higher prices, as it may very well really be $375ish, but I think it is sufficient to say that we are on the right track here.
This begs the question, "How is this going to help us predict realistic future price levels, once gold passes the $550 target? Remember I mentioned earlier that I was going to bring you back to the 33-year gold chart. Well, now is that time. Go ahead and take a quick look if you need to jog your memory. Then cast your eyes on the following representation of what the Fibonacci principle of 'one' - a price action is met with an equal price reaction -- holds in store for long-term gold investors.
Notice that the price of gold is in all likelihood going to form a bowl at $850 - the 1980 high -- over the next five years or so, with the implication being an eventual ascent to the $1,445/oz, which would equal the price difference from top to bottom over the 21-year bear market. As well, notice that the likely duration of this bull market in gold should likewise be 21-years (a 1:1 ratio), with the possibility of gold reaching an ultimate price target of $3,000, which is hypothesized by one very intelligent, veteran investor, Richard Russell, as being the likely point at some time in the future that the Dow/Gold Ratio will be 1:1, as it was in 1980 when the two crossed at the 850 level.
Enough 'ones' for you? Well, we can dream certainly, because in fact, and based on the primary hypothesis of this essay, we certainly cannot count on gold getting all the way up to $3,000, but we can certainly hope. Perhaps the most reasonable expectation is that gold and the Dow meet at ~1500, as we know that based on the premise of this essay, we have a very good chance of that occurring, sometime over the next 19 years.
No?
Good investing all.
CAPTAINHOOK
25 March 2003
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