Dr. Clive Roffey
Bullion has broken above the critical $355 level. The recent period of indecision formed the right shoulder of a reverse head and shoulders pattern that gives a short term upside count to $395.
In this issue I detail my Elliott wave analysis of the long term gold market. The future prospects are frightening. Despite the positive sentiment in the US equity markets the long term relative strength pictures still totally favour the precious metals and their stocks.
I remain convinced that we are not going to see a typical inflationary or deflationary environment but one of stagflation. I am looking for stagnant economic growth, not massively declining growth, coupled with inflation in which the cost of goods become more expensive. This scenario is already giving minor signals. The commodity markets are indicating that they are looking for a substantial bull run. To me this implies two things.
First, the flight from the promissory notes that are paper assets, equities, bonds and currency has begun. Investors will in future seek more tangible assets. Second the potentially large rise in metal prices implies a falling dollar rather than increased industrial usage. The commodity bull cycle is usually the last to move after stocks, bonds and currencies have run their course.
How many times have I detailed silver stocks? Most of the silver plays have appreciated 100% since their March lows. In the short term they may be a little overbought but it is not time to sell. There is a lot more still to come.
About 18 months ago I went bearish on platinum stocks, and from subsequent performance this was a correct decision. In South Africa I have my own TV programme every Wednesday evening and two weeks ago I changed my stance on platinum stocks to bullish.
In a nutshell I am extremely bullish on all precious metal stocks. But at this point of time prefer the undervalued and to some extent ignored gold stocks. The laggard of the whole gold market has been Durban Deep. But I have been buying bucket loads of this undervalued stock at the crazily low prices. I am expecting a real recovery surge from DROOY in the near future.
I am watching the Dow for any signs of a break under 9000. It touched this critical support last week and bounced back to the top of its range at 9350. These two chart values are exceptionally important. Above 9350 could see a continuation of the rally for another 500 points but a move under 9000 will trigger an attack on the previous 7000 lows. Watch the Dow.
Long Term Gold Analysis.
For a long time I have been concerned about the commonly accepted Elliot Wave format of the gold price in which the 1974 to 1976 correction was notated as the 1-2 and the current correction from 1980 to 2001 labelled the 3-4 as shown in the chart below.
It is most unusual to have a twenty one year bear market after a two year correction. Under normal circumstances the correction from 1980 should have lasted a maximum of five years, not twenty one.
In addition the uncontrolled euphoria during the last six months of 1979 that accompanied gold’s move from $300 up to its peak at $850 in January 1980 was more in keeping with a classic fifth wave climactic blow off rather than the end of a minor thrust wave.
As I pondered this anomaly I realized that the 1980 corrective move must be a higher wave order than the 1974 correction and so I started delving into long term gold prices. I found the answer.
Going back to 1833 I noted that when plotted on a semi-log scale the price data revealed several thrusts and corrections that were more in keeping with the time frames of recent moves.
For a century from 1833 to 1930 the gold price was stable at $20.66. In 1931 the price dipped to its century low of $17.06. This was the bottom point of the previous market. The price doubled in the ensuing three years to trade at $34.70 in 1934. This became the first upward move 1 of a new huge gold bull market. A five year bear market followed and the price dipped to its low of $31.69 in 1939. This was the first corrective wave 1-2 of the big bull market.
From 1940 to 1968 the gold price was effectively fixed at $35 until the price rallied to $41 in 1969. This move marked the minor first minor up leg 1 of the big extended wave 3. The short two year hiccup back to test $35.95 in 1970 completed the minor 1-2 of big wave 3.
The recent history of the gold bull market commenced. But the key factor is that the 1974 correction back to 1976 was not a major move but the minor 3-4 leg of big wave 3. The final euphoric thrust of bullion to its $852 peak in January 1980 was a typical fifth wave blow off and signalled the end of big wave 3. As we all know, the past 21 years have been bearish for bullion. This does not fit with a minor corrective wave but is clearly a major correction.
If we remove from the chart the non trading period from 1940 to 1968 when the gold price was artificially fixed the argument for the extended third wave from 2 to 3 becomes even more pronounced.
In addition the first major correction from 1 -2 and the second major correction from 3 – 4 become more in time focus.
The implication from this analysis is that the correction to the big wave 3 is complete and we have only just started the big wave 5. If Elliott analysis is to be believed this upward thrust MUST take the bullion price well above the $850 level of the previous 1980 peak of big wave 3.
I must conclude that we have already started the final fifth major bull market since 1931 that should see the gold price move well above the previous $850 peak.
One of the other interesting aspects of the gold price is the wedge formation of the 21 year correction. There is a serious overhead resistance at $430. Should the gold price move above this resistance then it would confirm the new long term major bull market that the gold stocks have already indicated is in motion.
The final fifth wave is also likely to split into five smaller sub waves. This implies that the ultimate peak for bullion could well be five or eight years away. Very simply gold shares are an INVESTMENT.
I am well aware of the dictum that gold shares are for trading. What should actually be stated is that bear markets are for trading and bull markets for investing. As gold is in a long term bull market I maintain that gold and silver stocks are LONG TERM investments.
Dr. Clive Roffey
chartist@global.co.za
www.shareaction.co.za
August 15 2003
Technical Analysis Course : www.charts.co.za
Website analysis : www.utm.co.za
Email : chartist@hotmail.com
Gold Action is a fortnightly commentary on global gold markets produced
by Dr. Clive Roffey who has been a leading independent commentator on
gold markets since 1969.
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