The bearish view presupposes the end of a 2-year B-wave and is now descending into a multi-year C-wave move to finally finish this gold famine (for more details see my previous article). Indeed, in one of their later updates, EWI predicted some weeks back that we were now in the third wave of a third wave which is most bearish for gold (I am not sure where EWI get their gold charts from, they seem to be based on futures prices rather than spot price). As it happens, their proposed 3rd of 3rd has been invalidated on the latest spot chart. Who said Elliott Wave soothsaying was easy?
In contra-distinction, my bullish view is a multi-month corrective wave 2 to the two-year cycle 1 wave completed in February. This tends to be a short correction in long-term commodity bull markets and the original projected time for it was at least four to five months.
Since sub wave A of our wave 2 has turned out to be impulsive, we can confidently classify this as a zigzag A-B-C correction [1]. The one question is whether we have now finished a B-wave move from $322 to $375 or not. Since a B-wave is corrective in nature we would expect to see a three-wave formation embedded within it. This is not easy to see; therefore it is possible that we may currently be at the end of the wave b of B (which has retraced a near fibonacci 62% as of 28th June).
The other possibility is that we have indeed finished wave B in late May (as shown on the chart) and are finishing of the whole correction with a final wave C down to around the lows of April. The trouble with this interpretation is that the downward wave lacks an impulsive formation. However, there is a 1 in 5 chance that if this is a wave C, it could be an ending diagonal [2]. In that case, completion of the entire 6 month correction is only weeks away. However, we shall lean slightly towards the incomplete B-wave scenario and watch how prices develop over the next month or two.
At this stage in the game, the bearish 1-2 wave shown is pretty much alike to the corrective A-B wave since wave A and 1 can both be impulsive and waves B and 2 are both corrective. So, no one can claim the pre-eminence on that score. But are there any other aspects we can look at to decide which way this market is going? There are in fact two Elliott approaches to this. The first is to look at the historical data for wave behaviour in commodity bull and bear markets over the years [3].
Here a couple of points can be made about the recent $53 B-wave move. So far, we have seen this wave B (or the bear's wave 2) retrace almost exactly 80% of the previous A wave (or bear's wave 1). Now, looking at the historical data, if we presume this is a long-term bull market, then the 80% retracement is the fourth most common retracement for a B-wave (behind 38%, 50% and 62%). In the case of the proposed long term bear market, 80% is the sixth most common retracement for wave 2 of a downward impulse wave.
Moreover, when one compares the frequency of the 80% retracements between long term rising and long term falling commodity markets, the bull case is significantly more common than the bear case. Indeed, 80% retracements are about three times more frequent for bull markets than bears (as indeed are general retracements above 50%). Therefore, the statistical conclusion is that 80% B-wave retracements speak of bull-market territory.
It can be added that common sense dictates that this ought to be the case. If one is in a long-term bull market, then corrections in general are "fighting" against a more powerful upward trend whilst corrections in bear markets are fighting against a more powerful downward trend.
As an aside, what about our recent A-wave down from $389 to $322 in term of commodity bull markets? As it turns out, it was a perfect 50% retracement of the two-year bull (a $67 drop from a $134 rise). This is the second most common retracement in a commodity bull market, so we are right on course in terms of previous historical data for A-waves as well.
Confident that such large retracements are more a feature of bull than bear markets, we look at the second approach, which is comparing Elliott Wave patterns between like markets. Which markets has been most closely mirroring the price action of gold in the last two years? The tactic here is to compare patterns in highly and positively correlated markets to see if there is a consensus on the overall price movement.
One obvious answer is the XAU and HUI gold equity indices, which are both going through a large corrective phase too. But analysing these offers no further clues as to future price movement because they are following the same wave pattern as the metal. But one area does offer an intriguing insight and that is the CRB index. Gold is a commodity as well as money, and it comes as no surprise that the CRB index has been following a similar two year bull market as gold since late 2001 (gold forms 6% of the CRB index and has equal weighting with all the other components).
Looking at the graph below reveals that the corresponding drop in the index from 252 to 228 is most likely a zigzag A wave in contrast to the impulsive A wave of gold. What does this mean? It means that commodities are still in a bull market because a corrective wave cannot form the first wave of a larger downward impulse wave! It can only mean that we are in a corrective pattern that will end with the resumption of the inflationary commodity bull market. Since it is most unlikely that we could have a bull market in commodities but a bear market in gold, this implies that our recent gold moves are also short-term corrective but long-term bullish.
As can be seen from the chart, it looks like the CRB index is about to finalise its C-wave in a month or so. This influences the interpretation of the gold chart to suggest it too may be in a final C-wave [4].
So, armed with these consolations, how do I see the gold market over the next few months? In my previous article, I suggested that a four to five month correction was a likely scenario. That would take us out to July, which is still possible if we are in the final C wave - but I have stated my reservations. In a zigzag correction such as we have seen since February, the C-wave tends to be impulsive with the small chance of being an ending diagonal. The most common price target is 75% of wave A and about 150% of wave B, but there are other targets of decreasing probability. Time wise, wave C tends to be around the same time as wave A and 200% to 300% of wave B.
Using the A-wave data and assuming the B-wave does not exceed its recent high projects a final corrective price of about $327. However, it is likely that the 50% fibonacci retracement may pull this final number down to match the previous A wave drop to $322. A further retracement down to the 62% level of $306 is also a possibility.
In terms of time projection, we are in more uncertain territory since wave B may not yet be complete. But a projection into mid-September for the end of the correction would be appropriate. If wave B has finished, my original projection into late July would hold.
So, we stand in the final endgame of the bull-bear gold debate. I can expect further drops in the price of gold whatever camp one is in. But if gold rallies and breaches $375 again, the bearish interpretation is invalidated and the bull is looking good.
Breach $390 again and the bull is firmly out of its temporary stalls!
Roland Watson
tiny@cogitate.freeserve.co.uk
9 July 2003
FOOTNOTES
- A zigzag is what we normally call a 5-3-5 wave. That is, two five wave impulses sandwiching a 3-wave correction wave.
- An ending diagonal is a contracting pattern of 5 waves - each of a 3-wave corrective nature.
- Historical data provided courtesy of Richard Swannell at Elliott Wave Research.
- Note that the CRB C-wave could yet be a 3-wave formation that would suggest a contracting triangle with a further D and E wave to follow. This is not likely with Gold since wave A was impulsive.
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