Dr. Clive RoffeyI find it most incongruous that global markets are being knocked on fears of US inflation and yet gold is supposed to be the hedge against inflation. We are back into the realms of stupidity once again.
The chart of gold bullion has several features that need to be analysed.
- The MACD in the top frame and RSI in the bottom frame have both mapped out classic reverse divergence buy signals as their current lows are well under the low at L1 yet the metal price is nowhere near to making a new low. This is a major buy signal and signifies a continuing BULL trend.
- The price has pulled back to the support level and has effectively wiped out the whole of the previous upside move. This is a classic Elliott Wave correction.
- On Wednesday there was a gap on the downside that has all the hallmarks of an Exhaustion gap.
- The price mapped out a falling wedge pattern that fell under the lower trend. Such spike sell offs are normally precursors to a major trend reversal.
- In my long term Elliott Wave analysis of the gold price this was the 7-8 correction in a nine wave extended bull run.
- The next leg up to wave nine will be the final move in this period of the bull market.
- It should take the price well above the previous $735 high and well into the $800's before wave 9 is complete. My upside targets for HAR at R205 and DRD at R21 remain intact.
There are two possible Elliott interpretations that I believe have credence. The first is my original and consistent nine wave format of which we have just finished the 7-8 wave correction and are now ready to surge through to the final wave 9.
The second interpretation is almost the same as the one above except the wave count displays the classic five wave format and not the extended nine wave pattern. It makes very little difference to the overall interpretation except for the current 3-4 correction format. It is not usual to have such a sudden drop in price as a full correction. In his case there is an implication that the sudden drop in the current correction may be the first overstated sell off leg of a triangular pattern. That is why I have marked the wave 4 with a question mark. It is merely the speed of the next move that will be affected, not the final outcome.
Note that there was no sell divergence on the RSI. It made new highs with the metal price indicating a stable bull trend.
If the triangular pattern occurs it will extend the time frame for the true start of the next bull run to really pick up speed and move into the final peak, probably through to the second quarter of next year.
There are some distinct signs that will determine which of the Elliot configurations is correct.
If the nine wave extension is correct then the gold price will reverse sharply and push straight back to attack the previous $725 high. But if the triangular pattern is correct there will be an extension of the time frame.
If the triangular pattern is correct then the maximum upside move by the gold price to point X, the first peak inside the triangle, will be 61.8% of the fall from $725 down to $542. This was a fall of $183 and 61.8% of this gives $113. The peak at X will be $542 + $113 for a target of $655. This is the key value.
If the price pushes well above $655 we can expect the nine wave picture to dominate and a very strong bull run to the final top will take place, probably before the end of this year.
But if the gold price stalls at $655 and drops back to around $590 then the triangular pattern is more likely. This will extend the time expectation for the ultimate top of this bull run into the second quarter of 2007.
The final price objective will remain the same, irrespective of the Elliott configuration. If the nine wave picture is correct then bullion should peak by the end of this year. But if the triangle materialises then I expect the final peak to be pushed back to the second quarter of next year. Watch the $655 level as the key indicator of this variation.
However the share data clearly lines up with the nine wave strong format for bullion and not the triangular possibility.
All the gold shares have completed classic Elliott corrections. Anglogold did the Zig-Zag, DRD the flat top, Goldfields the Irregular Top and Harmony the triangle. The shares are ridiculously under priced on chart levels relative both to bullion in dollars and Rands and have to play some serious catch up.
I have constantly detailed that the shares MUST go well above their wave I May 2002 peaks before this current bull trend can end. This implies some huge moves on the share prices that are still well under their previous May 2002 peaks.
I cannot see these strong share price moves being achieved if the gold price triangulates. The only factor that could cause this would be a dramatically falling Rand.
When I look at the lagging data on the shares and the levels to which they must go before the end of the current bull market I have to consider the nine wave picture for bullion as the most likely event.
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Dr. Clive Roffey
16 June 2006
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