first majestic silver

Elliott Wave Gold Math

July 1, 2005

Many readers might neither be familiar with Elliott Wave principles in technical analysis of chart reading, nor accept those principles as working guidelines. In a recent work "Commodity Bull Resumption" a series of events was described which can credibly lay out the end of the great 2005 gold long-term correction, and the beginning of the next great gold bull market major upleg. The long-term price pattern has changed, to herald the next phase. The sequence began with the short cover rally in General Motors stock shares, certainly an important signal from hedge funds, who probably sold the crappola out of the gold sector to cover margin calls and investor redemptions. The sequence ended with US Treasury Bonds selling off in a somewhat minor fashion, the euro currency faltering, and gold rising (led by Europe).

Not to my surprise, many who claimed gold would rise with a continued US$ driver mechanism have been proved wrong. When the only gold bull is in US$ denomination, sure, that is the case. The decoupling of gold from the euro is clear as day. Other factors are taking center stage, not the least being trade war. Asians have withdrawn support for the US Treasury securities generally, despite what you hear from the clueless cast of financial anchors in the media. In "Three Great Big Lies" you can see the evidence. In this next gold bull phase, the USDollar will not be the principal power force. The single horse pulling the gold cart can now yield the way to a team of fresh horses, much like the Pony Express transferring the mailbag to a 4-horse team in a Powerful Stagecoach. My analysis has focused upon the dismantlement of the Petro-Dollar, rising Asian trade war, and a gradual break in the USTBond support worldwide, not just the USDollar link to gold.

Gold is poised to vault to very serious new heights, as measured in US$ per ounce, maybe even nosebleed heights. In the past year, on a few occasions my pen has scribed how the inflation machinery in the United States is operating in reverse gear, how secular deflation is a powerful force, fully imported from Asia to the USA, how the USTBond bull has so many best friends (aka Bond Amigos) in the financial markets. However, major changes in the golden winds have shifted in the last several weeks. The key event was the multiple NO votes on European political power proposed for concentration in Brussels, sure to hear more NO votes in the continental chorus. The rejection opens the door for simultaneous monetary inflation, currency debasement, and lost confidence in all things money. BIGTIME DEBASEMENT, AS IN WORLDWIDE!!! These developments favor gold. The impact is all the more momentous and significant since now all three major continents are in MAJOR LEAGUE INFLATION MODE. The resistance by Europeans to destroy their currency had lifted since 2001 their euro currency as a proposed strong alternative to the USDollar and competitor against gold, with ample liquidity to boot. That has changed, as the Eurozone is the first battle-scarred victim in the currency war. The United States exported to Europe an overvalued currency, a sitting duck across the FOREX pond.

My focus here is on long-term projections for the gold metal price, the HUI goldbug stock index, and the flagship Newmont Mining stock price. The conditions are finally coming in line, the pieces falling into place, the pipeline pressures being felt, the conflicts aligning with opposition forces. The gold price is heading toward $700 in the next major upleg. It will take time though. A consensus has formed that the gold price has endured a major correction on its chart. Sentiment in all things gold was rock bottom a few weeks ago, a certain requirement. Confirmation comes with the expected debasement event on the euro currency and advent of trade war. This is critically important, since the euro has competed with gold as a safe haven alternative to the USDollar. The euro trading has 8 times the liquidity as gold, at $8.6 trillion annually on the FOREX versus $1.0 trillion in gold. The two NO votes so far in France and the Netherlands have indicated numerous additional NO votes among member nations for consolidated European Union political power. The billboards announce an invitation for investors to flee the false reserve currency into gold. The euro has advantages, which are fully discussed for my private readers.

On the North American continent, the end of the US Federal Reserve tightening is close. The number of future rate hikes depends upon Chairman Greenspan's personal stupidity, utter financial recklessness, and professional ineptitude. His state of confusion is the only clear perception. Conundrum, shanundrum! An inverted yield curve means many things, clearly outlined in my newsletter. On the Asian front, the dominant player is clearly China. The brewing trade war covers all three continents, but the focus is clearly between the USA and China. Textiles weave a nasty fabric across the world's three major continents, with a certain hemline of resentment. The protectionist winds serve as a punctuation mark on the euro-gold foundation. Protectionist winds are blowing, expansion is strained, and a mounting trade war is in early development stages, even as the October deadline for a yuan regime dismantlement hangs over the warring parties. These euro issues, USFed issues, Asian trade war battles, and other gold factors are fully discussed and analyzed in my Hat Trick Letter issues, issued in midmonth.

BULLION, THE GOLD METAL PRICE

Grant some liberty here on the declared Elliott Wave impulse minor leg identification. This is hardly an exact science, loaded with disagreement, dispute, debate, and artistry. My concern is more with the general picture among the three charts than a single one. In early 2001, gold put in a low of 265, although the continuous contract chart built in a slight premium at the time, over the cash market gold price. In December 2004, gold registered a high of 456. My forecast stated at a Chicago gold conference in Oct2004 was 455, in friendly opposition to Jim Turk's 485 forecasted target (and plenty of witnesses). That means we had a 190 point rise in the major Elliott Wave #1 upleg. Typically, the EW3 third upleg is 50% to 60% larger than the EW1 upleg. That translates to 285 to 305 points of potential power in the virtuous major EW3 upleg, to a level bounded by 700 to 720 per ounce. Let it be known that the textbook three impulse moves up seem more like five here over the past three years. Let's not quibble, and instead employ some pro-forma asterisks in honor of gold cartel ambushes. The textbook two impulse moves down might have been completed, unsure actually. The 415 level might prove to be the starting point for the major EW3 wave. Its start might instead turn out to be in the 390 to 400 range. Regardless, the next major upleg is foretold by the following charts related to stocks, which are much clearer along textbook lines. We appear to be headed to a 700 gold price in US$ terms in the future.

HUI, THE GOLDBUG MINER INDEX

In late 2000, the newborn Goldbug Unhedged Index HUI put in a low of 40. In December 2003, the HUI registered a high of 250. That means we had a 210 point rise in the major Elliott Wave #1 upleg. Typically, the EW3 third upleg is 50% to 60% larger than the EW1 upleg. That translates to 315 to 335 points of potential power in the virtuous major EW3 upleg, to a level bounded by 495 and 515 in the index. The textbook three impulse moves up have been loosely conformed to the rules, seen over the past three years. The textbook two impulse moves down seem to have been completed in rather clear form. The 180 level might prove to be the starting point for the major EW3 wave, since it has survived a retest. Regardless, we appear to be headed to 500 in the future, according the Elliott Wave guidelines. Profits in miner stocks will be obscene.

NEWMONT, THE GOLD STOCK FLAGSHIP

In late 2000 Newmont Mining, the largest among the HUI indexed member stocks, put in a low of 14. In December 2003, the NEM share price registered a high of 48. That means we had a 34 point rise in the major Elliott Wave #1 upleg. Typically, the EW3 third upleg is 50% to 60% larger than the EW1 upleg. That translates to 51 to 55 points of potential power in the virtuous major EW3 upleg, to a level bounded by 88 and 92 in the index. The textbook three impulse moves up have been loosely conformed to the rules, seen over the past three years. The textbook two impulse moves down seem to have been completed in rather clear form. The 37 level might prove to be the starting point for the major EW3 wave, since it has survived a retest. Regardless, we appear to be headed to 90 per share in the future. According the Elliott Wave guidelines, profits in the gold miner flagship stock will be obscene.

START, MOMENTUM, DURATION

Initial triggers are cited above, in euro debasement, in the end of USFed tightening cycle, and in growing trade war. The wild card is rising price inflation on a systemic level, evident even in the goofy Consumer Price Index. The CPI stands as a widely rejected insult to intelligence, despite its usage to adjust statistics for inflation. By the way, crude oil in 1975 was not the same as $80 in inflation adjusted terms, but more like $120 per barrel.One cannot dismiss the legitimacy of the CPI, yet claim to use it in headline calculations. Costs are gradually being passed along by producers, suppliers, and service providers. Material costs, scrap costs, insurance costs, energy costs, shipping costs, health care costs, these are all on the upswing and are straining businesses across the entire economic spectrum. The corporations are flush with cash. The wealthy households are flush with cash. Higher prices are slowly being passed along, which only the strained individuals cannot pay. Those people will be pushed aside.

It is possible that the kickoff of this grand resumption of the gold bull market will suffer a restart at the starter gate. The USFed might mindlessly keep raising rates to kill off the US Economy, as Greenspan's final chapter is written as Secretary of Inflation, in true monetary drug dealer fashion. He might kick the debt drug addict in the teeth more than two more times. He might kick some teeth out in extra innings this autumn, as he continues to walk in a fog mired by a mindboggled conundrum. The drug dealer is confused. Regardless, the next leg in the gold bull market is near at hand. Would Greenspan intentionally raise interest rates and create an inverted yield curve by decree? Why? Perhaps for the same reason a scorpion stings its victim, even if a transportation source. It is his nature, and the scorpion's nature.

If the major EW3 upleg wave does not begin at a 415 gold price level, then it will begin slightly lower, perhaps in the 390 to 400 range. Even with Fed Fund target hikes beyond 3.5% (2 more), the gold price might not work too hard to remain above 415 easily. Momentum for the next major upleg in the gold price will be provided from numerous sources. In fact, forces will come primarily from the four identified areas (euro disfavor, end of US rate hikes, advent of Asian trade war, onset of price inflation). Do not be surprised in the next couple years to see it come from additional factors like housing declines, bank failures, rampant bankruptcies, strikes against WalMart, strikes at Long Beach loading docks, energy & metals deprivation, shipping lane blockades, central bank discord, clear unhidden conflict among G-10 finance ministers, and possibly shortages to create dead zones in the US Economy. These events lie down the road, like in 12 to 18 months at their inception, with event acceleration over the next 3 to 5 years absolutely certain as time proceeds and control by government, banking, and economic authorities is gradually lost. Such is the natural beauty of chaos, which obeys no master.

Be sure to know that some of these events are well forecasted in the Hat Trick Letter, some having occurred already, others yet to come. In private writings two years ago, my email inbox took plenty of abuse for claimed forecasts that Saudi Arabia would be targeted by Al Qaeda for terrorist bombings. That happened five months after my call. Three developments would radically reshape the gold investment landscape, all of which can be expected to occur in time on at least a limited basis.

  • If actions are taken against the USA to bring a hastened end to the informal Bretton Woods II collusion (in support of the USDollar by Asia), such as a coordinated withdrawal, then things could get ugly fast.
  • If actions are taken against the USA due to criticism on indulgent excessive piglike energy consumption and waste (can you say OBESE?), then things could get uglier fast.
  • If actions are taken against the USA due to objection to the military course in Iraq, such as international boycott, then things could get ugliest fast.

For a nice long list, somewhat exhaustive, of potential reasons how the gold price is rising and will continue to rise, see "25 Reasons Why Gold Will Rise (revisited, +2 more reasons added)" for some substantive justification for a higher gold price.

The duration of the next major bull market upleg should be approximately as long in time duration as the first leg, perhaps a little longer. This analyst is no card carrying Elliott expert though. The EW1 major wave lasted approximately four full years. If June 2005 marked the beginning of EW3 major upward wave, then we are in for a veritable orgy on confluence in favorable conditions which might well endure until the end of this decade. The wondrous nature of the EW3 major wave is that it represents the "SWEET SPOT" of the bull market, wherein the investment community and the general public sing in golden harmony. The fundamentals align with the technical trends. Investors rejoice, and even enjoy round after round of orgasmic high tone utterances. The press & media will be critical sideline cheerleaders, reluctant at first since co-opted by their corporate parents. It took four years to set the stage, for the United States to lead the pack in destruction of money, a task we excel in to be sure. Our lead has done damage to Europe, which now "sees the light" to destroy its money. Asian willingness has done harm to themselves, whose cooperation will turn far more contentious. Asia will over time work in unison in energy and commodity supply, even political cooperation. The Japan versus China conflict over harsh memories from World War II will be a wall of worry they easily climb.

 

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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 23 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com.

Jim Willie

Jim Willie

Jim Willie CB, also known as the “Golden Jackass”, is an insightful and forward-thinking writer and analyst of today's events, the economy and markets. In 2004 he launched the popular website http://www.goldenjackass.com that offers his articles of original “out of the box” thinking as well as content from top analysts and authors. He also has a popular and affordable subscription-based newsletter service, The Hat Trick Letter, which you can learn more about here.  

Jim Willie Background

Jim Willie has experience in three fields of statistical practice during 23 industry years after earning a Statistics PhD at Carnegie Mellon University. The career began at Digital Equipment Corp in Metro Boston, where two positions involved quality control procedures used worldwide and marketing research for the computer industry. An engineering spec was authored, and my group worked through a transition with UNIX. The next post was at Staples HQ in Metro Boston, where work focused on forecasting and sales analysis for their retail business amidst tremendous growth.

Jim's career continues to make waves in the financial editorial world, free from the limitations of economic credentials.

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