Elliott Wave Gold Update 18

March 26, 2008

The $988.50 forecast in Update 17 for the peak of Large wave I was exceeded by a small margin. The gold market now appears to be in the process of working through corrective Large wave II which is estimated to decline about 16%, give or take a couple of percentage points. Concerns about an extended 5th wave have been alleviated

One fascinating thing occurred in the process of reaching the recent price peak. The forecast of $988.5 presented in Update 17 was arrived in the following analysis:

Forecast Structure of Large Wave I of Major Wave THREE. London PM Fixings:

Small Wave  1  6 Oct 2006  to   1 Dec 2006      $560.7 to $648.7         +$88.0    +15.7%

Small Wave  2  1 Dec 2006  to   10 Jan 2007    $648.7 to $608.4         -$40.3     -  6.2%

Small Wave  3  27 June 07   to    8 Nov 2007     $642.1 to $841.1         +$199     +31.0%

Small Wave  4  8 Nov 07     to   19 Nov 2007     $841.1 to $778.8         - $62.3    -  7.4 %

Small Wave  5*14 Dec 07   to         ?                   $789.5 to $988.5         +$199      +25.2%

Large Wave  I*  6 Oct  06   to         ?                    $560.7 to $988.5         +$427.8   +76.3%
* Forecasts highlighted in yellow.


The forecast of $988.5 for the peak of small wave 5 (and thus also Large wave I) was arrived at by assuming that small wave 5 would be the same magnitude as small wave 3. Thus the gain for small 5 was predicted to be $199, the same as the gain in small 3. The absolute dollar gain of $199, rather than the proportionate gain of +31.0%, was chosen in order to err on the conservative side. If the forecast had used the percentage gain of +31.0%, the target for the peak of the small 5 (and Large I) would have risen to $1,033. ($789 x 1.31 = $1,033).

Incredibly, $1,033 was precisely the highest price achieved in the cash gold market on 17 March 2008. The London AM fix on that day was $1,023 and the PM fix was $1,011.2, both numbers being the absolute highs for those respective fixes to date.


Data updated to 20 March 2008.
In real time it was obvious that $988.5 was not going to the peak of small 5 because only one minor correction of approximately 4% had occurred up to that point. At least one further minor correction was required, followed by a push to a new high above $988.5, to complete small 5. This duly happened. The analysis of small 5 is depicted in the table below:

Actual Structure of completed Small Wave 5 of Large Wave I. London PM Fixings:
Minor Wave  i    14 Dec 07  to   15 Jan 08          $789.5 to $913.0         +$123.5  +15.6%

Minor Wave  ii   15 Jan 08   to   21 Jan 08          $913.0 to $871.2         -$41.8     -  4.5%

Minor Wave  iii   5 Feb 08   to   3 Mch 08          $887.5 to $988.5         +$101.0   +11.3%

Minor Wave  iv   3 Mch 08  to  10 Mch 08         $988.5 to $969.2         - $19.3    -  2.0 %

Minor Wave  v  10 Mch 08  to  17 Mch 08         $969.2 to $1011.2       +$42.0     + 4.3%

Small Wave  5  14 Dec 07  to  17 Mch 08       $789.5 to $1011.2       +$221.7  +28.1%

A couple of interesting points emerge from this analysis:

  • Minor wave iii with a gain of $101.0 was smaller than minor i which gained $123.5. The third wave in any impulse sequence cannot be the smallest, hence minor v had to be smaller than minor iii. It was, with minor v gaining only $42.0.
  • In situations where the third wave is not the largest in the sequence, it is sometimes found that the overall gain in the two smallest waves equals the gain in the largest wave. In Small 5 above, minor i had the largest gain of $123.5. The overall gain from the start of minor iii ($887.5) to the peak of minor v ($1011.2) is $123.7, exactly the gain in minor i.   
  • Minor wave ii was a corrective wave with two downward thrusts in the 4% range, but they were part of the same corrective pattern, being the a and c minor waves. This was another of the irregular flat upwardly skewed corrections that have been prevalent in the gold market recently.

Revised Wave Labels

In Update 17 a revised naming format for the various waves was introduced. For the sake of clarity, these are outlined once again:

The bull market consists of five Major waves designated ONE, TWO, THREE, FOUR and FIVE. Major TWO and Major FOUR are corrective waves with a 25%-30% magnitude of anticipated decline.

Major upward impulse waves, ONE, THREE and FIVE will each contain 5 Large waves designated in Roman Numerals, I, II, III, IV and V. Large II and Large IV are corrective waves with a 16% magnitude of decline, give or take a couple of percentage points.

Large waves I, III and V will each contain 5 Small waves designated 1, 2, 3, 4, and 5. Small waves 2 and 4 are corrective waves with approximately 8% magnitudes of decline.

Small waves 1, 3 and 5 will each contain five Minor waves designated i, ii, iii, iv and v. Minor waves ii and iv are corrective waves each declining 4%, give or take 1-2%.

The gold market has just completed Large wave I of Major wave THREE. It is currently in the process of working through Large II of Major wave THREE, a corrective wave expected to be a decline of approximately 16%.

Corrections

Markets will always have corrections. They should be welcomed and not feared. They allow those who wish to take profits to do so. New players are given the opportunity to establish positions which become platforms for further rises. Just 3 months ago gold was around $800. A 25% gain to a level of $1,000 in such a short period left everyone who had ever bought gold, even during the previous 3 months, with a good profit on their investment. It represented a prime opportunity to take profits. Significant profit taking precipitated the current correction.

As mentioned, the gold market is now dealing with Large wave II, which is anticipated to be a correction of approximately 16%. Corrections are notoriously difficult to analyse and can come in all sorts of complex formations absorbing varying amounts of time. We will wait to see how this correction evolves and will analyse it in a future edition of these Updates.

The current underlying fundamental financial and economic circumstances are chronic. The recent Bear Stearns episode could only have occurred if the US financial structure was on the verge of a systemic melt down. The evidence allows for no other interpretation.

In the same way that the bankruptcy of two Bear Stearns hedge funds in June 2007 marked the tip of the iceberg of the sub-prime crisis, the demise of Bear Stearns itself may well be the tip of the iceberg marking the start of major counter-party problems in the OTC derivatives market. There will almost certainly be more situations akin to Bear Stearns.

With this scary fundamental situation underlying the markets, it is realistic to anticipate that the current correction in the gold price may be sub-normal, i.e. less than the 16% expected decline, and may be over fairly quickly. A “normal” large correction of 16% from $1011 would produce a target of around $850. A 12% correction, which is possible in these circumstances, would produce a target of about $890. If the 12% decline is calculated from the cash market high price of $1033, the target becomes about $910.

It seems that any price below $900 represents a buying opportunity, especially when we consider what comes next in this gold bull market. What comes next is Large III of Major THREE. Readers of these Updates will be familiar with the “third of the third” concept. This is the time when one can expect the strongest and most violent gains. Entering a period of “third of the third” at the two largest wave magnitudes portends a great deal of excitement. It is not the time to be too cute. It is a time to fasten seat belts and hold on grimly.

Updated forecast templates

Now that Large wave I has been completed, it is appropriate to update the forecast templates for Major wave THREE.

Template Revised 24 March 2008: 
Actual Structure of Large Wave I of Major Wave THREE.  London PM Fixings:
Small Wave  1  6 Oct 06    to    1 Dec 06        $560.7 to $648.7          +$88.0    +15.7%

Small Wave  2  1 Dec 06    to   10 Jan 07       $648.7 to $608.4          -$40.3     -  6.2%

Small Wave  3  27 June 07  to   8 Nov 07        $642.1 to $841.1          +$199     +31.0%

Small Wave  4  8 Nov 07    to   19 Nov 07       $841.1 to $778.8          - $62.3    -  7.4 %

Small Wave  5  14 Dec 07  to   17 Mch 08      $789.5 to $1011.2        +$222      +28.1%

Large Wave  I  6 Oct  06  to  17 Mch 08      $560.7 to $1011.2        +$451      +80.4%

Revised Forecast Template Structure of Major Wave THREE: London PM Fixings.
Large Wave  I        6 Oct 06   to 17 Mch 08    $560   to $1011         +$451     +80%

Large Wave  II   17 Mch 08   to    ?                  $1011 to $850            -$161     -16%

Large Wave III       ?              to    ?                   $850   to $1572          +$722     +85%

Large Wave IV       ?              to    ?                   $1572 to $1320          - $252     -16 %

Large Wave V        ?               to    ?                  $1320 to $2042         +$722      +55%

Major Wave THREE  6 Oct  06  to  ?             $560   to $2042          +$1482  +260% 
Forecasts highlighted in yellow

The above forecast for the peak of Major THREE at $2042 assumes that Wave III and V will be equal at $722. If they turn out to be equal in percentage terms, then the target for the end on Major THREE increases to $2442.

It will be possible to attempt an estimate of the likely shape of Large III once a low point has been established for Large wave II which is under way at present. The low point of Large II will be the starting point for Large III, the analysis of which will be for a future Update.

In the above forecast it has been assumed that Large II will decline the full 16% and not the suggested 12% smaller magnitude due to the chronic underlying fundamental circumstances. It should be noted that there is an outside possibility that the current correction may exceed 16% by a small margin, perhaps declining by 18%. That would give rise to a forecast decline to $830 for the low point of Large II.

Alf Field

Comments to: ajfield@attglobal.net

Disclosure and Disclaimer Statement: The author is not a disinterested party and has personal investments gold and silver bullion, gold and silver mining shares as well as in base metal and uranium mining companies. The author’s objective is to interest potential investors in this subject to the point where they are encouraged to conduct their own further diligent research. Neither the information nor the opinions expressed should be construed as a solicitation to buy or sell any stock, currency or commodity. Investors are recommended to obtain the advice of a qualified investment advisor before entering into any transactions. The author has neither been paid nor received any other inducement to write this article.

Alf Field was born and raised in South Africa. He is a Chartered Accountant by training. Together with a partner, he started his own funds management business in 1970 in Johannesburg. In August 1971, when the USA stopped converting US dollars for gold at $35, Alf perceived a major opportunity to buy large quantities of gold mining shares personally and for clients. In 1979 he migrated with his wife and four children to Australia. He is currently a self-funded retiree who manages his own portfolio. In 2002 Alf started writing articles on gold related subjects, including monetary history, as well as a series of gold price forecasts using the Elliott Wave technique.

In 1934 President Franklin Delano Roosevelt devalued the dollar by raising the price of gold to $35 per ounce.