Elliott Wave Gold Update III

October 24, 2005

In August 2003 I published an Elliott Wave gold price forecast that targeted a price of $630 as the peak of the first major wave in the new gold bull market. Incredibly, that forecast still seems to be on track and seems to have a decent chance of being achieved.

The original August 2003 forecast is reproduced in full in the appendix to this article.

One major flaw developed in the forecast and this needs to be examined. In a second article, dated 23 September 2004 when the gold price was $405 ("Elliott Wave Gold price Update II"), my expectation then was for gold to rise rapidly to $500 without a serious correction. This rise was expected to be followed by a 16% decline to $420. The final upleg to $630 was anticipated to follow the correction to $420.

By early November 2004 the gold price had risen above $430, making a new 16 year high in the process. Immediately the gold market gathered a head of steam and by 2 December 2004 had reached a PM Fixing of $454.2. The market looked set to rocket straight up to $500 but instead was hit by an avalanche of selling that stopped the rise in its tracks. The dashed lines on the chart below depict the forecast rise to $500 and the subsequent sharp decline that never happened.


Chart updated to 21 October 2005

It is all very well to speculate on the source of the large selling in early December 2004 and to say that the gold price "should" have risen to $500. The fact is that it did not rise to $500. What is important now is to determine whether the correction from $454.2 on 2 Dec 2004 was of the correct order of magnitude to be classified as Wave IV in my original forecast, i.e. the 16% decline anticipated from the peak of Wave III. For the following reasons I believe that we can conclude that Wave IV is of the correct magnitude and was completed some months ago:

  1. With the price amplitude of Wave III being sub-normal, it is reasonable to expect that the price amplitude of Wave IV would also be sub-normal;
  2. The length of time covered by the Wave IV correction, 7.5 months from early December 2004 to 15 July 2005, is the longest correction in the bull market;
  3. The correction has taken the form of a triangle which is often the shape of fourth waves, and this is Wave IV;
  4. The rule of alternation has been observed as Wave II was a quick zig-zag while Wave IV is a long drawn-out triangle;
  5. The lowest price reached during the correction was $411.1 on 9 February 2005, only $9 from the forecast target low of $420;
  6. The low point of the fifth wave in the triangle, which marked the end of the triangle and which is also the point from where the next upleg would be measured, was $418.3 on 15 July 2005, less than $2 from the ideal forecast target low of $420.

If this is indeed the case, that Wave IV is complete and is of the correct magnitude, then we can attempt a forecast of the smaller waves constituting Wave V. The market appears to be busy with the minuette waves constituting Wave (i) of Wave V, as follows:

I suspect that the minor waves in Wave V will be similar to those in Wave I, as first and fifth waves are often similar. The following is the analysis of the actual minor waves in Wave I:

The full analysis of the first major Wave 1 of the bull market would then look like this:

The alternate forecasts are offered because the preferred analysis of Major Wave 1 has Wave III as 41.9%, the smallest gain of the 3 main impulse waves, which a No-No in Elliott Wave terms. Alternate 1 thus has Wave V equal to Wave I in dollar terms while Alternate 2 has Wave V at just less than Wave III in percentage terms.

SUMMARY

Despite the lack of adequate price amplitude in Wave III, it appears that Wave IV was of adequate magnitude and that Wave V probably commenced at the $418.3 Gold Fixing of 15 July 2005.

A possible break down of the minor waves in Wave V is depicted in the above forecast. The gold price forecast made 2 years ago thus still has a good chance of producing the $630 peak (plus or minus $20) anticipated for the peak of the first major Wave 1 of the bull market. If this is achieved, it should be followed by the largest correction of the bull market, something in the range of 20%-25%, implying a pullback to around $500 (Wave 2).

This would be a normal technical development as once gold gets above $500, it will be creating 24-year new highs with a base at $500. A "good-bye kiss" return to the $500 level would not be an unusual development.

LONGER TERM OUTLOOK

We can now allow ourselves a brief look at the longer term possibilities for the gold price. IF the target price for Wave 1 of $630 is achieved and IF the subsequent price correction in Wave 2 returns the gold price to $500, THEN we can speculate on the possible magnitude of the next big upleg in the gold bull market.

The first major Wave 1 would be approximately 2.5 times the starting level of $256 ($630 divided by $256 = 2.46), so the minimum level that we can forecast for major Wave 3 is 2.5 x $500 = $1,250. Third waves are often the strongest in a sequence, so it is possible that Wave 3 could be as much as 4 times its starting level (2.5 x 1.618 = 4), providing a target of $2,000 ($500 x 4) for the peak of major wave 3.

Before we get too excited about the wave 3 forecasts, we should wait and see how the shorter term forecasts work out.

Alf Field
Comments may directed to the author at: [email protected]

Disclosure and Disclaimer Statement: In the interest of full disclosure, the author advises that he is not a disinterested party in that he has personal investments gold and silver bullion, gold and silver mining shares as well as in base metal and energy companies. The author's objective in writing this article 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.

APPENDIX:
The following longer term forecast (which was published on 25 August 2003 when the gold price was $360) appears to remain in force. No corrections have been made to this analysis:

This would leave the analysis of the larger order of magnitude 5-wave sequence looking like this:

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.

The volume of all the gold ever mined can occupy a cube 63 feet on each side.

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