Elliott Wave Gold Update VI

June 5, 2006

The current gold price correction has probably been completed in terms of price magnitude but the correction may not be completed in terms of time duration and complexity. The next upleg should take the gold price above $800 with only two minor corrections (of the 4%-6% variety) on the way, but only after the present correction is complete. After the peak above $800 has been reached, the most severe correction of the bull market thus far should occur.

The size of the recent gold price correction has clarified the concerns expressed in Update V about whether the PM Fixings are an adequate measure of some of the smaller price corrections in the market. The Comex futures prices gave a much better reading of the situation and confirmed that it will be important to consider Comex price movements in future. The London PM gold fixings will still be important for considering the longer term movements as the larger corrections should always be visible in the PM Fixings. Calculations in both Comex and PM Fixings will be depicted in future.

This incident has highlighted the dangers and pitfalls inherent in using Elliott Wave calculations to make price forecasts. Missing or misinterpreting even a minor wave can give rise to some major and costly errors. The flip side of this is that this technique can provide a wonderful insight or "road map" of where the market is and where it is likely to go to.

Quick Summary:

  1. In Update V the ideal target for the peak of wave (iii) of V was given as $697.5 with an alternative higher possible target of $718. The gold price vaulted over these levels to reach a peak of $733.3. This burst of excess optimism leading to an overshoot of the target area set up the conditions for a slightly larger percentage correction than the 8%-10% that was anticipated.
  2. The validity of the ideal peak of $697.5 was verified by subsequent events. A full 10% correction from $697.5 targets $627.7. Coincidentally $627.7 is the exact mid point of the range of the prior 4th wave of lesser degree, which was the decline from $644.4 to $610.9 on 20 April 2006 and shown as wave 4 of (iii) in the analysis.
  3. Corrections often retrace back to the range of the prior 4th wave of lesser degree. Last Thursday, 1 June 2006, the low on Comex futures was $623.8. There is a high probability that having reached the mid point of the prior 4th wave of $627.7 and also achieved a decline of 10.6% from the ideal price peak of $697.5, that $623.8 will prove to be the low price for the current correction.
  4. The rule of alternation suggests that the current correction will be complex and drawn out in terms of time. While $623.8 may be the absolute low price for the correction, it is likely to mark just the end of the first wave (a-wave) of the correction, with more sideways action to come that will absorb some time.
  5. The shape of the correction with the greatest probability of occurring is the triangle which is almost exclusively a 4th wave shape and we are dealing with wave (iv) of V. This will require a number of price oscillations of declining magnitude, thus forming the triangle and absorbing some time. If the shape is in fact a triangle, it will be added confirmation that the market is in wave (iv) of V.
  6. There is no certainty that the ongoing shape of the correction will be a triangle. It could take the form of a number of other sideways formations, some of which could probe back into the $644.4-$610.9 range of the 4th wave of lesser degree.
  7. Once the current correction is complete, wave (v) of wave V will get underway. If $623.8 turns out to be the low price for the current wave (iv) of V, a target price of $805 will be generated for the peak of wave V, which will also mark the peak of Major Wave ONE of the bull market. Then Major Wave TWO, a corrective wave, will take place and this is the reason why it will be the largest correction in the bull market thus far, probably in the 20% to 25% range. It will be the last chance to load up on bullion and mining shares before the big Major Wave THREE gets going.
  8. If the current wave (iv) of V turns out to be a triangle, it could generate a higher ideal target price for the peak of wave V, possibly in the area of $860. As the minor waves unfold in wave (v) of V, they will assist in fine tuning a possible price target for the peak of wave V.
  9. If the gold price declines below $610 it will require a revision of the wave count because the price will have dropped below the $644.4-$610.9 range of the prior minor 4th wave and the percentage declines will be too large to justify the assessment set out above.

I have been swamped with emails asking about the fact that the correction was meant to be in the 8%-10% range whereas it has escalated to 14.9% in the Comex futures ($733.3 to $623.8 = $109.5) and 13.8% in the PM Fixings ($725 to $625 = $100). At this stage I am not concerned about this apparently excessively sized correction for several reasons.

Data updated to 2 June 2006.

Firstly corrections will often retrace back to the range of the 4th wave in the immediately prior wave. This is not an infallible rule, which is why it was not mentioned in Update V, but it happens often enough that one should be on the look out for it to happen. In this instance the prior 4th wave was the correction from $644.4 to $610.9, depicted by the rising red triangle in the above graph, and the correction back into that range can be clearly seen.

In fact, the low price on 1 June 2006 was $623.8, very close to the exact midpoint of the $644.4-$610.9 range, which is $627.7. This is one of the reasons why I suspect that we have seen the low for this correction and is the first reason for being unconcerned about the excessive magnitude of the correction. Provided the low for the correction holds above $610, i.e. within the range of the previous 4th wave of minor degree, it will be sufficient evidence that the current correction is of the correct magnitude to be wave (iv) of wave V. If the gold price declines below $610, it will be necessary to think again and revise the wave counts.

The second reason for my lack of concern relates to my expectations of the peak for wave (iii) of V being in the range of $697.5 to $718.0. The following were the analyses provided:

The $697.5 level was chosen as the likely ideal price peak because it provided the most symmetrical patterns, making wave 5 of (iii) a gain of $86.5, identical to the $86.5 gain for wave 1 of (iii). It also allowed for (but was not stated) the anticipated correction of 8%-10% to conclude within the range of $644.4-$610.9, the prior 4th wave of minor degree, as discussed above. The $634 target related to the correction being 9% from $697.5. Interestingly, a 10% correction from $697.5 would have produced a target of $627.7, exactly the midpoint between $644.4 and $610.9.

The alternative target of $718 was arrived at by assuming that wave 5 of (iii) would be 17.5%, the same percentage gain as wave 1 of (iii). A 10% correction from $718 would have produced a target of $646.2, just above the $644.4-$610.9 range.

Markets are not always going to provide neatly elegant and symmetrical patterns. In this case the market managed to clear the suggested targets to reach $733.3 on 12 May 2006, thereby making wave 5 of (iii) the largest wave in wave (iii) in both dollar and percentage terms.

The fact that the market overshot on the upside in an excess of optimism probably made it inevitable that the subsequent correction would also be bigger than expected. This is the second reason for not being concerned about the excessively large correction. If $623.8 turns out to be the low for the correction as expected, that low will be 10.6% below the previously ideal forecast peak of $697.5. Perhaps symmetry will have been restored.

A third reason for lack of concern at the excessive size of the current correction relates to the nature of corrections. Corrections are notoriously difficult to forecast in terms of shape and duration. Often one can only be certain that the correction is complete after the next impulse wave is underway.

With 4th waves, however, we do get a couple of clues due to the rule of alternation. This simply means that if the 2nd wave correction in a move is quick and simple, the 4th wave will be complex and of a longer duration, and vice versa. We are currently dealing with a 4th wave correction (wave (iv) of wave V) so we can get an idea of what it will look like be examining wave (ii) of V.

Wave (ii) of wave V is depicted in the table above as the decline from $541.8 to $492.3 which took place between 12th and 21st December 2005. It was a simple downward zig-zag and was over very quickly. Accordingly we should anticipate that the nature of wave (iv) of V will be the opposite, i.e. complex and extended in terms of time. Thus the decline to date in the current correction to $623.8 is likely to be only the first wave, or a-wave. There should be several more waves before the correction is completed.

Triangles occur most commonly as 4th waves. Again this is not an infallible rule but when dealing with 4th waves one should be prepared for the possibility of it being a triangle. The appearance of a triangle as the form of the current correction would fulfil the requirements of being more complex than wave (ii) and also being more drawn out than wave (ii). In addition it would allow for the initial down wave to $623.8, the a-wave, to be the largest in terms of magnitude.

A triangle would require another 4 waves of declining proportions oscillating between $733 and $623.8, thus forming the shape of a triangle. If symmetry has been restored, the apex of the triangle should be in the area of an 8%-10% correction from the $733.3 peak of wave (iii) of wave V. This would position the apex between $660 and $674. Once a triangle has been completed it gives rise to a rapid upward movement called a thrust.

While a triangle is the preferred option for the current correction, the fact is that it could take the shape of a number of different sideways corrections which could include additional probes into the $644.4 to $610.9 range of the prior 4th wave correction. I would only become concerned if the gold price were to decline below $610, below the range of the prior 4th wave, and the percentage declines would then become excessive. If that happened, it would indicate an error somewhere in the earlier wave count and necessitate a revision of the wave count.

A final possible reason for lack of concern at the size of the correction is that the impulse waves have grown dramatically in size since July 2005, so it is possible that the size of the corrections has also increased. This will become clearer as the bull market progresses.

We can now turn to the detailed wave analysis and also indulge in some price forecasts. The following is the final picture of wave (iii) of V:

This analysis places the ideal target peak price for wave V at $805. The minuette waves within the coming wave (v) of wave V will provide further clues to the final peak of wave V. These minor waves will be reviewed as they unfold but this will only happen after the conclusion of wave (iv) of V which is still underway.

If the highest probability scenario of a triangle unfolds for wave (iv) of V and the apex of the triangle is midway between the anticipated range of $674 and $660, i.e. $667.0, an additional target of $860 ($667 plus a gain of 29%) will emerge as a possibility.

There is no major difference between the forecast based on PM Fixings and that derived from the Comex prices, so we will go with the Comex range of between $805 and $860 as the possible ideal peak for wave V, a range that will be refined as additional waves emerge. This will also be the peak of the first Major Wave ONE of the bull market. The Major Wave TWO correction that follows should be of the order of 20%-25%. The strongest portion of the bull market, Major Wave THREE, will follow the conclusion of the Major Wave TWO correction.

Alf Field
Comments may be made to the author at: ajfield@attglobal.net

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 bullion and gold mining shares. 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.

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 total world's holdings of gold could be transported by a single solitary oil tanker.

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