Gold Market Prepares to Separate the "Wheat from the Chaff"

The gold market posted a remarkable performance on Friday (June 8) and had many gold bulls licking their chops in anticipation of further gains in the near-term. While we were equally impressed with gold's performance, we are hesitant to jump aboard this latest upward move for reasons we will explain below.

We have been asked whether or not "we are off and running" in the precious metals sector yet. Friday's performance across the sector was certainly impressive in percentage terms, and it is always heartening when gold has a good day. But we do not believe the sector is quite ready to begin the next leg of its bull campaign (although we are close). Here is why:

Friday's average rise of about 4 percent in gold and gold stocks, while impressive in percentage terms, was not so impressive in other respects. Most disturbing, trading volume across this sector was not commensurate with a move of this magnitude. Therefore, we believe we are in for perhaps a few more weeks of "grinding" before things really take off. From an Elliott Wave perspective, this corresponds to the first reaction again the trend in a developing bull market. And it is here, more than anywhere else in the market cycle, that the phenomenon known as "capitulation" takes place.

We fully expect that over the next 3-6 weeks we will see more disgust, more surrender, more of an "I give up" attitude among long-haul gold bulls than we have witnessed in the entire course of the preceding 21-year bear market in gold. This may, perhaps, seem like an exaggeration to some, but watch the market closely in the days and weeks ahead and see if this scenario does not unfold. Make no mistake about it, gold and precious metal stocks have bottomed, but the weeks ahead will likely test the mettle and fortitude of investors, thereby separating the proverbial "wheat" from the "chaff."

Another interrogator asks, "Do you subscribe to view that the POG is manipulated by non-market forces ? If so, how can traditional wave based analysis be applied effectively to this market?"

Our answer: Sure the market for gold futures and gold stocks is being Manipulated - it always has been to some degree or another, sometimes even by central banks and other large and influential interests. Does this therefore translate into the complete sublimation and effective destruction of gold's underlying cyclical forces? Absolutely not. In fact, a large-scale, concerted manipulation campaign can only work in so far as it is in harmony with the cycles. Any attempt, for instance, by the central banks and other gold manipulators at bucking the overall trend of the cycles would be financial suicide-it simply wouldn't work. Gold manipulation to the downside has worked for these many years only because the dominant long-term cycles have been down. But now that the cycles have bottomed/are bottoming, this conspiracy will no longer work, and I'm sure the conspirators know this. Besides, few people realize that manipulation campaigns work both ways: the manipulators push gold prices as low as they can so that they can buy as much of it as they can before the next cyclical upward move comes along to increase the value of their holdings. A few years from now, the "manipulators" will undoubtedly conspire to push the price of gold even higher from where it will then be so they can sell their line to the unsuspecting public and make a gargantuan fortune. Thus we will witness the completion of the "manipulation cycle."

The 10-day chart pattern in the XAU index is that of a developing head and shoulders bottom reversal. This could translate into another few days of rallying prices before the gold sector ultimately pulls back into the fateful "wave 2" that we spoke of earlier. From a longer-term outlook, both the one-year daily and the three-year weekly XAU look strong and reflect intensive accumulation, which bodes very well for gold's intermediate-term prospects. But as we said, the next few weeks will likely test the bullish convictions and commitment of gold traders. After this "sifting" period is complete (likely by no later than early/mid July) gold will be in a very strong technical position to resume its emerging bull market.

From a long-term perspective, one can see quite clearly the aforesaid reverse head and shoulders pattern in the 10-year gold chart. Try looking at it sometime and see if you don't agree. The left "shoulder" has already developed, as has the "head" Now the right shoulder remains to be completed, a process which will in all likelihood witness a gold price of $540-$560/oz., followed by a pullback, and then a sustained move to around $860, minimum (based on the measuring implications of this developing pattern). The general public likely won't jump the gold band wagon until they see $1,000/oz. gold.

All of this will undoubtedly be realized by or before the Year 2004, at which time the 55-year Kondratieff Wave bottoms, along with the dominant long-term equities cycles. And since the K-wave that is bottoming in 2004 is the fourth K-wave in America's national history (the number 4 being the number of completion or finality in cyclical theory), this strongly suggests the American capitalist system will have ended, American prosperity will have been destroyed, wealth creation will come to an end, the debt system will have collapsed, and America's most established and cherished political and financial institutions will no longer be standing. Indeed, the next three years will be a time when gold will come into its own as a monetary medium/investment, and people will finally recognize the intrinsic value and wealth preserving attributes of the yellow metal.