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Tenorio Research Market Analysis

The Tenorio Research Letter - Issue 63.09

April 30, 2001

Virtually nothing has changed analytically from my last update for Gold Eagle in August 2000 ( ) except that I can now reconfirm the outcome of that analysis.

I always believed, even in 1980, that the last high in September 1980 at ~$720 was the "orthodox" or true top. Briefly, the initial drop from January was a three-wave affair, and the run-up from March to September was in five clear waves. A lower top for wave five is called a "fifth wave failure" and pointed to major future weakness, as indeed happened.

In 1988 the late A.J. "Jack" Frost, earlier a colleague of Hamilton Bolton, and later a collaborator of Bob Prechter, wrote a small monograph, published by Prechter, in which he presented a similar count.

The corrective bear market from 1980 has been an Elliott wave ABC (5-3-5) correction in the form of a zigzag. Wave B of the zigzag was a long-term triangle from 1982 to 1996. (Triangles are considered to be "three's" by definition, as they occur primarily in locations where three's do: waves 4 and B.) In a zigzag, the B wave terminus may not exceed 61.8% of the entire price move of wave A, and this was fulfilled by the top in February 1996.

Wave B is a contracting limiting triangle, so called by Glenn Neely to differentiate it from several other triangle types. Elliott discovered limiting triangles. Neely found that the apex of a contracting triangle's relationship in time to the beginning to end of the triangle itself defined limiting versus non-limiting.

To keep it brief, a limiting triangle's apex (lines drawn to a point through either AC or CE and BD) should be 20-40% beyond the end of wave E in time, and ideally 38.2%. The apex of gold's B wave triangle from 1982 to 1996 is 37% beyond January 1996. Thus the triangle count is substantiated.

Next it is possible to count the bear market from 1996-99, wave C, as a five wave post-triangular thrust with a third wave extension, thus completing a 5-3-5 zigzag. Since wave C is less than 61.8% of Wave A (September 1980- June 1982) the zigzag is a truncated zigzag. In gold's case the length of wave C is very close to the ideal 38.2% length for a truncated zigzag. (Also wave C meets the minimum requirements for a thrust out of a limiting B wave triangle at just short of 75% of the triangle's longest internal wave, 75-125% being the usual thrust as a percentage.)

Thus we have a legitimate Elliott wave count for gold from the $35 low in 1967 to a putative low in 1999. Five waves up with a fifth wave failure, indicating weakness, and a zigzag with a B wave triangle that retraced 73% of that bull market. The time span of approximately 13 years up and 19 years down makes the two larger degree waves relate to the whole as ~38.2 and ~ 61.8% in time.

Since the low on 15 August 1999, exactly 23 years from the great low of 1976, gold has traced out an extremely frustrating pattern. In six weeks gold ran up approximately 45% in price to 338.00 (basis three month forward futures). But since then the market has experienced a backing and filling action that has driven most bulls to distraction.

However, for several reasons I believe we can say with reasonable certainty that the lows are behind us. First of all the Elliott Wave analysis of market action since 25 August 1999 continues to support that date as the most probable low. The initial spike to 338.00 occurred in five waves. Then we have had another very leisurely and complicated second wave, mimicking the long second wave of higher degree from 1980.

This wave two also has been a zigzag with a B wave triangle, like the one from 1980. Zigzags are more bearish, as a rule, than flats or triangles, and this one has been quite bearish, erasing almost 100% of wave one. However at the same time this zigzag points to strength to come in that wave C of the zigzag was a diagonal or terminal triangle, a very weak five wave formation which occurs only in wave five of an impulse or wave C of a corrective formation.

Having a valid Elliott wave structure is not tantamount to "a sure thing" as anyone who does Elliott work, or reads it, knows. But it's an analytical start. Most who persist in doing Elliott wave work over a longer period of time become convinced that it measures the structure of market sentiment. Long before Elliott, great traders like Jesse Livermore recognized the "three pushes to the top" and two back as something inherent in active markets. So did great theorists like Charles Dow.

Several long-term timing indicators also pointed to a final low occurring in the first or second quarter of this year.


The sentiment toward gold was all-encompassing bullishness in late 1979 and early 1980. I was trading in a Japanese firm in San Francisco at the time, and we used to stand in the trading room and cheer as gold went limit up ($25-50) each day. People lined up to buy gold coins, but they were also lining up to sell silver into the peak. I also remember buying incredibly wonderful complete sterling silverware lines for a few pennies on the dollar as some dealers went bankrupt in 1983-83, one of the few times my wife has been genuinely proud of me as a trader….;)

The sentiment in 1999 was much as I described on page one: worn out, battered down, anesthetized, lethargic, comatose. There were still a few gold bugs out there, but they were so mainly in the sense of sticking to one's political party or religion through to the end, and largely without a sense of firm conviction.

After the stock market meltdown of 1998 and commodity meltdown of 1998 and 1999, the gloom was thick and the headlines and magazine covers proclaimed the coming deflationary depression. I thought a bottom could be at hand based on my analysis of the Long Economic Wave of Kondratieff. (If you have never read Kondratrieff's most important paper, please take a look at it at some time my Long Wave site: (Go to the masthead bar, "Kondratrieff's Life and Works", and see the instructions, including password, for reading or downloading the short paper and its charts.)

As long term readers know, my interest in the Long Wave goes back to the 1960's. In recent years I have primarily discussed it as part of the overall background in my "Year End Review". If you have seen the 1999 year's "YER", now available for downloading at the primary Tenorio Research website, you know that I have been looking for the bottom of the long down wave of Kondratieff possibly to have ended in 1998 (bonds) to 1999 (commodities).

The past few Long Waves have been 53-54 years peak to peak or trough to trough, and the study I have done of all potential waves since the 13th century in the West had an average of 53.6 years, with seven of twelve being 54 years +/- 4 years, but there have been a few shorter and longer periods.

The "ideal" or typical low for the Long Wave would be 2003, but I have thought that the 1998 stock market and bond deflation scare low and the wipeouts in hogs (to 1919 prices!) and nearly every other commodity, including crude oil, in 1999 may have been the corresponding low for commodities and rates.

I decided, somewhat arbitrarily, that if GDP and the CRB Index, unemployment, and wage pressures continued through a substantial part of 2000, I would be inclined to feel that the low was in. If I am wrong, we have had or are having a last "late winter thaw" and a slide down into 2003-4.

This is not the time or place to get into the Long Wave in detail, but if interested you may want to explore the Long Wave site I gave you above, re-read the 1999 YER, or search the University of Colorado website ( under my name for a number of posts on the subject over the past 6-12 months.

If the Long Wave has bottomed, then in all probability so has gold. Before you jump up and down, if you are a surviving gold bug, let me hasten to add that this does not imply a raging bull market the day after tomorrow. If you remember or have studied the price action of the markets from 1946 to the last Long Wave low in 1949 and beyond, you will know that there were bull and bear markets for all commodities (excepting gold, of course, since it was "fixed" or price-controlled at the time) from 1949 until 1974-80, but the early years were only mildly inflationary (after 1950) until the 1960's.

I personally feel that the inflationary pressures will be greater in this cycle, but I cannot tell you yet whether that will be early or late. All I can tell you is that those pressures exist and will continue to exist.

A generalized outlook for markets in the up wave of any Kondratieff Long Wave is for higher GDP growth, higher wages, increased median family incomes, gradually increasing inflation, gradually increasing interest rates, a wilting dollar, and, oddly enough, a rising stock market.

The stock market will become more schizophrenic in that it will have periodic inflation fear bear fits. Even though I believe stock market P/E levels will most likely fall throughout the up wave, as happened in the comparable period of the Long Wave from 1896 to 1920, GDP and profits will grow faster for quite some time. I would not expect the annual increases seen in the recent down wave, but stocks will increasingly be a better place to be than bonds, which will get destroyed. It will be a period for careful stock selection rather than index trading. You will want stocks which are either beneficiaries of inflation through their primary product (gold, lumber, real estate, etc.), or can easily raise prices and market share, or are unaffected by inflation.

Since gold's major competitor, the US dollar will be declining with inflation, gold's "exchange value" with the dollar will improve. The portion of one's portfolio that went to bonds and cash will now be better invested in gold and cash. Any cash will be best stored in very short term or demand deposits in dollars or in other stronger currencies. For US-based investors, Canadian dollar T-bills or short term notes may be a good choice. It's possible that the EuroFX or Swiss franc will regain their allure of the last up wave cycle, but it is still too early to be sure of that. In fact, the power of the dollar since 1998 suggests that the dollar may be the true "hard currency" this time. But that's another story.

Since the North American gold stocks universe is now thinner, African, Australian, and other strong markets will need to be examined as well. With gold stocks near all-time lows now, it's bottom fishing season. I will not be giving advice on stock picking, as I am neither an investment advisor nor a gold stock analyst.

One conviction I have for my own portfolio is that I should balance it out with one of more of the poly-metallic stocks to reduce volatility. Also holding gold bullion bars or coins is another way to do it. Although I will trade gold futures, I would not just trade "paper gold" any more than I would want to trade stock indexes to the exclusion of owning good individual stocks of all types. These are two very different categories of assets for different parts of an overall portfolio.

As I write, New York Comex gold is less than $10 from the early April low, which, you will note, was also within two days of the major stock market low. The 1999 low is only ~ $12 lower. This is as good a risk/reward ratio as one can get. If the August 1999 low is taken out to the downside before ~ $275 on the upside (basis three month forward Comex gold), my current Elliott analysis would be proven wrong for the time being.


The first use of gold as money occurred around 700 B.C., when Lydian merchants (western Turkey) produced the first coins
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