What Does the Crystal Ball say About Gold?

August 2, 1999

What is likely to happen to the price of gold? Up or down?

If gold does begin a great new bull market, how far can one realistically expect the price of to gold to rise within a reasonable time frame?

This analysis uses the principles of Chart Symmetry, as the foundation for exploring answers to the above two questions. CS is a system that that was designed around the observation that prices tend to change direction along certain preferred gradients. An article in the Gold-Eagle archives explains the principles of Chart Symmetry in more detail than the brief summary given below.


All the charts used below are of the monthly close. The prices or values shown on the charts for the lines on the charts are therefore the values of the indicated lines for the end of August. These are not predictions that the price will in fact complete a move during August to reach that line, but provides the reader a measure of the move that could take place if the price pattern does develop in the direction of that trend line. The steeper the line, the greater will be the change in the line value over time.

The key point to remember throughout is that the gradients of all secondary lines were derived from the gradient of the master line. The scope for the analyst to 'do his own thing' and develop a pre-conceived pattern is therefore quite limited. The patterns that are shown in the analyses are inherent in the charts, but these are not the only patterns that can be derived.


There has been much speculation here about the state of the gold price. This analysis examines the long term POG in Yen and in US dollar and then uses the US Dollar-Yen rate as the third leg of a "technical triangle" of charts to draw conclusions on the probable development of the other two charts.

These conclusions are then evaluated against what can be learnt from what is the largest – and one of the most liquid – commodity market in the world, the US bond market. The US 30 year Treasury bond is analyzed both as a price index in Yen, and in terms of its yield in US currency.

Finally, the conclusions reached from all the charts are compared and tentative answers to the two questions at the top of the article are evaluated.

On occasion, fundamental assumptions will also be made about factors that could influence the future. These are discussed where relevant.

Gold Price in US dollars. Monthly close. Last = $255.6

The master line from which all other lines are derived, is the overall resistance line from the high in 1980 to the more recent top at $405.6 in January 1996 – just when the hedge funds are reputed to have climbed onto the "Gold Carry" band wagon.

Since their short sales were not offset by a corresponding long positions in a derivatives market, their actions – which by all accounts, including what can be deduced from changes in the lease rate, are still continuing – had and continues to have a depressing effect on the gold price.

It is worth the time and effort to sort out what at first may seem to be just a confusing jumble of lines – when the full picture emerges it tells an interesting story and sets the stage for what follows! Isolate and identify some of the more pertinent patterns on the chart, as described below:

Formation M-B is a pennant, as both boundaries slope in the same direction. A pennant is, just like the triangle, a traditional continuation pattern., i.e. the price should break upward from this pennant after it had completed leg 5. To complete leg 4 of the pennant before rising into leg 5, a move down to line B and thus a monthly close of $243 is needed.

However, the July close was right at some important support – firstly from the other pennant, M-F1, and secondly from line Y of the channel system X-Y-Z. This support could hold and trigger a rising trend in the gold price without first completing leg 4 of the large pennant. If this should happen and be followed by a break higher through line M, the pennant would complete abnormally and the move subsequent to the break should be steep and sustained.

A reversal now from current support would begin leg 3 of the pennant F1-M and also of the very large triangle, M-Y. A move higher to reach line M would complete leg 3 of pennant and triangle, and the price should rebound into leg 4 of these patterns.

The question is to decide which have the greater probability in terms of this analysis – a move even lower to reach $243 by the end of August, say, or a resurgence in the gold price, building on the base that has formed just above $250 over recent weeks – to start a great new bull market, as many suspect. And hope.

This question is examined here.

A second question is to find a realistic level gold can reach in a new bull market. If there is a new bull market, as the overall development of the charts appear to indicate.

This question can be explored irrespective whether the gold price rebounds off its current support or first declines further to complete leg 4 of the large pennant at line B. In the first case, the reaction after an abnormal break above M is likely to be more volatile and steeply sustained than if pennant B-M completes normally.

Gold price in Yen. Monthly close. Last = ¥29250

The analysis uses a similar definition for its master line to that used for the dollar price of gold, namely the overall resistance line from the top of the 1980 bull market to the most recent high, which in this case was in June 1998.

The difference from the 1996 high that was used for the dollar chart is caused by the weak yen between 1996 and 1998.

Channel A-B is a shallower derivative of line M, with line F the inverse of A and B. Line S is a near horizontal support line that was drawn in separately. Both B-M and S-M are large pennants of which the respective third legs were completed when the POG in Yen rebounded of line M. Leg 4 of pennant S-M has also been completed, but then the price broke marginally below line S, as if to continue lower and complete leg 4 of pennant B-M as well.

In order to reach line B, where it could find support from where a new bull trend could take off, the POG in Yen has to decline by 25% from the July close. A decline of this nature would probably require both the yen to strengthen significantly against the dollar while the dollar price of gold would have to fall substantially

From the dollar chart we know that a further decline in POG could find some significant support at about $240 – which would represent a decline of about 5% and which would require the Yen to appreciate to ¥90 to the dollar for the Yen price of gold to reach as low as support at line B.

While a combination of gold at $240 and the Yen at ¥90 is not impossible, it does seem rather unlikely to develop, given present circumstances, as follows from the discussion.

US Dollar Yen rate. Monthly close. Last = ¥114.5

The next step in the search for what is likely to happen to POG during the next few months and also what a realistic target would be if it did get going, is to examine the US Dollar-yen rate to see what we can learn from that chart.

The master line is the overall support line of the last stages of the 1970-1994 bear market in the dollar. Line P is parallel to M, with I the inverse of M. Lines F and F2 are steeper and shallower derivatives of M, respectively.

M-F is a large descending wedge formation. The dollar is now on the downward leg 4 of the formation, after some overshoot at the end of leg 3 at line F. This overshoot could be explained by the need to complete a new leg of megaphone F2-M, and even here there was some overshoot.

Megaphones develop as a result of major opposing forces acting on a market, taking turns to dominate the trend. Here the two forces probably arise from the increasing outflow of dollars as a result of the trade and budget deficits, and secondly, efforts by authorities to weaken the yen / strengthen the dollar.

The latter objective was a key element of the trade agreement in 1995 and it triggered an appreciation of 75% in the value of the dollar since mid-1995 to complete the most recent leg of megaphone F2-M.

Normal development of the descending wedge, M-F, now calls for a move down to line M, where leg 4 will be completed. Such a move, which implies that the dollar could reach as low as say ¥55, would also complete the next leg of the megaphone and set the dollar up for a major bull market against the Yen.

However, until – and if!– that happens, the dollar appears to be in a major new bear trend. Support at line I or at line P might hold firm, to force a rebound and a new break upwards from the wedge. Should that happen, it would be the end of the dollar bear market and very bullish for the dollar. For that reason, support at I and P are important mileposts to signal whether the new bear trend in the dollar is intact or not. Therefore, if at any point in time there is a definite break above line F at a month end, without a prior break below I or P, such an event would be a bull signal for the dollar.

A decline to ¥90 – to justify a sharp fall of about 25% in the price of gold in Yen, as required by one Scenario in the discussion above – the dollar has to fall below support at lines I and P. The question is whether such a decline in the value of the dollar can take place while the price of gold remains near or below its current levels.

US 30yr Treasury bond – Price index in Yen. Monthly close

To find an answer to the above question, we turn firtsly to the US bond market to see what effect a very strong Yen is likely have. We examine the Japanese perspective of the US bond market by calculating and analyzing a chart of the monthly values of a Yen price index for the US 30 year treasury bond. (¥/dollar rate divided by yield on bond)

The chart shows two main features – a very steep and extended bear market in the value of US long bonds in Yen, M1-P1, that lasted from the early days of the US 30yr Tbond until 1980, and secondly a mostly sideways but very volatile market that began in 1980. This new trend is contained within channel M-P and megaphone M-F.

The volatility of even this relatively stable market as of 1980 can be evaluated in terms of the increase in price equal to 140%, from 'x' to 'y', during the most recent rally in the 30 year Tbond, the one that completed the last leg of megaphone F-M.

This recent steep rise in value of the Tbond coincided with the 'Yen Carry' and shows how much capital profit – apart from profit arising from the wide interest rate spread – Japanese institutions and the hedge funds could make if they were into this market early enough, before the yen had appreciated too far against the dollar.

And, of course, if they had taken profit to repatriate their funds before October 1998, when the Yen had already started its recovery against the dollar and the US bond market topped out. Of the 140% potential capital profit represented from bottom to top, only 64% remain to be banked if Japanese investors now sell their US bonds and repatriate the funds immediately.

The decline in value of US bonds over the steep bear market contained in channel M1-P1, from 'a' to 'b', is all of 82%. With this experience behind them, it seems very likely that any further weakness in the US dollar, as required by the one scenario developed above, would speed up the repatriation of Japanese funds that remain invested in US treasuries – and on Wall Street.

Which brings us to the last question to be asked in this analysis – what is likely to happen to US bond yields if any selling pressure should materialize, as perhaps it would if the Yen strengthened further against the dollar?

Yield on US 30yr Treasury bond. Monthly close. Last =6.107%

The main feature on this chart is the very large pennant formation, F2-I, where line I is the inverse of master line M and F2 is the second steeper derivative of M.

Narrowing formations – triangles, wedges and pennants – typically complete 5 legs before the break from the pattern takes place.

Observation over many years has shown, as mentioned on previous occasions, that when the pattern fails to complete normally, there often is a violent and sustained reaction when the premature break eventually takes place.

Here the yield failed to complete leg 4 of the pennant when it reversed direction short of line I on the most recent rally. Now, at the end of July, the yield has just broken upwards from the wedge while technically still on leg 4. A strong reaction is to be expected – even if there is a new rally that could take the yield briefly back to line F2 for a goodbye kiss, before the bear market resumes.

The medium to longer term outlook for the US bond market is therefore quite bearish. In conjunction with any further weakness in the dollar, this is likely to cause most foreign investors – not only the Japanese – to sell off all US investments and repatriate the funds.


The overall picture that develops is one that is bullish for gold. Given normal market behaviour, the question really is not whether there will be a bull market, but whether it is at a point where the gold price could reverse its long term bear trend or whether we have to wait another month or two while POG declines to the next level of firm support at about $240 on its long term chart.

One key to this question lies with the chart of the POG in Yen. There is scope for – and a chart requirement – for a decline of about 25% in the yen price of gold. For that to happen, with gold support at $240, the Yen would have to firm to about ¥90 to the dollar. That development, again, would place the US bond market – and Wall Street! – under strong pressure. So the question now becomes:

"Can POG fall to and remain near $240 if the US dollar and US markets should decline substantially in value?"

IMHO the answer to this is in the negative. If US bond and equity markets fall sharply, while the dollar rapidly loses value in its new bear market, enough paper wealth would be looking for any place that promises a safe haven for gold to take off.

Gold might only get the leavings from the Japanese stock market and other paper towers where the downside risk is seen as much less than in US markets, but the gold market is very thin by comparison – even a small diversion of US paper wealth into gold would send the price of the metal and the shares skyrocketing.

So, while a decline to $240 can not be excluded, it seems more likely that gold may have found a floor just above $250 and might now be preparing to begin a recovery – one that could easily become explosive.

The second question asked at the beginning can be answered irrespective whether gold takes off now or later. We use two estimates from the charts to provide an answer. The first is that there is a really long term bull channel for gold and that this channel is indicated by lines T-X-Y-Z on the chart of the dollar price of gold.

Line T currently has a value of $755 and corresponds closely to the answer one would get if the rule of thumb for breaks from pennants and triangles are applied – i.e. that the extent of the new trend equals the length of the "flag pole" from which the triangle or pennant is suspended. This is the length of the rise, in this case, of the market into the high from where the triangle or pennant developed.

To find another answer we assume that the inverse line F on the chart of the Yen price of gold is also a reasonable target. It appears in fact to be more reasonable than line T on the dollar chart. Line F currently has a value of ¥76700/oz. To reduce that to a dollar price we have to make an assumption of what the yen-dollar rate will be.

Now the longer term Yen dollar rate has good support at around ¥100, with the potential to move down to ¥55 or below if the large wedge formation completes normally. If the Yen price of gold does recover as far as line F, it would imply that the dollar price of gold can be calculated to lie somewhere in the range of $76700/100 up to $76700/55, or in the range $767 up to $1400/oz.

Even at the current exchange rate of ¥114 to the dollar a POG of ¥76700 implies a gold price of $670!

It turns out that the apparently optimistic target on the dollar price of gold – line T – is actually very much lower than the apparently much more conservative target on the Yen price of gold!

This shows that in what could become a climate of a weak dollar, foreigners buying gold in terms of their own historical experience might push the dollar price to levels not easily imagined today. And definitely not by the institutions with a very much vested interest in a lower gold price!

It also shows that gold can be expected to present more than an opportunity for very good profit – for holders of dollars it presents one avenue of preserving their wealth in what appears to be a very uncertain future for the US currency.

The one negative is that the story told in these long term charts – great upside potential for gold, substantial weakness for the dollar before support is found, steeply rising US bond yields with 10% as a first target for the yield on the US 30 year Tbond, and of course a POG probably moving well above $1000/oz – will not take place without great hardship and even catastrophe for many people riddled with debt and with whatever assets they retain stuck in rapidly declining markets.

A subsequent analysis will examine a range of market variables against the background painted in this essay.

It is estimated that the total amount of gold mined up to the end of 2011 is approximately 166,000 tonnes.