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Will Gold Decline to $250?

April 22, 2002

Gold prices are having a hard time clearing recent highs between $304-$308 and have largely moved sideways in a trading range as we predicted in our last gold market forecast. We wrote last time that gold is currently under the influence of two competing cyclical forces, which have manifested as parabolic bowl underneath gold's price line and a parabolic dome above it. This is what creates trading ranges and it accounts for the current dead-lock in gold futures. Gold is still under the influence of these dueling cycles and will encounter resistance at any attempt at rallying in the coming week. The parabolic highs for this current short-term cycle (which bottoms in early May) should be between $308-$310 before the over-riding down-curve pushes prices down again. The larger upward trend, however, remains firmly intact.

We have been asked to comment on the extremely bearish forecast for gold by certain Elliott Wave experts. These forecasters have predicted a decline in gold down to $250 in upcoming weeks based on their price projection techniques. Is this forecast legitimate? In a word, no. Without getting into the nuances of the gold wave count (which is highly subjective for obvious reasons) suffice it to say that for gold to decline all the way down to its long-term cycle bottom support of $250 would not only represent a complete retracement of gold's gains over the past couple of years but by definition would show that the sellers outnumber the buyers (which is true for anything more than a 50% retracement). Have the smart money gold traders, including the major financial institutions of the world, that have been accumulating gold and gold shares lost complete confidence in gold's ability to rally above $300? Will they allow all their work in overcoming that tremendous supply to be completely erased and start all over again? Not likely.

Not only would a decline to $250 defeat the progress of the past 2 ½ years since gold's time cycle and price bottom but it completely flies in the face of the current bearish outlook for the broad stock market this year. Even the Elliott Wave experts are forecasting a major decline in stock prices by the end of the year, yet they still hold firm to their bearish outlook on gold. This is untenable since a massive decline in gold prices would actually be a reflection of underlying equities market strength and would completely nullify the bearish argument in stocks. The only explanation the insiders and market makers would allow gold to fall down to $250 would be that they've lost completely faith in gold and actually see the stock market and the economy improving. How can this be in the face of the falling K-wave? How can this be in the year when the 4-year Presidential Cycle bottoms? How can this be when the major 12-year cycle has not yet bottomed? By definition, stock prices must follow the trajectory of these cycles during the "hard down" phase of their declines. And gold generally tends to move in the opposite direction during this phase.

Finally, the bearish gold posture among the Elliott Wave experts goes against their own tenets of chart pattern analysis. Anyone who has read their books and newsletters knows of the extreme importance they assign to triangle patterns. Triangle breakouts take on added significance to them and aid them in their wave counting. Take a look at the long-term weekly chart for gold and you will see a clearly defined triangle pattern that can be drawn off the top of gold's highs in late 1999 and early 2000 with the lower boundary drawn off the lows in early 2001. The breakout occurred earlier this year. Based on the minimum measuring implication of this pattern gold should reach the $345-$350 area. Even the Elliott Wave experts acknowledge these rules of triangle interpretation, yet they have completely ignored this important and extremely bullish price pattern. In short, the Elliott Wave practitioners are guilty of a leap of logic in embracing the bearish gold scenario.

When it comes to the gold market patience equals profits. This is an area where patience will truly have its rewards. Sustained gold bull markets take time to develop, especially considering the prolonged 20-year bear market that gold emerged from in late 1999. The kind of overhead supply that resulted from this unprecedented decline takes time to overcome, and prices cannot begin to rise in a sustained fashion until supply is largely absorbed. However, the rewards for those who practice patience in the gold market will be immense. Gold prices cannot be expected to take off in a really big way until the public smells fear. Only when fear replaces complacency among the investing public can gold soar to meteoric heights. Gold, more than just being a barometer for inflation and deflation, is the quintessential "fear index." Its price is a reflection of monetary concerns among the masses. It responds well to deflationary equities bear markets not to mention currency devaluations. Gold will comes into its own in 2002. What we've seen so far is just a foretaste of better things to come.

The XAU is in a slightly stronger position than physical gold itself. This reflects the strong and growing demand for gold stocks on the part of "smart money" investors. More and more big-money traders and investors are waking up to the huge profit potential to be found in this sector. Almost every one of the clients we speak to on a daily basis are into gold shares, some for the first time in years.

The parabolic bowl that began in January in the XAU's daily chart is still in its ascending phase and has not yet reached the point of exhaustion. This means that at the very least the XAU will have "flotation," that is, prices should hover near the recent highs for a while before encountering resistance. A parallel trend channel is also providing support above $70 right now, and the XAU should decline to no lower than $67 in coming weeks based on the current configuration of parabolas and trend lines. The XAU's dominant short-term cycle bottoms in early May, so there will be a mild downward impulse pressing against prices until then but the fact that the XAU has held up so well in the face of this declining cycle underscores the incredible strength behind the gold stock sector.

In conjunction with our gold analysis, let's take a look at the dollar index. The strength of the U.S. economy in recent years can be credited in large part to the tremendous strength of the U.S. Dollar index relative to other major currencies. The strong dollar has been a great boon for foreign producers exporting cheap goods to America and has been largely responsible for the robust consumer economy of recent years. The strong dollar has also acted as a bulwark to prevent a sustained gold bull market and has been useful to the financial establishment in many other ways. Lately, everyone seems to be focused on the dollar and its perceived weakness. Many analysts have openly predicted a dollar collapse to begin sometime this year. Is a complete breakdown of the dollar likely in 2002? It's possible that a breakdown could begin by late summer, but dollar strength is likely to persist in some measure until then. However, the currency outlook will be radically altered next year by a series of unprecedented changes to the U.S. dollar and its purchasing power.

The dollar's weekly chart really tells the whole story. Going back to 1999 you can draw a rising trend line off the August-September lows of that year and project it forward through 2002. Along the way the price line touches the trend line and reverses in January 2000, January 2001, and October 2001. The dominant interim dollar cycle bottoms above this trend line (which also happens to be a magnetic equilibrium center) every time from 2000 onward. This shows that the intermediate-term trend is still up. The dollar is still strong above $116 since not only is this where trend line support is met but also parabolic bowl support. By drawing a succession of concentric curves around the tops and bottoms of the dollar price line the parabolas can be identified. Right now the underlying bowls are stronger than the domes and the most recent dome will be exhausted by early June. The mid-point of the underlying parabolic bowl in the weekly chart was passed in January of this year. Since parabolas are equilateral in construction, the first half of this bowl took nine months to form; therefore, the bowl won't exhaust completely until early September of this year.

This is also around the time when the dominant time cycles in the equities market are expected to turn down hard, so we should see a steep dollar decline in the fall of this year to coincide with the fall in equities. This combined bear market will translate into a powerful gold market and gold stock rally, so it should not be surprising that the autumn witnesses the high in prices for the year in gold.

Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy.  The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment.  He is also the author of numerous books, including “2014: America’s Date With Destiny.” You can view all of Clif's books here. For more information visit www.clifdroke.com.


With gold stolen by Conquistador Francisco Pizarro from the Inca Empire in 1532, Spain financed its conquest of Europe.
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