Elliott Wave Gold Update IV

In August 2003 I published an Elliott Wave forecast for gold which suggested that the target for the peak of the first major wave of the new gold bull market was $630. This target was affirmed in subsequent articles, the most recent being "Elliott Wave Gold Update III" published 24 October 2004. Recent developments have necessitated a revision of the wave count. There is now a possibility that the target of $630 could be exceeded, possibly by a wide margin, depending on price action over the next few weeks.

Those who wish to skip the detailed Elliott Wave analysis may turn directly to the "Summary" section immediately below for the revised forecasts. Those who wish to understand the reasoning behind the changes will have to work their way through the "Detailed Analysis" which follows the "Summary".

SUMMARY

• The large increase in the magnitude of impulse waves in the gold market over the past 6 months has necessitated the revision of the price target for the peak of the first major up-wave in the new bull market.
• The old target of $630 has been abandoned and a new target of circa $768 has been estimated.
• There is a possibility that the market is about to start a "3rd of 3rd" wave, implying a strong up-move of at least $90 (to $630) without a significant correction. This level should be followed by a 4%-5% correction to $600.
• On the way to $768 there should only be the 4-5% correction just mentioned, an 8-9% correction and two further 4-5% corrections. After achieving the approximate $768 first major peak, the gold bull market should experience the first major correction, which should be in the range of 20%-25%.
• The above bullish expectations are predicated on the assumption that the recent correction from $572.1 (2 Feb) to $538.7 (16 Feb) is the minuette correction of about 4-5% expected at this time. The correction to date is 5.8%.
• If the current correction declines below $538.7 basis London PM Fixings by more than a few dollars, it would probably nullify the immediate bullish case and require a return to the drawing boards to reassess the situation.
• The correction from $572.1 to $538.7 is just $1.70 from an exact 38.2% correction of the prior $83.1 up-move, a classic Elliott relationship. Also the two minor down waves in the correction are almost the same size, another common relationship. These facts support the notion that the correction is complete and that the 3rd of 3rd strong up-wave should follow immediately.
• It is possible that there may be further sideways action in the correction (e.g. to form a "flat"), but the parameters remain the same. A significant decline below $538.7 sends us back to the drawing boards while a clear upside break above $572 would indicate an onset of the 3rd of 3rd strong up-move.

DETAILED ANAYSIS

For easy reference, the following was the forecast (yellow highlighted sections) made in the "Update III" article of 24 October 2005:

The market appears to be busy with the minuette waves constituting Wave (i) of Wave V, as follows:

I suspect that the minor waves in Wave V will be similar to those in Wave I, as first and fifth waves are often similar. The following is the analysis of the actual minor waves in Wave I:

How have the above forecasts turned out? The low of wave (4) of (i) was at $456.5 (forecast was $460) and the magnitude was a decline of -4.0% (forecast was -3.2%). Then upward wave (5) of (i) got underway in no uncertain terms. The forecast high for that rise was set at $490, to make this wave roughly equal to wave (1) of (i). A correction in the 8%-9% range was expected to follow this peak.

The gold price paused briefly at $490 and then continued to power upwards in a straight line, finally peaking at $536.5 on 12 December 2005. There is no doubt in my mind that this stunning move beyond the forecast $490 peak was a 5th wave extension, a rare event and generally incapable of being forecast.

Extended waves do provide us with other forecasting tools. Firstly the price invariably retraces the entire magnitude of the extension and, secondly, often has a double retracement. In view of the fact that wave (5) of (i) was expected to peak at $490, I concluded that this was where the extension started from. Thus to retrace the entire length of the extension, the gold price had to correct from $536.5 to $490.

It was satisfying to see the correction finish at $489 on 21 December 2005, exactly retracing the full extent of the 5th wave extension. At the same time the correction amounted to $47.5 ($536.5-$489), a magnitude of 8.8%. Thus the 8.1% correction originally anticipated from $490 actually commenced from $536.5 due to the extension and helped to confirm that this decline was indeed wave (ii) of wave V.

Turning to the comparison of wave V with wave I (see above), it is interesting to note that wave (ii) of wave V, shown in the paragraph above as a magnitude of -8.8%, was almost identical to wave (ii) of wave I, which was a magnitude of -8.9%.

Despite this remarkable similarity in the magnitudes of the wave (ii) corrections, impulse up-wave (i) of wave V was massively larger at +28.1% (see the analysis below) than the magnitude of wave (i) of wave I, which was +13.7%, as depicted in quote from "Update III", shown above.

In these circumstances it was necessary to conclude that wave V is not going to be similar to wave I. Thus far wave V shows every sign of being very much larger than wave I. The previous forecast of a $630 peak for the first major wave of the new gold bull market, which was based on the assumption of wave V being similar to wave I, thus had to be jettisoned forthwith.

Before getting into a new detailed forecast, I need to explain that I use the magnitude of the corrective waves to determine where we are in an Elliott Wave pattern. The rhythm in the gold bull market to date has seen minuette corrections in the 4%-5% range. The corrections of one larger degree of magnitude have been in the 8%-9% range. The next higher degree of correction has been about 16%-18%.

It is important to understand this principle. It relates directly to the forecast that will be made below. In a bull market the sequence of the corrections should be as follows:Wave I: 4%, 4%, 8%; 4%, 4%, 8%; 4%, 4%, 16%, the latter being Wave II. Wave III: 4%, 4%, 8%; 4%, 4%, 8%; 4%, 4%, 16%, the latter being Wave IV. Wave V: 4%, 4%, 8%; 4%, 4%, 8%; 4%, 4%, 20-25%, the latter being the first Major correction in the gold bull market. The correction highlighted in yellow is the correction that the market is currently dealing with. There will thus be four further corrections of 4%, 8%, 4% and 4% before the market reaches the first major peak and has to then to endure the 20%-25% decline.

After each 5 wave impulse sequence, the correction that follows is of one higher degree. The analysis of the actual minuette waves of wave (i) of wave V (shown above) reveals corrective wave (2) of -3.7% and corrective wave (4) of -4.0%. Having completed a 5 wave sequence, the next correction, i.e. following the $536.5 peak, had to be of the 8% magnitude. It turned out to be 8.8%, as discussed above.

It is easier to see this on a chart. The following chart depicts the London PM gold fixings since the start of Wave V:

The corrections are bounded by red parallel lines. The lower two were the -3.7% and the -4.0% corrections referred to above. The 3rd one, from $536.5 to $489, was the 8.8% correction. That concluded waves (i) and (ii) of wave V.

Congratulations if you have stuck it out to this point, because this is where it gets really interesting. From the $489 low the gold market commenced wave (iii) of wave V. We know that this wave should have two corrections of the 4-5% variety before another 8-9% decline occurs, which decline will be wave (iv) of wave V.

Now check the chart above. From $489, the low of wave (ii) of Wave V, the gold price has risen in a straight line to the recent peak of $572.1. There are no intervening corrections other than of miniscule proportions. Certainly nothing approaching the 4-5% level expected for the first minuette correction is seen - until the current correction, which is the top one contained by red lines. This means that the $83 rise from $489 to $572.1 is minuette wave (1) of wave (i) of wave V. This is the largest impulse wave of the bull market to date and yet it must be classified as a minuette wave! That shows the extent to which the impulse waves have enlarged in the past 6 months, a period during which the gold price started rising in terms of all currencies.

More importantly, if this assessment is correct, then gold is about to start wave (3) of wave (iii) of wave V. Elliott followers know that the "third of a third wave" is the strongest combination, leading to a very large impulse wave. This 3rd wave up-move should be larger than the $83 magnitude of the first up-move, and could perhaps be as much as $90+, pointing to a peak for (3) of (iii) around $630. This $90 move should be achieved without any significant corrections. The next 4-5% correction should only occur after $630 has been reached.

This bullish scenario is what potentially lies directly ahead once the current correction, wave (2) of wave(iii), is complete - PROVIDED that the current correction does not exceed the recent low of $538.7 by more than a few dollars. A decline to below say $530 basis London PM Fixings would nullify this bullish conclusion and require a return to the drawing boards to reassess the situation. The reason is that the current correction already amounts to 5.8%, slightly in excess of the 4-5% expected. The following is the analysis of the current correction:

Wave (a) of -$23.4 and wave (c) of -$21.5 are almost the same size, a common relationship. Furthermore, the 38.2% correction of the previous $83 up-move is at $540.40. Hence $538.7 is just $1.70 from that classic Elliott corrective point. This is sufficient to suggest that this correction is complete and thus the market is set to embark immediately on the exciting 3rd of 3rd wave.

There is the possibility that the correction just analysed is only wave (a) of a flat correction, wave (b) being a rally to close to $570 and wave (c) a decline to around $538. This would only delay the onset of the 3rd of 3rd wave, not eliminate it. Only a decline significantly below $538.7 would nullify the bullish case and require a reassessment. A London PM Fixing significantly above $572 should be a confirmation that the 3rd of 3rd is underway.

Assuming that the above analysis is correct, we can now move to the calculation of the forecast peak of wave V. The forecast assumes that the coming wave (3) of wave (iii) rise will be larger than the preceding gain of $83 of wave (1) of wave (iii). It is assumed that wave (5) of wave (iii) will be a smaller magnitude, maybe a 10% rise. The corrections are as discussed and the magnitude of wave (v) of wave V will be similar to the magnitude of wave (i) of wave V at approximately 28%.

If this analysis proves to be anywhere near the mark, investors waiting for a large correction before committing themselves to an entry into the gold market may have to be spectators all the way up to the $768 peak.

The 20%-25% major correction anticipated to follow the approximate peak of $768 of the first major impulse wave should thus have as its low point $614 (a 20% correction) or $576 (a 25% correction).

A typical correction reaches the low of the previous 4th wave correction which, in the above forecast is at $600, midway between the above two numbers, so $600 should be a reasonable target for the big correction to follow the $768 peak.

Alf Field
Comments may be made to the author at: [email protected]

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.