Elliott Wave Gold Update V

In "Elliott Wave Update IV" published on 19 February 2006, the following was the summary of my views on gold at that time:

Summary of Gold Update IV:

• 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.

What happened subsequently:

Further sideways action was needed and a "flat" correction did form, with a b-wave rise to $565.2 (March 2nd) and a c-wave decline to $535.0 (March 10th) to within "a few dollars of $538" to complete the correction. Then the 3rd of a 3rd strong upwave that was anticipated to produce a rise of "at least $90 without any significant corrections" got underway. It has been a humdinger, showing just how powerful a 3rd of a 3rd wave can be.

In London PM fixing terms, the gold price has risen virtually in a straight line to Friday's (May 5th) PM fix of $678. In the Comex gold futures, however, the price reached a peak on April 20th of $644.4 and literally within hours corrected to a low of $610.9 for a decline of 5.2% before closing the day at $622.8. My forecast called for a correction of 4%-5% after the gold price had exceeded the target of $630.

Was this decline of 5.2% from $644 to $610 what we were looking for? If so, why did the correction not appear in the PM fixings? These questions will be addressed later.

This following was the chart shown in Gold Update IV published on 19 February:

Data updated to 17 February 2006

The corrections are bounded by red parallel lines. The lower two were the 3.7% and the 4.0% minor corrections within wave (i) of V. The 3rd correction, from $536.5 to $489, was the 8.8% correction that formed wave (ii) of V. The rise from $489 to $572 and decline to $538.7 were the minuette waves 1 and 2 of wave (iii) of V, hence the forecast that wave 3 of (iii) of V lay immediately ahead, the strongest wave in the sequence.

This is what has happened since the above was published on 19 February 2006:

Data updated to 5 May 2006

By any standards, this was a remarkable forecast, one that relied largely on a detailed knowledge of the Elliott Wave principles plus a modicum of inspiration.

What made the forecast perhaps more remarkable was the fact that in mid-February when the $538.7/$535.0 low was established, most gold market experts were calling for a correction to $450/$480. One of the most fervent gold bulls was calling for a pull back to $500. Words such as "extremely over-bought", "reversion to mean needed" and "over-extended, correction coming" were predominant in gold commentaries. To forecast that the strongest move of the sequence was immediately ahead, a move that would take the gold price upwards by more than $90 with only miniscule corrections on the way, was an extremely bold prediction at that time.

Enough of the past. What about the future? Unfortunately the situation is not absolutely clear and there are a couple of possibilities. The forecast called for a 4%-6% correction once wave 3 of (iii) of V was complete. The confusion arises because in the Comex gold futures market there was a 5.2% correction from $644.4 to $610.9 within a day, a correction that does not appear in the graph of the London PM fixings. This was exactly the magnitude of correction that was anticipated and arrived as expected, after $630 had been exceeded. The following is the chart of the gold futures prices. The correction referred to is shown as a rising triangle bounded by red lines:

I have always used the PM fixings as my reference for the gold price because they relate to physical transactions when time zones permit both Europeans and North Americans to participate in the fixings. I was suspicious of futures prices because they are largely paper transactions and participants with deep pockets can manipulate prices in the short term.

Volatility in the gold market has built up considerably over the past 6 months and one must now question whether a single price fixed once a day is adequate to make gold price forecasts. On the other hand, was the correction on April 20th from $644.4 to $610.9, which was accomplished within a few hours, a true market move or something that was manipulated by desperate shorts trying to cover their positions?

If the Comex movements are the correct interpretation of the gold market, then the next correction will be of the 8%-10% order of magnitude. If the PM gold fixings are the true reflection of the market, the next correction will be in the 4%-6% range. The magnitude of the next correction will thus clarify the situation and determine whether we need to place more emphasis on Comex prices in future or continue to rely totally on the PM fixings.

One of the reasons why I am considering introducing the Comex futures into the equation is because the correction on April 20th from $644.4 to $610.9 was $33.5. Despite the fact that it took only about 5 hours to achieve this correction, it was similar in dollar terms to the prior correction from $578.8 to $541.8, a decline of $37.0, despite the fact that it took 5 weeks to complete that correction. The following is the analysis of wave (iii) of wave V using the second month gold Comex futures prices:

Forecast of wave (iii) of wave V using Comex futures prices:

Wave 5 of (iii) is currently in progress and reached $685 on Friday May 5th This wave has reached levels from which another correction can be expected. In the above forecast it has been assumed that wave 5 will be the same dollar amount ($86.5) as wave 1, giving rise to a target of $697.4. If wave 5 is the same percentage (17.5%) as wave 1, the peak would be $718. In fact, a peak anywhere between $685 and $718 is possible.

As already pointed out, this analysis critically depends on wave 4 being the correction as depicted above. There was no such correction in the physical market as depicted by the London PM fixings. Assuming this Comex analysis is correct, the coming correction should be of a magnitude of 8%-10% and the following forecast of wave V itself can be attempted:

Forecast of wave V using Comex Futures prices:

This analysis produces a target for the peak of wave V of $818, slightly higher than the $768 target calculated in Update IV on 19 February 2006. The largest correction of the gold bull market to date should be anticipated to follow the peak of Wave V. This correction should be at least 20%, suggesting a correction from the forecast peak of $818 to around the $650 area.

There is, however, a much more bullish scenario which would come into play if PM fixings are continuing to depict the true underlying forces in the gold market. We will only know whether this possibility is realistic if the next correction in the gold market as revealed in PM fixings is restricted to the 4%-6% range.

If that were to happen, the above analysis using Comex futures prices would have to be abandoned and a new calculation undertaken using the new magnitude of wave 3 of (iii). A correction in the 8%-10% range would verify the Comex calculations.

Already wave 3 of (iii) of wave V in PM fixing terms has risen from $535.0 to $678, a gain of an astounding $143 without a significant correction. This is the sort of action that can be anticipated from a "3rd of a 3rd" situation and was the reason why I was so excited about the prospects for gold 3 months ago.

If this "3rd of the 3rd" wave has not yet finished, which we can only determine after the magnitude of the next correction has been established, a much higher target for the peak of wave V will come into play. We can leave that subject and the calculation of the possible higher peak price for wave V for a future Gold Update.

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.