Elliott Wave Gold Update X

Gold Update IX indicated that there was a high probability that the 5 month correction in the gold price finished at the $560.7 London PM fixing on Friday 6 October 2006. That is exactly what happened.

Update IX was written over the weekend following the $560.7 London PM fixing and that article was published before the markets opened on Monday, 9 October. The forecast of the exact low of the correction, literally to the day, was thus produced in real time. This accurate call once again confirms the efficacy of the Elliott Wave technique as applied to the gold price.

The following chart of the PM gold price fixings was shown in the Update IX article:

Data updated to 6 October 2006

Update IX included the following comment:

Targets for the end of major wave THREE are vastly higher than the current gold price. We should wait for confirmation that we are actually in wave THREE before calculating the upside potential for this wave. What we are looking for is: 1) immediate strong upside impulsive action and, 2) a breakout from downtrend from the May peak. This will probably be evidenced by the gold price knifing upward through $610.

The chart below shows the gold price action since the $560.7 low point of Wave TWO. The twin requirements of immediate upside action followed by a break through the downward trend-line from the May 2006 peak have both occurred. Even the requirement for "knifing upward through $610" has been achieved.

Data updated to 24 November 2006

Consequently we can be about 90% certain that upward major wave THREE is underway. Corrections can sometimes develop into very complex structures and it is necessary to keep this possibility in mind. That is why we cannot be 100% certain at this time that the correction is complete. The final doubt will be removed once the gold price exceeds the May 2006 peak at $725.

As promised, we can now allow ourselves the luxury of speculating on the heights to which major wave THREE might soar and, perhaps more importantly, the shape and structure of wave THREE. Fortunately we have a lot of useful information that can be gleaned from the rhythms and structure of major wave ONE that can assist in formulating this template.

We know that wave THREE cannot be the shortest wave in the sequence. We also know that third waves are typically the longest and strongest in a sequence. Thus major wave THREE should be at least as large as major wave ONE in terms of magnitude and will probably be much larger than wave ONE.

In this forecast template it is assumed that wave THREE will achieve the minimum requirement which is to be equal in magnitude to wave ONE. Wave ONE commenced in April 2001 at a PM fixing of $255.9 and finished on 12 May 2006 at $725. Thus the peak of wave ONE was 2.83 times the staring level. ($725 divided by $255.9).

Assuming that it is merely the same magnitude as wave ONE, the minimum peak for wave THREE should thus be 2.83 x $560.7, the latter price being the starting level of wave THREE. This gives a target for the template peak of wave THREE of $1,586, which could perhaps be rounded off to $1,600.

We also know that wave THREE will consist of three separate but smaller upward waves separated by two corrections of about 16% each. This magnitude of correction is derived from wave ONE. Using conventional technical analysis, the likely point of first major resistance in wave THREE should be at the 1980 peak level of around $870. A 16% correction from $870 would cause a decline to $730, a typical support level under conventional technical analysis being the peak of major wave ONE. This is how the magnitudes of waves I and wave II of wave THREE have been arrived at in this template.

The other waves have been determined by assuming that wave III of wave THREE will be the strongest and will include the "Point of Recognition", i.e. that point in time when the majority of participants in the gold market collectively realise that the gold really IS in a new bull market. Wave V of wave THREE is assumed to be similar in size to wave I of wave THREE.

Using these inputs we can make the following guess as to the shape and magnitude of major wave THREE:

These numbers cannot be expected to be precisely accurate (they may well be exceeded) but they are provided in the expectation that they will be an approximate guideline as to what may be expected in terms of structure and price movement in wave THREE.

Each of the smaller uplegs, i.e. waves I, III and V, will also break down into smaller waves in similar fashion, but obviously with lesser dimensions than in wave THREE. Thus the two corrections within each of waves I, III and V, should be of the order of 8%, give or take a percentage point, as compared to 16% in the wave THREE corrections.

This means that the current rise in wave I, which is expected to extend from $560 to $870, should contain two corrections of approximately 8% each. It will be easier to estimate the magnitude of wave I of THREE once the minor waves have started to unfold. That will be the subject for the next Gold Update article.

Technical analysis provides TIMING as well as PERSPECTIVE. The template of the expected structure of major wave THREE is presented in order to provide the necessary perspective. Without some idea of how high the rise in the gold might extend, it is almost inevitable that one will sell out too early and thus miss the huge gains that will accrue by riding out the entire move. Third waves are typically the strongest and most exciting periods. This is what the gold market has in store for its participants over the next few years.

Alf Field

Comments to: [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 in base metal mining shares including Zinifex and Mincor ment. 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.