Long Term Gold Analysis

For a long time I was concerned about the commonly accepted Elliot Wave format of the gold price in which the two year correction from 1974 to 1976 correction was notated as the 1-2 and the recent 21 year correction from 1980 to 2001 labeled the 3-4 as shown in the chart above.

It is most unusual to have a twenty one year bear market after a two year correction. Under normal circumstances the correction from 1980 should have lasted a maximum of five years, not twenty one.

In addition the uncontrolled euphoria during the last six months of 1979 that accompanied gold's oil price based inflation move from $300 up to its peak at $850 in January 1980 was more in keeping with a classic major fifth wave climactic blow off rather than the end of a minor thrust wave.

As I pondered this anomaly I realized that the 21 year 1980 corrective move must be a higher wave order than the two year 1974 correction and so I started delving into long term gold prices. I found the answer.

Going back to 1833 I noted that when plotted on a semi-log scale the price data revealed several thrusts and corrections that were more in keeping with the time frames of recent moves.

For almost a century from 1833 to 1930 the gold price was stable at $20.66 but in 1931 it dipped to a century low of $17.06 at B. This was the bottom point of the previous century long bear market and signaled the start of a new long term bull market.

The price doubled in the ensuing three years to trade at $34.70 in 1934. This became the first upward move 1 of a new huge gold bull market. A five year bear market followed and the price dipped to a low of $31.69 in 1939. This was the first corrective wave1-2 of the big bull market.

From 1940 to 1968 the gold price was effectively fixed at $35 until the price rallied to $41 in 1969. This move marked the minor first minor up leg 1 of the big extended wave 3. The short two year hiccup back to test $35.95 in 1970 completed the minor 1-2 of big wave 3.

The recent history of the gold bull market commenced at this point. But the key factor is that the two year correction from1974 back to 1976 was not a major move but the minor 3-4 leg of big extended wave 3. The final oil inflation based euphoric thrust of bullion to its $852 peak in January 1980 was a typical Elliott fifth wave blow off and signaled the end of big wave 3. The extended wave from 2-3 lasted a total of 41 years from 1939 to 1980.

As we all know the following 21 years from 1980 to 2001 were bearish for bullion. Such an extended period of time does not fit with a minor corrective wave but is clearly a major reaction that mapped out a 50% correction to the 41 year previous bull wave.

If we remove from the chart the non trading period from 1940 to 1968 when the gold price was artificially fixed the argument for the extended third wave from 2 to 3 becomes even more pronounced.

In addition the first major correction from 1 -2 and the second major correction from 3- 4 become more focused in time.

The implication from this analysis is that the correction from $850 to $252 in the big wave 3-4 reaction is complete and we have only just started the big wave 5. If Elliott analysis is to be believed this upward thrust MUST take the bullion price well above the $850 level of the previous 1980 peak of big wave 3.

I have always concluded that we have already started the final fifth major bull market since 1931 that should see the gold price move well above the previous $850 peak.

Bullion broke decisively above the 15 year resistance at $430. During the past week it has pulled back to test this breakout. This has provided a minor iii-iv correction and another buying level with further upside counts. I am looking for a move to $495 as the next phase to be followed by a minor 3-4 correction prior to completing wave 6 at around the $530 level for point 7. At this point a reasonable correction from 7 to 8 can be anticipated that could last for four or five months. After this correction comes the final upside euphoria surge that should take bullion back to around $630. In my analysis, this will be the time to panic. A move above $600 will signal the end of the major bull run from 2001. It will be selling time.

Until then sit back and relax. Sure we will see some of the usual volatility associated with all precious metals. But I do not see any long term danger until bullion is well over $600.

My final position is that the above analysis I posted last week to $630 should be the first leg of a major bull run lasting at least another five years.

I am not going to postulate on the ultimate price level as I would like to reach $630 first and then see what type of correction ensues.

But if my Elliott analysis is anywhere near correct then the gold price should move well above its $850 peak to reach the high point of this new bull market.

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Dr. Clive Roffey

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20 December 2004