Elliott Wave Golf Update XI

Both gold and silver seem poised for dramatic upside price explosions if the latest Elliott Wave count set out below is correct.

Update XI contained a warning that if gold performed sluggishly as the price approached $680-$700 (instead of acting powerfully as anticipated) that there was the possibility of a B wave peak at that level, which could be part of the ongoing correction since May 2006. The gold price was sluggish when it got above $680 in February and soon started down. This raised concerns about a gold price decline to possibly below $600 and maybe a test of $560.

Fortunately there is another possibility that has very bullish connotations and which looks as if it has a high probability of being the correct interpretation. This interpretation calls for an immediate strong 3rd wave upward move in both silver and gold. Under this interpretation gold should knife through the resistance in the $680-$700 area without a problem and rise to levels in excess of previous forecasts for the peak of wave 3 of $760. A target of a minimum of $800 is now possible for the peak of wave 3.

What has created this bullish scenario is the formation during the past 3 months of what looks like an irregular ABC correction. An irregular correction is one where the peak of the B wave is above the starting point of the A wave. This type of formation is clearly visible in the silver chart below where the peak of the B wave at $14.82 is above the $14.24 starting point of the A wave decline.

Data updated to 21 March 2007.

Irregular corrections such as the one depicted in the above chart indicate that the underlying market is very strong, leading to expectations of unusually strong upside action in the period immediately ahead. This is what is now anticipated for both silver and gold.

The analysis of the A and C waves in the silver correction show them to be remarkably similar, which adds credibility to this interpretation. The following are the details of these two waves:

These two declines are almost identical in percentage terms. The conclusion must be that they form part of the same corrective wave, hence the interpretation that this is an irregular ABC. In fact, the irregular correction in silver is almost text book perfect.

The picture in gold is slightly more confusing because it appears that the irregular formation is skewed upwards. The implication of this is that the upward forces that are about to burst forth in gold are stronger than those at work in silver. The following chart depicts the irregular correction in 2 Month Fwd Comex Gold:

Data updated to 21 March 2007.

As with silver, these two corrective waves are almost identical in percentage terms at 7.8% and 7.7%. The only explanation for these two waves to be of this magnitude in this formation is if they are both part of the same corrective wave, i.e. an irregular ABC correction. Once again the precise proportions of the declines add credibility to this conclusion. The way the irregular correction is skewed upwards suggests that there are extremely strong forces at work in the gold market that should soon propel the yellow metal upwards in a very strong 3rd wave type move. On this occasion one would expect the gold price to knife through the resistance in the $680-$700 area without a problem and reach a higher level than previously anticipated for wave 3.

The forecast in Update XI targeted $760 as the peak of wave 3. The current formation will require the measurement of wave 3 to start from a higher level ($639.9 as opposed to $603.6), thus the peak of wave 3 should be at least $40 higher than previously forecast. That pushes the new forecast for the peak of wave 3 to at least $800.

To complete the picture, the following chart depicts the movements in the London PM gold fixes:

Data updated to 21 March 2007.

The proportions in the A and C waves of the London PM gold fixes are not as precise as those found in silver and in Comex gold. They do nevertheless support the thesis that what the precious metals have experienced over the past 3 months has been an irregular correction in wave 2 of the current sequence. The strong upward wave 3 has probably just commenced.

The degree to which the PM fixings chart has been skewed to the upside is even more dramatic than in the Comex gold futures. This suggests that the demand in the physical market must be very strong and that physical demand is the most important driver of the current gold price move. The conclusion is that this is about as bullish as it is ever likely to get in the precious metals markets. The word "explosive" certainly comes to mind.

Warning: Although the odds seem to strongly favour the explosively bullish scenario, it is worth considering what might go wrong and what signals one could expect if things were going wrong. The major negative factor to bear in mind is the concern about the possibility of the B wave peak at $685 being a B wave peak of one degree of magnitude higher than the one analysed here.

That would raise the prospect of a decline below $600 and a possible test of the $560 level. If gold drops clearly below $630 and silver drops clearly below $12 from current levels, then these lower targets would come into play. They would indicate that the Major Wave TWO correction was not yet complete. The odds seem to be against this happening, but it is wise to keep these guidelines in mind in case that eventuality occurs.

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.