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One Model Which Can Help Traders Navigate Gold Prices

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Even amongst technical market analysts that use mathematics (rather than fundamental events) to create forward price models are split as to whether or not they see any real value in using the Elliott Wave Principle that was created by R.N. Elliott in the early 1930s.

In August 1938 Ralph Elliott published a detailed account of his studies and observations as to how prices of any given financial market will move through time. Simply put this technique looks at the collective investor psychology which contains periods of optimism and pessimism. From this basic assumption he created a model to incorporate the fact that market prices alternate between periods of bullish market sentiment (impulse waves), and bearish market sentiment (counter/corrective waves).

According to Wikipedia, “In the early 1930s, Elliott began his systematic study of seventy-five years of stock market data, including index charts with increments ranging from yearly to half-hourly. In August 1938, he detailed the results of his studies by publishing his third book, entitled The Wave Principle. Elliott stated that, while stock market prices may appear random and unpredictable, they actually follow predictable, natural laws and can be measured and forecast using Fibonacci numbers.”

Applying the Elliott Wave Principle to Current Gold Prices

In August 2018 gold pricing hit a bottom as it traded to $1165 per ounce. Following this correction gold entered a multiyear bullish cycle. Based on Elliott Wave Theory this cycle will be composed of five waves, with waves one, three and five moving prices higher. With two counter waves (wave two and four) moving prices lower.

Our technical studies indicate that gold has just begun a corrective wave four, which will be followed by a final fifth wave to complete the bullish sequence. Wave one is always considered a benchmark wave that is used to forecast three of the four upcoming waves. Wave two is typically a .618% retracement of wave one. Wave three typically is a 1.618 extension of wave one. Wave five is usually equal in the price move seen in wave one.

As you can see from the chart attached wave one took gold pricing from $1165 up to $1352, with gold gaining $187. Wave two was a corrective wave in which gold traded from $1350 down to $1270. Wave three was a perfect 1.618% extension of wave one. Beginning at $1270 per ounce, wave three took gold to $1564, gaining almost $300 during this time period. On approximately September 3rd the current leg of the rally (wave three) concluded and gold pricing began a wave four corrective period. The decline in prices from $1564 to the lows achieved yesterday at approximately $1492 marked the beginning of this corrective cycle. Our current model suggests that this correction might contain three distinct waves labeled a, b and c. This model suggests that we have just concluded the “a” wave. Gold has just begun the counter wave “b’ be which should take gold pricing higher. Typically, it will regain between 60% and 75% of the price decline of wave “a”. The corrective cycle will conclude with one last corrective wave, wave “c”. Following the completion of wave four, ( comprised of “a”, “b” and “c”) gold prices will find support and the fifth wave moving gold pricing higher will begin. Based on the principle that wave one and wave five should be about equal in length we could see gold moving to approximately $1650 before the end of this year.

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Wishing you as always, good trading,

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.