ELLIOTT WAVE AND THE GOLD PRICE
Robert Prechter’s forecast that
the gold price would drop below $250 (and possibly even below $200)
has caused a degree of angst amongst gold bulls. Bob has made so many
astonishingly accurate calls in the past, especially relating to the
stock market in the 1980’s, that one should consider his views
I venture into this discussion with some trepidation but feel that my
views may be helpful to understanding what motivates Bob’s call
and why he may be wrong. The gold market is approaching a point of
resolution and it will be useful set out the relevant critical
I have some minor credentials for entering this debate. I was using the
Elliott Wave Principle (EWP) years before Bob popularised it with his
books on the subject and his accurate calls in his monthly
publication “The Elliott Wave Theorist”. During the
1970’s I had a degree of success using the EWP in the gold
market. For some reason, possibly the huge emotional element in this
market, I found that the EWP produced its best results in the gold
I am not a gung ho advocate of the EWP. I discovered not only its
strengths but also its weaknesses. I prefer to have fundamentals,
technicals and the EWP all in place (if possible) before committing
myself to an investment. The EWP does have the tools to provide a
magnificent guide to potential future market movements and turning
points, these being its major strengths.
weaknesses of the EWP are as follows:
incorrect reading of even a single minor wave can put one on the
wrong side of the market for some time.
waves are notoriously difficult to evaluate and often their
conclusion can only be determined after the event.
exceptions, e.g. 5th wave failures and wave extensions,
can lead to some serious mistakes and major lost opportunities.
the minor waves are confusing, difficult to interpret and conflict
with EWP rules.
It is difficult to comprehend by other than seriously devoted students.
purposes of this analysis I will use only the London PM Gold fixing
prices. In the Futures markets the participants with the deepest
pockets can control the market because settlement is invariably in
cash. Futures’ trading is almost always on a highly leveraged
basis and the strongest player can push prices around to trigger
forced stop loss trades by smaller players. In the gold fixings, to
be a seller one must actually have physical gold for delivery and the
price must be paid in full. The PM fix is the one where time
differences allow both European and North American traders to
participate. The PM fix is thus the “real” gold price in
following is a weekly chart of the London PM Gold Fixings for the
past 5 years.
I have drawn a 5-wave upward zigzag followed by a 3-wave downward
zigzag in red lines on the above chart. This is the typical shape of
an EWP bull move followed by a bull market correction. These in turn
represent just the first two waves in the next wave of a greater
order of magnitude.
mid 1999, when the gold price dipped towards a low of $253, Bob
Prechter forecast an extended rally in the gold price that would be
followed by a final decline to below $253 to a low point approaching
$200. This final decline would mark the end of the huge gold bear
market spanning more than 2 decades and spawn a massive new gold bull
counter trend moves are often 3 wave affairs, generally referred to
as A, B and C waves. In Bob’s forecast, the sharp rally to $325
in September 1999 was the A wave, the decline to $256 in April 2001
the B wave and the subsequent two year rally to $382 in February 2003
the C wave. Give Bob his due, he forecast (at the start of the move)
that the peak would be about $360 and he recommended short sales in
gold after the price moved above this level in February 2003. He now
believes that the market is on its way down to new lows below $253.
At this stage gold bulls must respect this forecast until it is
(hopefully) eliminated by the London PM gold fix rising above $382.
could Bob have gone wrong in his analysis? There are three facts that
make me suspicious about Bob’s analysis. The first is that the
long 22-year bear market down trend line from 1980 has been broken to
the upside. This is often a sign that a corrective pattern has been
completed. As mentioned earlier, the completion of corrective
patterns, even those lasting 22 years, can sometimes only be deduced
after the event. Secondly, it is approaching 4 years since the $253
low in September 1999. This is an excessively long time for the type
of corrective wave that Bob was forecasting.
some rhythmic proportions have begun to appear in the gold market.
These are similar to those that were evident in the 1970’s gold
bull market and which have been missing since the gold bear market
started in 1980. The EWP analysis on page 4 illustrates some of these
relationships. This is an analysis of the minor waves starting from
the April 2001 low point of $256, which is where I believe the new
gold bull market started.
I suspect Bob’s error (if it is indeed proved to be an error) is
to be found at this point. My suspicion is that the down wave from
$325 in September 1999 to the low of $256 in April 2001 was the move
that Bob expected to go to new lows below the September 1999 low of
$253. It didn’t, so Bob assumed the wave count referred to
suspicion is that this inability of the gold price in April 2001 to
go below $253 low of September 1999 represented one of those EWP
exceptions known as a “5th Wave Failure”. This
a rare event that happens when the final minor wave of a much larger
sequence fails to exceed the previous low point, mainly because the
market has been gathering strength for the forthcoming major change
of direction. This is obviously something that only becomes evident
later as the bull market developes and forces the analyst to accept
that it was a 5th wave failure.
to the analysis of the minor waves in the first leg of the new bull
market, the move from $256 in April 2001 to $382 in February 2003
seems to be a completed composite move. The minor waves contained
within this composite move are confusing, hard to analyse and
sometimes conflict with EWP rules.
the magnitude of the various corrective waves within the up move from
$256 to $382, the two largest corrective waves are $25 and $26
respectively. All the other corrective waves are smaller. This is how
the 5 wave upward zigzag depicted by the red lines on the above chart
was determined. Despite the confusing patterns of the minor waves,
the underlying 5-wave upward Elliott zigzag was still capable of
beauty of being able to discern a 5-wave zigzag of this nature is
that one can confidently forecast that the correction that follows
will be significantly larger than the magnitude of the two
minor corrective waves within the upward zigzag. Those minor
corrections were $25 and $26, so it was possible to forecast that the
correction from the $382 peak could possibly be at least double $25,
suggesting a correction of about $50. In fact the correction was $62,
dropping from $382 to $320 in a mere 2 months. This is a very
valuable insight to have ahead of the move. A further interesting
point is that the two downward waves in this $62 correction were each
exactly $38, (see the analysis on the next page), this being one of
the proportional rhythmic movements referred to earlier.
EWP Bull Market Analysis
|* Minor Waves not shown.
This would leave the analysis of the larger order of magnitude 5-wave zigzag looking like this:
||$256 to $382
||$382 to $320
||$320 to $500
||$500 to $420
||$420 to $630
||$256 to $630
completed this 5-wave upward zigzag in the larger degree, one could
confidently forecast that the ensuing correction (which would be yet
another order of magnitude greater) should substantially exceed the
proportions of the corrections within this wave, which are 16.2% and
16% respectively, ie waves II and IV above. One could
anticipate a downward correction of probably somewhere between 25%
and 33% from the $630 peak estimated for Wave (1). This level
of $630 would not be the end of the gold bull market but
merely the first up-leg of a 5-wave zigzag of the same magnitude as
There is no purpose served in taking
the forecast beyond this point at this time. Let the gold price reach
$630 first, and then we will see what the 25%/33% correction that
follows looks like. By that time there will be much more data
available with which to extend the EWP forecast with a greater degree
Bob Prechter’s forecast of
a decline in the gold price to below $253 remains a serious
possibility and must be accorded respect. A London PM gold fixing
above $382 will greatly reduce, if not totally eliminate, the
prospect of Bob’s forecast proving to be correct.
London PM gold fixing above $371 followed by a fix above $382 will
enhance the probability of the forecast set out in my analysis above
being correct. This would indicate that a move to about $424 without
a serious correction was about to occur.
decline below approximately $340 basis the PM London fixing would
suggest that the correction from the February 2003 peak of $382 has
not yet been completed. Possible points where this correction could
terminate are $320 (base of wave a), or a level of $309 (where wave
c would equal wave a).
decline below $309 would in my opinion enhance the odds of Bob
Prechter’s forecast being correct.
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Statement: The author has personal
investments in JCI Ltd (JCD), in the JCI Redeemable Convertible
Debentures (JCDD) and in Randgold Exploration Ltd (RNG). The
author has not been paid to write this article nor has he
received any other inducement to do so. The author will benefit
from any appreciation in the market prices of these securities.
The author’s objective in writing
this article is to invoke an interest on the part of potential
investors in these securities 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 these securities.
Investors are recommended to obtain the advice of a qualified
investment advisor before entering into transactions in any
of these securities.