Elliot Wave Gold Update V
In “Elliott Wave Update IV” published
on 19 February 2006, the following was the summary of my views
on gold at that time:
Summary of Gold Update IV:
- The large increase in the magnitude of impulse
waves in the gold market over the past 6 months has necessitated
the revision of the price target for the peak of the first
major up-wave in the new bull market.
- The old target of $630 has been abandoned and a new target
of circa $768 has been estimated.
- There is a possibility that the market is about to start
a “3rd of 3rd” wave, implying a strong up-move
of at least $90 (to $630) without a significant correction.
This level should be followed by a 4%-5% correction to $600.
- On the way to $768 there should only be the 4-5% correction
just mentioned, an 8-9% correction and two further 4-5% corrections.
After achieving the approximate $768 first major peak, the
gold bull market should experience the first major correction,
which should be in the range of 20%-25%.
- The above bullish expectations are predicated on the assumption
that the recent correction from $572.1 (2 Feb) to $538.7 (16
Feb) is the minuette correction of about 4-5% expected at
this time. The correction to date is 5.8%.
- If the current correction declines below $538.7 basis London
PM Fixings by more than a few dollars, it would probably nullify
the immediate bullish case and require a return to the drawing
boards to reassess the situation.
- The correction from $572.1 to $538.7 is just $1.70 from
an exact 38.2% correction of the prior $83.1 up-move, a classic
Elliott relationship. Also the two minor down waves in the
correction are almost the same size, another common relationship.
These facts support the notion that the correction is complete
and that the 3rd of 3rd strong up-wave should follow immediately.
- It is possible that there may be further sideways action
in the correction (e.g. to form a “flat”), but
the parameters remain the same. A significant decline below
$538.7 sends us back to the drawing boards while a clear upside
break above $572 would indicate an onset of the 3rd of 3rd
What happened subsequently:
Further sideways action was needed and a “flat”
correction did form, with a b-wave rise to $565.2 (March 2nd)
and a c-wave decline to $535.0 (March 10th) to within “a
few dollars of $538” to complete the correction. Then
the 3rd of a 3rd strong upwave that was anticipated to produce
a rise of “at least $90 without any significant corrections”
got underway. It has been a humdinger, showing just how powerful
a 3rd of a 3rd wave can be.
In London PM fixing terms, the gold price has
risen virtually in a straight line to Friday’s (May
5th) PM fix of $678. In the Comex gold futures, however, the
price reached a peak on April 20th of $644.4 and literally
within hours corrected to a low of $610.9 for a decline of
5.2% before closing the day at $622.8. My forecast called
for a correction of 4%-5% after the gold price had exceeded
the target of $630.
Was this decline of 5.2% from $644 to $610 what
we were looking for? If so, why did the correction not appear
in the PM fixings? These questions will be addressed later.
This following was the chart shown in Gold Update IV published
on 19 February:
Data updated to 17 February
The corrections are bounded by red parallel
lines. The lower two were the 3.7% and the 4.0% minor corrections
within wave (i) of V. The 3rd correction, from $536.5 to $489,
was the 8.8% correction that formed wave (ii) of V. The rise
from $489 to $572 and decline to $538.7 were the minuette
waves 1 and 2 of wave (iii) of V, hence the forecast that
wave 3 of (iii) of V lay immediately ahead, the strongest
wave in the sequence.
This is what has happened
since the above was published on 19 February 2006:
Data updated to 5 May 2006
By any standards, this was a remarkable forecast,
one that relied largely on a detailed knowledge of the Elliott
Wave principles plus a modicum of inspiration.
What made the forecast perhaps more remarkable
was the fact that in mid-February when the $538.7/$535.0 low
was established, most gold market experts were calling for
a correction to $450/$480. One of the most fervent gold bulls
was calling for a pull back to $500. Words such as “extremely
over-bought”, “reversion to mean needed”
and “over-extended, correction coming” were predominant
in gold commentaries. To forecast that the strongest move
of the sequence was immediately ahead, a move that would take
the gold price upwards by more than $90 with only miniscule
corrections on the way, was an extremely bold prediction at
Enough of the past. What about the future? Unfortunately
the situation is not absolutely clear and there are a couple
of possibilities. The forecast called for a 4%-6% correction
once wave 3 of (iii) of V was complete. The confusion arises
because in the Comex gold futures market there was a 5.2%
correction from $644.4 to $610.9 within a day, a correction
that does not appear in the graph of the London PM fixings.
This was exactly the magnitude of correction that was anticipated
and arrived as expected, after $630 had been exceeded. The
following is the chart of the gold futures prices. The correction
referred to is shown as a rising triangle bounded by red lines:
I have always used the PM fixings as my reference
for the gold price because they relate to physical transactions
when time zones permit both Europeans and North Americans
to participate in the fixings. I was suspicious of futures
prices because they are largely paper transactions and participants
with deep pockets can manipulate prices in the short term.
Volatility in the gold market has built up considerably
over the past 6 months and one must now question whether a
single price fixed once a day is adequate to make gold price
forecasts. On the other hand, was the correction on April
20th from $644.4 to $610.9, which was accomplished within
a few hours, a true market move or something that was manipulated
by desperate shorts trying to cover their positions?
If the Comex movements are the correct interpretation
of the gold market, then the next correction will be of the
8%-10% order of magnitude. If the PM gold fixings are the
true reflection of the market, the next correction will be
in the 4%-6% range. The magnitude of the next correction will
thus clarify the situation and determine whether we need to
place more emphasis on Comex prices in future or continue
to rely totally on the PM fixings.
One of the reasons why I am considering introducing
the Comex futures into the equation is because the correction
on April 20th from $644.4 to $610.9 was $33.5. Despite the
fact that it took only about 5 hours to achieve this correction,
it was similar in dollar terms to the prior correction from
$578.8 to $541.8, a decline of $37.0, despite the fact that
it took 5 weeks to complete that correction. The following
is the analysis of wave (iii) of wave V using the second month
gold Comex futures prices:
Forecast of wave (iii) of wave V using Comex
|1 of (iii)
||21/12/05 to 2/2/06
||$492.3 to $578.8
|2 of (iii)
||2/2/06 to 10/3/06
||$578.8 to $541.8
|3 of (iii)
||10/3/06 to 20/4/06
||$541.8 to $644.4
|4 of (iii)
||20/4/06 to 20/4/06
||$644.4 to $610.9
|5 of (iii)*
||20/4/06 to ?
||$610.9 to $697.4
* Forecast Wave (iii) of wave V
||$492.3 to $697.4
Wave 5 of (iii) is currently in progress and
reached $685 on Friday May 5th This wave has reached levels
from which another correction can be expected. In the above
forecast it has been assumed that wave 5 will be the same
dollar amount ($86.5) as wave 1, giving rise to a target of
$697.4. If wave 5 is the same percentage (17.5%) as wave 1,
the peak would be $718. In fact, a peak anywhere between $685
and $718 is possible.
As already pointed out, this analysis critically
depends on wave 4 being the correction as depicted above.
There was no such correction in the physical market as depicted
by the London PM fixings. Assuming this Comex analysis is
correct, the coming correction should be of a magnitude of
8%-10% and the following forecast of wave V itself can be
Forecast of wave V using Comex Futures prices:
||15/7/05 to 12/12/05
||$419.2 to $541.8
||12/12/05 to 21/12/05
||$541.8 to $492.3
|| - $ 49.5
||21/12/05 to ?
||$492.3 to $697.4
||$697.4 to $634.4
||- $ 63.0
|| $634.4 to $818.0
Total Wave V
||$419.2 to $818.0
This analysis produces a target for the peak
of wave V of $818, slightly higher than the $768 target calculated
in Update IV on 19 February 2006. The largest correction of
the gold bull market to date should be anticipated to follow
the peak of Wave V. This correction should be at least 20%,
suggesting a correction from the forecast peak of $818 to
around the $650 area.
There is, however, a much more bullish scenario
which would come into play if PM fixings are continuing to
depict the true underlying forces in the gold market. We will
only know whether this possibility is realistic if the next
correction in the gold market as revealed in PM fixings is
restricted to the 4%-6% range.
If that were to happen, the above analysis using
Comex futures prices would have to be abandoned and a new
calculation undertaken using the new magnitude of wave 3 of
(iii). A correction in the 8%-10% range would verify the Comex
Already wave 3 of (iii) of wave V in PM fixing
terms has risen from $535.0 to $678, a gain of an astounding
$143 without a significant correction. This is the sort of
action that can be anticipated from a “3rd of a 3rd”
situation and was the reason why I was so excited about the
prospects for gold 3 months ago.
If this “3rd of the 3rd” wave has
not yet finished, which we can only determine after the magnitude
of the next correction has been established, a much higher
target for the peak of wave V will come into play. We can
leave that subject and the calculation of the possible higher
peak price for wave V for a future Gold Update.
8 May 2006
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