By Alf field        
September 29, 2003

Alf Field (

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 very carefully.

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 points.

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 market.

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.

The weaknesses of the EWP are as follows:

  1. An incorrect reading of even a single minor wave can put one on the wrong side of the market for some time.

  2. Corrective waves are notoriously difficult to evaluate and often their conclusion can only be determined after the event.

  3. The exceptions, e.g. 5th wave failures and wave extensions, can lead to some serious mistakes and major lost opportunities.

  4. Often the minor waves are confusing, difficult to interpret and conflict with EWP rules.

  5. It is difficult to comprehend by other than seriously devoted students.

For 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 my opinion.

The 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.

In 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 market thereafter.

EWP 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.

Where 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.

Thirdly, 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 above.

My 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.

Returning 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.

Checking 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 being discerned.

The 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

Date Wave # From To Change   %
06/04/01–25/05/01    (i) $256 $291 $35 13.70%
25/05/01-06/07/01    (ii) $291 $265 ($26) -8.90%
06/07/01-31/05/02   (iii) $265 $327 $62 23.40%
31/05/02-01/08/02   (iv) $327 $302 ($25) -7.60%
01/08/02-05/02/03   (v) $302 $382 $80 26.50%
06/04/01-05/02/03     I $256 $382 $126 49.20%
05/02/03-18/02/03     a $382 $344 ($38) -10.00%
18/02/03-25/02/03     b $344 $358 $14 4.10%
25/02/03-07/04/03     c $358 $320 ($38) -10.60%
05/02/03-07/04/03     II $382 $320 ($62) -16.20%
07/04/03-27/05/03    (i) $320 $371 $51 15.90%
27/05/03-17/07/03    (ii) $371 $343 ($28) -7.50%
Forecast   (iii) $343 $424 $81 23.60%
  (iv) $424 $394 ($30) -7.10%
  (v) $394 $500 $106 26.90%
   III $320 $500 $180 56.30%
   IV* $500 $420 ($80) -16.00%
   V* $420 $630 $210 50.00%
* Minor Waves not shown.  

This would leave the analysis of the larger order of magnitude 5-wave zigzag looking like this:

Wave  I $256 to $382 $126 49.20%
Wave  II $382 to $320 ($62) -16.20%
Wave III* $320 to $500 $180 56.30%
Wave IV* $500 to $420 ($80) -16.00%
Wave V* $420 to $630 $210 50.00%
Wave (1)* $256 to $630 $374 146%
* Forecasts

Having 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 Wave (1).

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 of confidence.


  1. 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.

  2. A 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.

  3. A 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).

  4. A decline below $309 would in my opinion enhance the odds of Bob Prechter’s forecast being correct.

Alf Field

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Disclosure 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.

Disclaimer: 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.