Elliott Wave Gold Update XVII

Alf Field
10 Jan, 2008

These Gold Update newsletters have achieved some notably accurate forecasts during the past. Some recent examples are the following:

1. Update IX identified the low point of the correction from the $725 May 2006 peak. The low point was a London PM fix of $560.7 on 6 October 2006. That day was a Friday. Update IX was written over the weekend and published on Monday 9 Oct 06 before the markets opened, hence that call was made in real time.

2. The confusing series of sideways corrections during the first 8 months of 2007 were correctly analysed as an unusual and very bullish sequence of irregular corrections with an upwardly skewed bias. This gave rise to a forecast of an "upward catapult of at least $100 without any serious corrections on the way." As can be seen in the chart below, the gold catapult was much greater, achieving a gain of $199 (from $642 to $841) with 2 small corrections on the way.

Data updated to 8 Jan 2008.

The recent triangle was wave 4 of wave I. It was the correction anticipated to be about 8%, give or take 1-2%. The maximum magnitude of the decline was 7.4%, precisely as required. This determines the location of wave 4. Fourth waves are often triangles. Wave 3 was a typically strong third wave, often the strongest in the sequence.

While the Elliott Wave technique can be very useful in determining turning points and providing a guide to the future, it is appropriate to issue a few words of warning. Elliott Wave is not an easy route to riches. The first article of this Update series was titled "Elliott Wave and The Gold Price", published on 25 August 2003, and included the following:

"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.
a
2. Corrective waves are notoriously difficult to evaluate and often their conclusion can only be determined after the event.
a
3. The exceptions, e.g. 5th wave failures and wave extensions, can lead to some serious mistakes and major lost opportunities.
a
4. Often the minor waves are confusing, difficult to interpret and conflict with EWP rules.
a
5. It is difficult to comprehend by other than seriously devoted students."

With that warning in place and the obvious caveat that future forecasts may not be as accurate as past results, we can continue.

In the gold market the corrections at different degrees of magnitude have been 4%, 8%, 16% and 25% thus far, give or take 1-2% in each case. This knowledge enables one to make a stab at producing a template for future market movements. In Update 16 the following template was attempted for the current major wave under way, Major Wave THREE:

Previous template in Update 16:

We are currently in wave I of major wave THREE. We can now insert the first two minor waves of wave I and make a guess at the remainder of wave I as follows:

The following warning was included:

"The $870 target for Wave I of Wave THREE was derived from the expectation that the historic 1980 highs in the $850-$870 range would be a magnet for the start of a larger correction. This is pure speculation. The peak of Wave I could well be higher or lower, something that will be estimated once the current wave 3 is complete."

As discussed above and shown in the chart, Wave 3 of Wave I ended at $841.1 (not $790 as estimated previously) and Wave 4 declined -7.4%. We can now include these actual results in the analysis of Wave I of Wave THREE which is set out below.

The fact that Wave 3 ended at $841, significantly higher than the previous expectation of $790, has a flow on effect as it increases the finishing point of Wave 5 (and thus also Wave I) to a level above the original forecast of $870. The new finishing point is estimated at $988 by using some input from conventional technical analysis.

Revised Template:

1. Readers have complained that these articles are difficult to follow because the different wave magnitudes are not adequately labelled. For sake of clarity, future analyses will incorporate the following: The bull market consists of five Major Waves designated ONE, TWO, THREE, FOUR and FIVE. The Major impulse waves, ONE, THREE and FIVE will each contain 5 Large waves designated in Roman Numerals, I, II, III, IV and V. Large Waves I, III and V will each contain 5 Small waves designated 1, 2, 3, 4, and 5. These designations are incorporated in the above revised Templates.

2. Yet smaller magnitudes will be designated Minor and Minuette. Hopefully this will help to reduce confusion.

3. The target of $988.5 for Small Wave 5 (also the peak of Large Wave I) is a guess based on conventional technical analysis. The formation is a pennant on a flag pole. Pennants or flags occur at about the halfway point in a move, hence the rise following the pennant is about the same as the rise preceding the pennant or flag. Thus the rise in Small wave 5 at $199 is the same as that for Small wave 3.

4. The projected gain in Small Wave 5 is about 25%, which is similar in size to previous Small impulse waves in Wave ONE.This adds credibility to the $988 target.

5. The $988 target has a further EWP plus in that the 16% (approximate) correction expected to follow the peak of Large Wave I produced a target low of $830, which is within the range of the prior fourth wave of lesser degree, in this case Small Wave 4, which encompasses the range of $841-$779, which is a normal occurrence.

6. The predicted rise from $789 to $988 should incorporate two corrections of approximately 4%. Thereafter a 16% correction should follow.

7. Having given the bullish side of the projection, which has a high level of probability, one should bear in mind that Small wave 5 may be closer to the gain in Small wave 1, which was only $88. A gain of say $100 would give a target of $889 for the peak of Small wave 5. This possibility is accorded a low probability.

VERY IMPORTANT CONSIDERATION:

The above Templates have been produced assuming a "normal" EWP structure. What is of concern at the moment is the possibility of a 5th wave extension in the current Small wave 5. This is one of the EWP weaknesses mentioned above.

An extension simply means that the Small wave 5 currently underway will contain 9 Minor waves instead of 5, and will include 4 Minor corrections in the 3-4% range instead of 2. If such an extension does occur, it will push the peak of the current Small wave 5 beyond (and possibly considerably beyond) the $988 target projected above.

Why should one consider this possibility? Extensions occur when the underlying fundamentals become extreme. The current financial crisis appears to be of a "once in a life-time" variety. The crisis is discussed in greater detail in my article "Into the Abyss" which was published earlier this week.

By any measure, the underlying financials are extreme and the case for holding gold as insurance is a strong one. Consequently it is wise to consider the possibility of a 5th wave extension in the current circumstances and to be prepared for it. It should really only concern those people who plan to trade gold by selling out as gold nears $980 in order to scalp the profit from the expected 16% correction.

If the gold price does experience such a 5th wave extension and the peak of Small wave 5 is say $1,150 instead of $988 as forecast in the above Template, then it is possible that someone who sold at say $960 may not have an opportunity to reinstate their position at a profit.

If you have been buying fire insurance for your home, why would you phone the insurance company to reduce your cover when you can actually see the bush fire approaching?

10 Jan, 2008
Alf Field

321gold Ltd