My Dear Friends,
You know I have great respect for Alf Fields both as a master of his
methods (there are very few) but also for having a mercantile sense
which cannot be taught. You know of his accuracy during the two major
bull markets for gold.
I fully agree with Alf on the potential of the next move. I feel
confident the accordion chop that Kenny points out did complete itself
on the day of the longest predicted period of consolidation.
I see gold headed into the $2000, but only as another steep on its way to Alf’s number.
Respectfully,
Jim
The Skinny:
"Once this correction has been completed, Intermediate Wave III of
Major THREE will be underway. This should be the largest and strongest
wave in the entire gold bull market. The target for this wave should be
around $4,500 with only two 13% corrections on the way."
KEYNOTE SPEECH AT SYDNEY GOLD SYMPOSIUM 14-15 NOVEMBER 2011
BY ALF FIELD
THE MOSES PRINCIPLE
The Moses Principle is an irreverent theory based on the question of
why Moses spent 40 years traversing the Sinai desert before leading the
Israelites to the “promised land”.
God was powerful enough to send numerous plagues to devastate the
Egyptian economy until Pharaoh allowed the Israelites to leave Egypt.
Later God caused the Red Sea to part so that the Israelites crossed on a
dry sea bed. When the pursuing Egyptian army and their chariots were in
the sea bed, the waters crashed back and drowned them.
If God was powerful enough to do all of these things, why not allow
the Israelites to go straight to the “promised land”? Why did Moses
spend 40 years traversing the barren desert before leading the
Israelites to the “promised land”? Here is the irreverent theory. Every
Israelite over middle age when they left Egypt probably died during the
ensuing 40 years. The younger people were born in the desert or spent
their adult lives in the desert. After 40 years the life experience of
the survivors consisted of living in the desert. When they finally got
to the “promised land” it appeared to be “flowing with milk and honey”
when compared to their prior desert existence.
A total generational change had taken place so that the survivors had
no knowledge of anything other than the desert. There was nobody who
could remember what Egypt was like. The Moses Principle recognizes the
fact that over any 40 year period, a generational change takes place.
What has this got to do with gold? Recently we passed the 40th
anniversary of 15 August 1971, the date when the last link between
currencies and gold was ended by President Nixon. This launched an era
of floating “I owe you nothing” currencies. Money was what any
government deemed it to be, generally something that the government
could create in unlimited quantities. That system, plus the fractional
reserve banking system, launched an era of ever increasing debt and
credit. It was an era where debt was desirable and money lost its
purchasing power.
Everyone in this room has spent their adult lives living under this
system. Most have had no exposure to monetary history or what money
really is. The new “Moses” generation will have to re-learn the lessons
of monetary history before the world can enter a new era of sound money
and stable economic growth. The impact of this generational change will
be discussed later.
The 15 August 1971 was an important date for me personally. I had
grown up in South Africa and in early 1970 started a funds management
company with a good friend of mine. The first 18 months was a struggle
as we were buffeted by a vicious bear market. By August 1971 our clients
were largely in cash awaiting the end of the bear market or an
inspirational idea.
That inspirational idea came on 15 August 1971 when I heard that
President Nixon had decreed that the USA would no longer exchange US
dollars held by foreign governments for gold at $35 per ounce. Gold had
limited downside but appeared to have good potential for substantial
gain. Gold shares were deeply depressed after 37 years of a fixed $35
gold price, another “Moses Principle” period. We bought gold shares
aggressively. This proved to be an astute move and our funds management
business was launched on a successful path.
Having locked ourselves into a big position in gold shares, we needed
to have some idea of how the gold price might perform and how high it
might rise. We ran into the conundrum that has confounded fundamental
analysts since 1971. How do you value something that has no utility
value, no earnings or net asset value, does not spoil or corrode and is
not used up?
Other commodities such as copper, soya beans and corn etc., are
priced using a combination of demand, supply and stocks. If demand
exceeds supply, stocks diminish, shortages develop, prices rise and new
production comes on stream. Eventually supply exceeds demand, stocks
build up, prices decline and marginal producers go out of business. The
cycle then repeats itself. Other commodities are produced for
consumption while gold is accumulated.
Consequently large stocks of gold exist in official hands as central
bank reserves. There are also large stocks of gold in private ownership,
in vaults around the world, in homes, buried in gardens, in coins and
gold jewelry. New mine production of gold is tiny compared to available
stocks. In 1971 official holdings of gold were about 37,000t. Cumulative
world gold production throughout history up to 1971 was estimated to be
about 90,000t, so investors/hoarders must have owned at least as much
as the official holdings. In 1971 world gold production was a mere
1,450t, or less than 2% of the estimated amount of gold held in the
world at that time.
The fundamental conclusion was that the owners of the large stocks of
gold would determine the future of the gold price. If they became net
sellers, the gold price would decline. If they became net buyers, the
gold price would rise. There were reasons to believe that they would be
net buyers. The world had been launched into an untried experiment where
all countries were subject to Government fiat currencies and, in
addition, there was a latent group of buyers in the wings. Americans had
been prevented by law from holding gold since 1933. With the collapse
of the gold exchange standard on 15 August 1971, there was no reason for
this prohibition to continue. On 31 December 1974 (another Moses
generation period from 1933) the largest and wealthiest nation on Earth
allowed its citizens to buy and own gold.
The obvious conclusion was that it was necessary to resort to
technical analysis to find a way to predict movements in the gold price.
I experimented with a variety of technical systems and then got lucky. I
discovered that the Elliott Wave Theory (EW) gave superb results in
predicting the gold price. I couldn’t get the same great results using
EW in other commodities or markets. EW is a complicated system with many
difficult rules, but I will try and explain it in simple terms.
The technique is to concentrate on the corrections. In terms of EW,
the sequence in a bull market is as follows. The market rises, has a 4%
correction, rises, has a 4% correction and rises again. At this point
the next correction jumps from 4% to a larger degree of magnitude, say
8%. The market then repeats the sequence. A rise, a 4% correction, a
rise, 4% correction, a rise and another 8% correction. When the market
is eventually due a third 8% correction, the magnitude of that
correction jumps from 8% to 16%. This sequence is repeated until two 16%
corrections have occurred when the size of the next big correction
jumps to 32%.
The beauty of EW is that the corrections in gold are remarkably
regular and consistent. Early in 2002 I picked up the 4%, 4%, 8% rhythm
in the gold market which convinced me that a new bull market had started
in gold. Another feature of EW is that once one is confident that these
percentages have been established and one has some idea of the
approximate size of the up moves, simple arithmetic allows one to
calculate a forecast of the future price trend.
Using this method I calculated that the gold price should rise from
the $300 ruling in 2002 to at least $750 without having anything worse
than two 16% corrections on the way. That was valuable information at
that time. Furthermore, from the $750 target a big 32% correction could
be expected to about $500. Then the bull market would resume, rising to
perhaps $2,500 before another 32% correction occurred. The final up-move
would take the gold price to much higher levels, possibly $6,000. Once
again, a valuable insight when gold was $300 in 2002.
The gold price actually got to a shade over $1000 in March 2008, a
four-fold increase instead of the expected three-fold rise to $750. That
was the point at which the 32% correction was due. Over the next seven
months the gold price in the spot market declined from $1003 to $680, an
exact 32% correction. Using PM gold fixings, the numbers were slightly
different. The high was $1011.0 and the low $712.5, making the
correction slightly less than 30%, but quite adequate.
The above chart depicts the monthly spot gold prices since the start
of the gold bull market in April 2001 when gold was $255. The 32%
correction in terms of spot gold is clearly shown. The high at $1003 and
the low at $680 established the extremities of the first two major
waves of the bull market, shown in the chart as Major ONE and Major TWO.
The gold bull market is in the process of working its way upward
through Major THREE, often the longest and strongest wave in the bull
market. There have been a number of interesting and unusual developments
in Major THREE which will be discussed later.
I would like digress at this point to share with you the reasons why I
started writing articles on Gold, EW and monetary history. The reason I
am standing here today is the direct result of writing those two series
of articles published on internet web sites. I am a self-funded retired
person managing my own investments. Unlike most people posting articles
on the web, I was not trying to sell subscriptions to a newsletter or
get people to buy something. Nor was I writing to big note myself. So if
I was not after fame, glory or riches, what was my motivation? The
following two stories will explain where I was coming from.
These stories are intensely personal. Even close friends and
relatives have not heard these stories. They are not meant to infer any
self-aggrandizement nor are they an attempt to alter anyone’s personal
views. The two stories are linked and relate eventually to gold.
Together they are the reason why I wrote the articles posted on the web.
The first story starts with an awful event where my son Richard was
attacked by a lion. He and his fiancée Rebecca were managing a game
lodge in northern Botswana. He took a couple of guests out on an early
morning game drive. They followed the tracks of a lioness and three cubs
down a dry river bed but lost the trail. When Richard got out of the
vehicle to find lion tracks, the lioness launched herself at him from
nearby shrubs. The lioness landed with her paws on his shoulders,
dislocating one shoulder and driving him to his knees. She then whacked
his head with her paws, virtually scalping him and nearly ripping his
ear off. She then bit him on the back of the neck. Any person or animal
subject to such an attack would almost certainly be dead.
Richard survived this vicious attack as a result of a series of
miracles. The first miracle was that the bite on the back of his head
had missed the vital arteries, missed the spinal column and had not
penetrated the skull. If the lioness’ bite had been fractionally deeper,
higher, lower or sideways, that would have been the end for Richard.
(In the speech, I skip to the story of the beggar’s sign. You can do likewise.)
The second miracle was that the couple in the vehicle reacted
instantly. The wife yelled at the husband to get into the driver’s seat
and drive at the lion, blowing the horn and making a noise. This caused
the lioness to back off. Richard was still conscious and managed to get
himself into the vehicle. He was able to work the radio to warn Rebecca
of what had happened.
The third miracle was that a couple of weeks prior to this event the
local team of paramedics had visited the safari lodge to give the staff a
lesson on what to do in the event of a lion attack. Rebecca remembered
everything that they had said. She reacted with astonishing calm. She
assessed the wounds, called the paramedics by radio, got what she needed
from the First Aid cabinet and then stayed with Richard staunching the
blood flows until the paramedics arrived.
The fourth miracle was that after being flown to hospital in
Gaberones, the capital of Botswana, Richard was allocated a doctor who
fully understood how to treat lion injuries. He knew that he could not
stitch Richard’s head for several days due to the threat of infection.
Lions do not use Colgate’s tooth paste! Richard was given a full
anesthetic on four consecutive days while the doctor cut away the
portions that were infected.
Richard required very large amounts of blood. The paramedics had
warned Rebecca that she should ensure that Richard was only given blood
which was certified HIV negative. There was blood available but none of
it came with the necessary certificate. How the vital blood was obtained
was another miracle, but that story is too long to discuss now.
When the stitches were removed from Richard’s skull, he was still
left with a gaping wound at the back of his head. A skin graft from his
thigh to the back of his head was required. A visiting plastic surgeon
was able to do the necessary graft, but Richard had to later fly to
Johannesburg for the surgeon to check that the graft had “taken” and to
have the stitches removed.
(Story of the Beggar’s Sign begins here.)
When we visited the surgeon he pronounced that the graft had “taken”
and that Richard was absolutely OK. All he needed was rest and
recuperation to be as good as new. Any parent who has lost a child will
understand the anguish and pain that we endured going through this
episode. Now our son, brother, and fiancée, whom we thought we were
going to lose, had been saved and returned to us.
At last we could relax. Nothing could go wrong now. You can imagine
the joy and jubilation in the car as we drove away from the surgeon’s
rooms. Then I saw a beggar at a traffic light. He was carrying a
cardboard sign which read:
“No Money. No Food. Please Help Me. God Bless”.
Impulsively I decided that I wanted to buy his sign and hang it on my
wall as a memento of this happy day. I had 200 Rand in my wallet,
probably more than he made in a month of begging. I called him over,
showed him the money and said that I wanted to buy his sign for R200. He
simply said “No!” The lights turned green and people were honking
behind me, so I gave the R200 to the beggar and drove on, leaving the
beggar with his sign.
After dropping Richard and Rebecca with friends I passed the same
intersection on the way to my lodgings. The beggar was still there and I
was now more determined than ever to buy his sign. I called him over to
the car. “I gave you R200 an hour ago, do you remember?” He said that
he remembered, clutching his sign protectively to his chest.
“I want to buy your sign for a special reason. Just tell me how much
you want for the sign and I will go to the nearest ATM and get the
money.”
He shook his head and again said “No”, clutching his sign
possessively to his chest. “It will only take you five minutes to make
another one” I said, but that elicited another vehement “No” from him.
The lights had changed and once again people were honking at me. “If you
will not sell me your sign, at least tell me why you won’t sell it.” He
replied “God gave me this sign!” I drove off with the words “God gave
me this sign” reverberating through my brain.
I am an accountant and investment analyst by training. I am used to
digging out facts, checking them and drawing conclusions from them. I am
skilled at calculating odds and probabilities. The odds of Richard
surviving such a terrible lion attack were off the charts. The odds of
finding the only beggar in the world who would not sell his sign for any
price were also astronomical.
I had always felt that I was in control of my life. I make the
decisions and do things my way. Richard’s recovery from the lion attack
was a situation over which I had no control and when I did try and take
control of something and buy the beggar’s sign, I had been rudely
rebuffed. The only logical conclusion was that God was giving me a sign
that He was in control, not me. It was the most humbling moment of my
life. Faith is a gift, but it seems that some people have to be bashed
over the head in order to accept that gift.
This unusual story needed to be told in order to fully understand the
second strange story that does deal with gold. The link came through
the Priest in the London parish where we lived for a few years. He had
been asked to request prayers for Richard’s recovery and as a result we
got to know him quite well. He is a cricket fanatic. When I heard that
he planned to visit Australia to watch the cricket series between
Australia and England in late 2002 and early 2003, I invited him to stay
with us at our house on the northern beaches for a couple of days after
the Sydney cricket test in January 2003.
In due course I picked him up from the city. It is about an hour’s
drive to our house, so we had plenty of time to chat. He wanted to know
if I had done anything special over the past year. I responded that I
had made a dramatic change in our family investments during the year,
putting some 40% of our capital into gold, silver and mining shares. He
was clearly interested and wanted to know why I had done this. I said
that I could see a number of problems developing, especially in America,
that would eventually result in a major financial crisis which would
threaten to bring down the entire world money and banking system. The
authorities would create vast new sums of money in an attempt to prevent
this melt-down from happening, resulting ultimately in the destruction
of paper currencies. This would require the establishment of a new
monetary system and I expected gold to be a major part of the new
monetary system.
He then asked a strange question: “How high do you think that the
gold price can go?” I tried to dodge the question as I did not want to
explain Elliott Waves to him, so I just said that gold would probably
rise to extraordinary heights. I explained that the extent of the gold
price rise depended on the quantity of new money created to ward off the
anticipated crisis. He persisted, wanting to know what “extraordinary
heights” meant. He obviously wanted a fixed number.
To mollify him I said that in the 1970’s bull market gold had
increased 25-fold from $35 to over $850. If the new gold bull market was
of the same order, then starting from a base of $255, the current bull
market could reach somewhere over $6,000 per ounce. He then wanted to
know what the current gold price was. When I said it was about $300, he
seemed satisfied.
The next morning the two of us went for a jog on the beach. He asked
if I believed in prophecy. I said that I had not really thought about
it. Given that there were prophets in the Old Testament who seemed to
have the word of God and in the New Testament there were people who had
the gift of prophecy, well yes, I guess that I probably had to believe
in prophecy.
He then told me this remarkable story. In his London Parish there was
a lady who did have the gift of prophecy. She had received several
prophecies that had related to him which proved to be accurate. As a
result he was convinced that she had the true gift of prophecy. There
was an occasion when this lady received an unusual prophecy, quite
different to anything she had previously experienced. She thought that
if the Parish Priest telephoned her, she would know that she had to tell
him about it. Indeed he did telephone, so she told him that she had
received this very strange prophecy. She had been instructed to write it
down and mail it to him. He was to keep it unopened until she called to
let him know that it was time to open the envelope.
A few days before he was scheduled to fly to Australia she telephoned
him to say that it was time to open the envelope. The prophecy
consisted of just one line which read:
“The price of gold will rise to extraordinary heights!”
These were the exact words that I had used the previous day in our
conversation in the car. He concluded that this prophecy was meant for
me!
I was quite shocked, gob-smacked actually. I would normally have
shrugged it off as an interesting story and forgotten about it. After
the lion episode and my experience with the beggar, I was more inclined
to take it seriously. What did it mean? There was nothing new in it for
me, other than being a confirmation from a very strange source that my
views were correct.
I felt that there must be a deeper reason for receiving such a
strange message. I concluded, somewhat reluctantly, that if I had been
given the talent and knowledge to see such a dramatic financial crisis
coming down the track, then surely I had a responsibility to warn people
about it?
The crisis that was coming had the potential to be the biggest event
in the lives of the current generation. It was likely to become the most
important factor governing investment decisions when the crisis
arrived. So I started trying to alert people to the serious financial
and monetary crisis that I could see coming and warn them to buy
precious metals as protection.
Talking to friends and fund managers about my views, I ran head first
into the Moses Principle. The new generation had not received an
education on monetary history, nor what qualities money should have. I
was met with glazed eyes and body language that showed no interest in
what I was saying. I was talking in many instances to the “new rich”
generation. They were the bankers, investment managers, stockbrokers,
hedge fund managers and others who were massaging the vast sums of money
and credit that had been created since 1971. They were taking their
percentage of the funds that flowed through their businesses and were
doing very nicely. They didn’t want to listen to a grey-haired old fogey
spruiking a coming crisis that was going to wreck the gravy train that
they were living off. Clearly this method was a failure.
The solution was to publish articles on internet web sites to get my
message across. I had to proceed slowly and cautiously, only giving
information that people could accept at that time. It was April 2005
before I felt confident that I could write an article titled “The Seven
D’s of the Developing Disaster” about the problems that I could see
developing, all starting with the letter D, – debt, deficits (budget and
trade), the US dollar itself, demographics (baby boomer unfunded
entitlements), derivatives, dwellings, deflation (including
deleveraging) and destruction, being the long running wars in Iraq and
Afghanistan. This article is located at:
http://www.gold-eagle.com/editorials_05/field042805.html
When the financial crisis eventually arrived in 2007, it was sparked
by derivatives (credit default obligations – CDO’s) and events in the
real estate market (dwellings). The arrival of the crisis allowed me to
write more aggressively. By late 2008 there was a much greater awareness
of the problems and I felt that I could leave it to others to deal with
the ongoing consequences.
In August 2003, in parallel with the money/economic articles, I
started forecasting the gold price using the Elliott Wave system. Here
too I had to proceed slowly. I felt that I could not reveal my longer
term forecast for the gold price because it was so bullish that I would
be branded as a nut case. When I wrote my final Elliott Wave article in
November 2008 I did reveal the full picture, showing that there was a
possibility that gold could reach the extraordinary heights of $10,000.
At that time gold was in the $750 area. That article can be found at:
http://www.gold-eagle.com/editorials_08/field112408.html
IMPACT OF THE MOSES PRINCIPLE.
It is now time to return to the Moses Principle and its impact on the
gold price. Perhaps the most important point is that the modern Moses
generation has had very little exposure to monetary history. They do not
understand what has caused the current financial crisis. If one does
not know what caused the current crisis, one cannot know how to go about
fixing it. Central Bankers and Finance Ministers are also part of the
Moses generational change. By the late 1990’s the new incumbents had
experienced a 20 year bear market in gold and were influenced by
Keynesian economics.
They didn’t understand why gold was held in their country’s foreign
exchange reserves and resorted to the wholesale selling of this
unnecessary “barbarous relic”. Famously Gordon Brown sold two-thirds of
Britain’s gold stock near the bear market lows in 2001/2002. Australia
sold a similar proportion of its gold. The European Central banks were
selling gold but had a joint agreement to restrict their combined sales
to 400t per annum. Even conservative Switzerland sold some of its gold
reserves.
Originally it seemed that Central bankers were selling gold to
protect the integrity and longevity of their paper currencies. Perhaps,
with the generational change, they did not know any better. Perhaps it
was just the “thing to do” at the time. Despite this central bank
selling, the gold price went up! Buying by investors/hoarders had
exceeded official selling and a new gold bull market was born. Central
bank selling of gold gradually declined. Recently central banks under
the leadership of Russia and Asian nations became net buyers of gold.
The GFC has created a much greater awareness in official circles of the
role that gold plays as a store of value asset in national reserves.
The distortions that have grown out of the 40 year period since 1971
have reached proportions that demand change. The problem is that the
current generation does not understand that the root cause of the GFC is
unsound money created at will by governments, combined with a banking
system that has enabled the creation of an unsustainable mountain of
debt. The modern generation is groping with the problem and gradually
working towards understanding that the underlying cause of the crisis is
monetary.
The modern generation will have to face some brutal truths as the
world deals with the ongoing global financial crisis. The following are
the brutal truths that apply to the USA and the world:
THE BRUTAL TRUTHS
- The slate needs to be wiped clean and a new sound monetary system introduced.
- That will require the elimination of all debt, deficits, unfunded
social entitlements, the US Dollar as Reserve currency, and the big
one, the $600 trillion of derivatives.
- To eliminate these problems by default and deflation will cause a
banking collapse and untold economic pain, leading to riots and
political change.
- Politicians are appointed for relatively short terms and opt for the easy solutions.
- While politicians continue to have the ability to create new
money at will, they will do so in order to prevent a melt down on their
watch.
- Consequently the odds point to governments wiping the slate clean
by generating enough new money to eventually destroy their currencies.
- The new international monetary system is likely to involve
precious metals. It will have to be money that people trust and that
governments cannot create at will.
This has happened many times before, dating back nearly 900 years to
the first paper money introduced in China. History is full of attempts
to use paper or fiat money, all of which ended in the destruction of
that money. The last century saw virtually every South American country
“wipe the slate clean” and begin again with a new money. Some did it
several times. The Romans faced a similar financial crisis and resorted
to reducing the silver content of the Denarius, eventually by about 95%,
before people refused to accept the Roman coins.
There are two things that are different about the current episode.
This is the first time in history that fiat or government issued
currency has been in use in every country around the world at the same
time. Secondly, we have an electronic money system which is very
efficient. It enables new money to be created at a faster rate than ever
before.
Every experiment with government issued fiat money has ended with the
destruction of that money There is no reason to believe that it will be
different this time. The world’s 40 year experiment with floating “I
owe you nothing” fiat currencies is coming to an end.
I have come out of retirement for this one off, once only, speech to warn that the good ship “
Life As We Know It” is sinking.
You have the choice of getting into a life boat
now or
going down with the ship. The life boats consist of precious metals and
other assets that will survive the coming currency destruction.
It is likely that gold will be the new unit of measurement or
standard of value against which the performance of other assets will be
judged. The challenge will be to find assets that perform better than
gold.
The forecast contained in the “Brutal Facts” segment is not a
pleasant one. It is unfortunately the most likely outcome. All that we
can do is to “be prepared”. It is vital for one’s personal financial
survival to take action now.
In conclusion, I would like to mention that my son Richard is married
to Rebecca and they have a 4 and a half year old daughter with another
baby on the way. They live in Sydney and Richard works for a local
company organizing tailor made safaris to Africa for small groups. If
you have any interest in doing such a trip, you can contact him at:
rfield@epicprivatejourneys.com
Alf Field ajfield@attglobal.net
7 November 2011.
ADDENDUM: Update of the Elliott Wave Gold Analysis
I promised that I would reveal some interesting things about the EW
moves in gold since the $681 low in October 2008. That low was the start
of the Major THREE wave. In Major ONE I mentioned that the corrections
were 4%, 8%, 16% and then 32%.
We know that Major THREE will likely be longer and stronger than the
prior Major ONE up wave. It is logical to expect that the corrections in
major THREE will be a larger percentage than those experienced in Major
ONE. This is how the first Intermediate wave of Major THREE developed
in terms of London PM Fixings:
Intermediate Wave I in London PM Fixings
- Oct 08 to Feb 09 $712.5 to $989.0 + $276.5 +38.8%
- Feb 09 to Apl 09 $989.0 to $870.5 -$118.5 -12.0%
- Apl 09 to Dec 09 $870.5 to $1212.5 +$342.0 +39.3%
- Dec 09 to Feb 10 $1212.5 to $1058.0 -$154.5 -12.7%
- Feb 10 to Jun 2011 $1058.0 to $1549.0 +$491.0 +46.4%
These are typical of the beautifully consistent sizes of EW waves in
gold. There are two up waves of about 39% and two corrections of about
12%. Several things can be determined from these numbers. In February
2010 it was possible to pencil in a target for wave 5 of $1470, being a
39% rise from the wave 4 low of $1058. The 12% corrections are larger
than the 8% for the equivalent waves in Major ONE, which was expected.
One can deduce that the correction to follow wave 5 will be one degree
larger than 12%, possibly double this figure. The target for wave 5 of
$1470 was exceeded mainly because this became an extended wave. It
reached a high of $1549 for a gain of 46.4%. The chart below depicts
these waves in London PM fixings:
Extended waves are simply waves that subdivide into an additional 5 waves. It happens mainly to 5
th
waves and generally makes life difficult for EW analysts. Difficult
yes, but not impossible.. The analysis of the first extension, the
extension of wave 5, is set out below:
Wave 5 of Intermediate Wave I – based on London PM fixings.
(1) 1058 to 1261 +$203 +19.2%
(2) 1261 to 1157 -$104 – 8.2%
(3) 1157 to 1421 +$264 +22.8%
(4) 1421 to 1319 -$102 – 7.2%
(5) 1319 to 1549 +$230 +17.5%
Wave 5 1058 to 1549 +$491 +46.4%
NOTE: From the $1319 start of wave (5) above, the target price
was $1319 + 19.2%, the same gain as wave (1), giving a target of $1572.
The high price for gold in wave (5) in the spot market was $1576 on a
day (2 May 2011) when the UK had a public holiday and there was no
London PM fix available. Thus the gain for wave (5) was stunted in terms
of PM fixes. This is not satisfactory and it became necessary to revert
to analysing the waves in spot gold prices to get
accurate
readings. This was also required in order to pick up the minor waves in
the final two extensions which were explosive in nature.
To illustrate how to analyse gold using EW through this difficult
period, it is best to work through the time line as it actually
happened. As noted above, the expectation was that following the
completion of the extended wave 5, a correction one degree larger than
12% would occur from the peak of wave (5) at $1576.
Gold had a minor correction to $1478 in the spot market and then
started a sharp upward move. When gold went to a new high above $1576
the probability of the big 24% (give or take 3%) correction occurring at
that time receded. The stronger probability was that a new 5
th
wave extension was underway. This was the first of the explosive series
of extensions in gold. It became an historic sequence of four 5
th wave extensions in declining orders of magnitude.
At the end of each extended wave, the spectre of the bigger
correction (21% to 27%) came into focus. With each new high, the bigger
correction was delayed and a new extended wave was born. At $1814, after
three 5
th wave extensions, the probability that $1814 was
THE
high was about 80%. Another extension at an even smaller degree was
accorded only a 15% probability. The remaining 5% covered the
possibility that the wave count was wrong and that a completely
different outcome was evolving.
From $1814 gold had a minor correction to $1723, then blasted through $1814 to new all time high prices. The odds of a fourth 5
th
wave extension at the smallest degree changed from a meagre 15% to a
90% certainty. The wave count at this smallest degree helped to
determine in real time that at a price over $1910 gold was in serious
danger of an important top, with the bigger correction certain to
follow.
Both charts updated to 7 October 2011 and illustrate the wave counts described.
We can now consider the possible magnitude of the current correction
from the $1913 top. The correction will be one degree larger than the
prior corrections, 12% in PM fixes and 14% in spot gold, an average of
13%. That compares with 8% in Major ONE. Both 8 and 13 are Fibonacci
numbers, so it may be that the next correction could be 21%, the next
Fibonacci number.
In Major ONE, the corrections tended to double when they moved up a
degree in magnitude, so one must consider 26%, double 13%, as a
possibility. A 21% correction from the peak of $1913 gives a target of
$1511. A 26% correction would target $1416. There is one further
possible target and that is $1478, the point at which the explosive
extensions commenced. The price of an item will often retrace the full
amount of the explosive extension. There was a recent example in silver
of such a full retracement of the explosive extension, see the chart
below:
This analysis was prepared on 27 September 2011, the day after spot
silver reached a low price of $26.59. The start of the extension was at
$26.50 on 28 January 2011. A mere 3 months later, at the end of April,
silver topped at $49.50, a very obvious explosive advance. Silver then
traced out an A-B-C correction where the A and C waves were declines of
similar size at $17 each, a typical EW relationship. At that low point
of $26.59 on 26 Sept 2011 – the silver price had exactly retraced the
full gain achieved in the explosive extension. The conclusion was that
there was at least an 80% probability that the silver correction had
bottomed at $26.59.
If gold retraces the exact gain achieved during the explosive advance
from $1478 to $1913, which occurred in just seven weeks, it will
represent a decline of 22.8%. That is nicely within the above
anticipated range of 21% to 26% for the current decline in gold. There
is a possibility that the spike drop to $1531 on 26 September marked the
low point of the correction in gold. The midpoint of the correction
from $1576 to $1478 is $1527, close to $1531. If $1531 was the low, it
was a decline of 20%. This is slightly below expectations, but it still
qualifies as one degree larger than 13%. At the date of writing (7 Nov
2011), gold has recovered to $1767, which is a 61.8% retracement of the
loss from $1913 to $1531 (-$382), a typical size for this type of
recovery. That leaves open the possibility (40% probability?) that gold
will have another dip to test the target areas mentioned. The higher the
price goes above $1767, the greater the probability that the low was in
at $1531.
Once this correction has been completed, Intermediate Wave III of
Major THREE will be underway. This should be the largest and strongest
wave in the entire gold bull market. The target for this wave should be
around $4,500 with only two 13% corrections on the way.
The word seems to be spreading.
A protester on Wall Street. Be careful what you wish for.
Following
our earlier post, equities retreated and converged towards the reality
of their credit cousins in the last 30 minutes to end only marginally
higher (or practically unchanged by futures close). A 30pts rally off
the overnight lows was far and beyond the performance of credit markets
which never traded green all day but it was EUR weakness (USD
strength) that was intriguing given the rally in PMs and commodities.
Gold and Silver are very marginally lower on the week while Copper is
up around 1% but it was Oil's outperformance on the day that was
impressive as the gentle roar of printing presses was heard on both
sides of the Atlantic (noting Brent in EUR trades at the top of its nine
month channel). Implied correlation diverged (upwards) from VIX into
the close suggesting macro overlays were more bid - which reflects also
the bid for protection in CDS markets - and signals far less risk
appetite than the headlines (until the last few minutes) suggested.
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