Cycles of Gold

 
 
 
 Elliot Wave Principles & the Price
of Gold
 
excerpted from various
articles
 
by
 
Alf Fields
 
edited by
Norman Scherer
 
 
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I have drawn a 5-wave upward zigzag followed by a 3-
wave downward zigzag in red lines on Chart #1. This is
the typical shape of an Elliott Wave Principle (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.

1
  
CHART #1
 
 
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 this page illustrates some of these
relationships. This is an analysis of the 5 minor waves of
Major Wave One starting from the April 2001 low point of
$256, which is where I believe the new gold bull
market started:
 
 
MAJOR WAVES of
GOLD
and the
Armstrong Cycle
 
Wave $
Dates From To Percent
# Change
04/06/01-
1 $256 $291 +$35 +13.7%
05/25/01
05/25/01-
2 $291 $265 -$26 -8.9%
07/06/01
07/06/01- 3 $265 $327 +$62 +23.4%

2
 05/31/02
05/31/02-
4 $327 $302 -$25 -7.6%
08/01/02
08/01/02-
5 $302 $382 +$80 +26.5%
02/05/03
04/06/01- WAVE
$256 $382 +$126 +49.2%
02/05/03 I
           
02/05/03-
A $382 $344 -$38 -10.0%
02/18/03
02/18/03-
B $344 $358 +$14 +4.1%
02/25/03
02/25/03-
C $358 $320 -$38 -10.6%
04/07/03
02/05/03- WAVE
$382 $320 -$62 -16.2%
04/07/03 II
           
04/07/03-
1 $320 $371 +$51 +15.9%
05/27/03
05/27/03-
2 $371 $343 -$28 -7.5%
07/17/03
07/17/03-
3 $343 $426 +$83 +24.2%
01/13/04
01/13/04-
4 $426 $375 -$51 -12.0%
05/10/04
05/10/04-
5 $375 *$454* +$79 +21.1%
12/02/04
04/07/03- WAVE
$320 $454 +$134 +41.9%
12/02/04 III
           
12/02/04- WAVE
$454 $418 -$36 -7.9%
07/15/05 IV
           
07/15/05-
1 $419 *$536* +$117 +28.2%
12/12/05
12/12/05-
2 $536 $489 -$47 -8.8%
12/21/05
12/21/05-
3 $489 $572 +83 +17.0%
02/02/06
02/02/06-
4 $572 $535 -$37.1 -6.5%
03/10/06
03/10/06- 5 $535 $725 +$190.0 +35.5%

3
 05/12/06
07/15/05- WAVE
$419 $725 +$306.7 +73.4%
05/12/06 V
           
4/06/01- Wave
05/12/06
$256 $725 +$469 183.2%
ONE
           
5/12/06- Wave
10/06/06
$725 $560 -$165 -29.5%
TWO
           
10/06/06-
1 $560 $649 +$89 +15.9%
12/01/06
           
12/01/06-01/10/07 A $649 $608 -$41 -6.7%
01/10/07-02/26/07 B $608 $685 +$78 +12.6%
02/26/07-06/27/07 C $685 $642 -$43 -6.7%
12/01/06- irregular ABC
2 $649 $642 -$7
06/27/07 correction
           
06/27/07-07/24/07 i $642 $684 +$42 +6.5%
07/24/07-08/21/07 ii $684 $657 -$27 -4.1%
08/21/07-09/28/07 iii $657 $743 +$86 +13.1%
09/28/07-10/04/07 iv $743 $725 -$18 -2.5%
10/04/07-11/08/07 v $725 $841 +$116 +16.0%
06/27/07-
3 $642 $841 $199 +31%
11/08/07
           
11/08/07-11/19/07 A $841 $779 -$62 -7.9%
11/19/07-11/26/07 B $779 $830 +$51 +6.5%
11/26/07-11/30/07 C $830 $783 -$47 -6.0%
11/08/07-
4 $841 $783 -$58 -7.4%
11/30/07
           
11/30/07-01/15/08 i $783 $913 +$130 +16.6%
01/15/08-01/21/08 ii $913 $871   -4.8%
01/21/08-??/??/08 iii $871      
  iv       -4%
  v        
11/30/07-??/?
5 $783 $1200?   
?/??
10/06/06-??/? WAVE
$560 $1200?   
?/?? I

4
           
WAVE
  $1200?$1000?  -16%
II
           
  1 $1000?      
  2       -8%
  3        
  4       -8%
  5        
WAVE
         
III
           
WAVE
        -16%
IV
           
  1        
  2       -8%
  3        
  4       -8%
  5        
WAVE
         
V
           
10/06/06-??? WAVE
?????
$560      
THREE
           
WAVE
        -25%
FOUR
           
  1        
  2        
  3        
  4        
  5        
WAVE
         
I
           
WAVE
         
II
           

5
  1        
  2        
  3        
  4        
  5        
WAVE
         
III
           
WAVE
         
IV
           
  1        
  2        
  3        
  4        
  5        
WAVE
         
V
           
WAVE
         
FIVE
 
[I have summarized Alf Field's gold wave counts in the
table above. All the gold prices are from The London
Bullion Market Association, London Gold Fixings PM price,
priced in US Dollars and rounded off to the nearest
dollar.....ed.]
 
Here is the above table in chart form showing the first two
Major Waves and the start of Major Wave III:
 
 

6
 
 
Notice the support the 300 day Simple Moving Average
provides (blue line). This support line has never been
violated to the downside since August 2001. As shown
above, this support line just penetrated $600 in February
2007.
 
 
Here is a chart of the current situation.
 
 
*One major flaw developed in the forecast and this needs
to be examined. In a second article, dated 23 September
2004 when the gold price was $405 ("Elliott Wave Gold

7
price Update II"), my expectation then was for gold to rise
rapidly to $500 without a serious correction. This rise was
expected to be followed by a 16% decline to $420. The
final up-leg to $630 was anticipated to follow the
correction to $420.

By early November 2004 the gold price had risen above

$430, making a new 16 year high in the process.
Immediately the gold market gathered a head of steam
and by 2 December 2004 had reached a PM Fixing of
$454.2. The market looked set to rocket straight up to
$500 but instead was hit by an avalanche of selling that
stopped the rise in its tracks. The dashed lines on the
chart below depict the forecast rise to $500 and the
subsequent sharp decline that never happened.
 
 

Chart #2
Wave 4 Triangle
updated to 21 October 2005

It is all very well to speculate on the source of the large

selling in early December 2004 and to say that the gold
price "should" have risen to $500. The fact is that it did
not rise to $500. What is important now is to determine
whether the correction from $454.2 on 2 Dec 2004 was of
the correct order of magnitude to be classified as Wave IV
in my original forecast, i.e. the 16% decline anticipated

8
from the peak of Wave III. For the following reasons I
believe that we can conclude that Wave IV is of the
correct magnitude and was completed some months ago:

1) With the price amplitude of Wave III being sub-normal,

it is reasonable to expect that the price amplitude of Wave
IV would also be sub-normal;
 
2) The length of time covered by the Wave IV correction,
7.5 months from early December 2004 to 15 July 2005, is
the longest correction in the bull market;
 
3) The correction has taken the form of a triangle which is
often the shape of fourth waves, and this is Wave IV;
 
4) The rule of alternation has been observed as Wave II
was a quick zigzag while Wave IV is a long drawn-out
triangle;
 
5) The lowest price reached during the correction was
$411.1 on 9 February 2005, only $9 from the forecast
target low of $420;
 
6) The low point of the fifth wave in the triangle, which
marked the end of the triangle and which is also the point
from where the next up-leg would be measured, was
$418.3 on 15 July 2005, less than $2 from the ideal
forecast target low of $420.
 
 
* The initial forecast for the first up wave (i) of Wave 5
was for $490. The gold price paused briefly at $490 and
then continued to power upwards in a straight line, finally
peaking at $536.5 on 12 December 2005. There is no
doubt in my mind that this stunning move beyond the
forecast $490 peak was a 5th wave extension, a rare
event and generally incapable of being forecast.

Extended waves do provide us with other forecasting

tools. Firstly the price invariably retraces the entire
magnitude of the extension and, secondly, often has a
double retracement. In view of the fact that wave (i) of
(5) was expected to peak at $490, I concluded that this
was where the extension started from. Thus to retrace the
entire length of the extension, the gold price had to
correct from $536.5 to $490.

9
It was satisfying to see the correction finish at $489 on 21
December 2005, exactly retracing the full extent of the
5th wave extension. At the same time the correction
amounted to $47.5 ($536.5-$489), a magnitude of 8.8%.
Thus the 8.1% correction originally anticipated from $490
actually commenced from $536.5 due to the extension
and helped to confirm that this decline was indeed wave
(ii) of wave V.

 
 
Turning to the comparison of wave V with wave I (see above), it is
interesting to note that wave (ii) of wave V, shown in the paragraph
above as a magnitude of -8.8%, was almost identical to wave (ii) of
wave I, which was a magnitude of -8.9%.

Despite this remarkable similarity in the magnitudes of the wave

(ii) corrections, impulse up-wave (i) of wave V was massively
larger at +28.1% (see the analysis below) than the magnitude of
wave (i) of wave I, which was +13.7%, as depicted in quote from
"Update III", shown above.
 

10
  
In these circumstances it was necessary to conclude that wave V
is not going to be similar to wave I. Thus far, wave V shows every
sign of being  much larger than wave I. The previous forecast of a
$630 peak for the first major wave of the new gold bull market,
which was based on the assumption of wave V being similar to
wave I, thus had to be jettisoned forthwith.
 
Before getting into a new detailed forecast, I need to explain that I
use the magnitude of the corrective waves to determine where we
are in an Elliott Wave pattern. The rhythm in the gold bull market
to date has seen minuet corrections in the 4%-5% range. The
corrections of one larger degree of magnitude have been in the
8%-9% range. The next higher degree of correction has been
about 16%-18%.
 
Now that we appear to have reached the peak of major wave ONE
at $725 we can make some guesses as to the peak of the big
major Wave THREE which will follow once the current Wave TWO
correction is completed. We now know that the $725 level is 2.83
times the $256 start of the bull market. We can project that the
peak of Wave THREE will be at least 2.83 times the low point of
this correction. As Wave THREE could be the strongest of the bull
market, it is possible that the multiple could be higher, possibly
1.618 x 2.83 = 4.58.
 
If the low of Wave TWO is in the region of $545, possible targets
for the peak of the strong Wave THREE to follow could be of the
order of $1,542 or possibly even as high as $2,496.
 
Wave TWO may have covered an adequate number of dollars to
the downside, but the initial down wave may only be the a-wave of
an a-b-c or more complex wave sequence. If so, Wave TWO will
absorb several more weeks or months and may exceed the 20%-
25% size expected for the current correction. 
 
The initial decline to $540 was of sufficient magnitude to satisfy the
dollar amount required for the Wave TWO decline, but it had
happened too quickly. Not enough time had elapsed to allow for all
the profit takers to get out and new long term buyers to come in
and take their place, thus building up a solid base of holders with a
cost entry in the $540-$730 range. This is a necessary building
block in the market to provide the support for higher prices to
come.

I surmised that the decline was only the A wave of a bigger A-B-C
correction which would absorb several more weeks or months. We
are now four months into the correction and possibly coming to the
end of the corrective period. This is the graph of Comex Gold now:

11
Data updated to Friday 8 September 2006.
 
There are a couple of interesting points on this graph. The Island
Reversal formation in June is a fairly reliable indicator of a change
of trend and it worked, at least for the moment. Gold gapped up
above $600 and quickly moved to $660 plus at which point those
people who had missed out selling the first time around came in
saying that this time they were not waiting for $700 and dumped
their positions.

The second interesting observation is the strong support line just

above $600 which has contained the 3 declines over the past
couple of months, a level reached again last Friday, 8 September.
The question is whether this level will hold again. If it does hold
then there is the potential for gold to move rapidly above $700 in
the near future. If this is the case we could label the peak at $674
on 14 July 2006 (Comex) as the peak of wave (i), the first upwave
in the new bull leg and the correction to the recent $608 level as
wave (ii).

If this support level just above $600 gives way, then we should
expect another visit to the lower $500 regions. That would then
confirm that the 14 July $674 peak was the end of the B-Wave and
that the decline to test the lows above $500+ would complete the
C-Wave. That would also complete Major Wave TWO, the biggest
correction in the gold market to date.

There is a high probability that the 5 month correction in the gold

price has ended. Often there is a relationship between the lengths
of the A and C waves of a correction, sometimes C equals A and

12
at other times C is only 61.8% of A.

At the low prices on both COMEX and the London PM fixings last
Friday (6 October), the C wave of the correction was almost
precisely 61.8% of the A wave. Equally important, the minor waves
in wave C have completed a full Elliott Wave sequence.

The picture can be seen most clearly in the following chart of the
London PM gold fixings:

 
 
Just to run through the numbers, wave A declined from $725 to
$567, a total drop of $158. Wave B rallied to $663.2. If wave C is
61.8% of the A wave decline of $158, wave C would extend for
$97.6 (61.8% of $158) from the B wave peak of $663.2. This gives
a target for the end of wave C of $565.4 ($663.2 - $97.6). The
London PM fixing on 6 October 2006 was $560.7.

On the COMEX gold futures, the corresponding figures are an A

wave decline of $171.3 from the May peak of $733 to the June low
of $562. Taking 61.8% of the wave A decline of $171.3 produces a
figure of $105.9 as the potential magnitude of the wave C decline.
Wave C commenced at $674 on the COMEX futures, implying a
potential low of $568.1 ($674 - $105.9).

The low price on the COMEX gold futures on Friday 6 October

was $567.0, slightly higher than the low on 4 October of $563.6.
Both these lows are within a few dollars of the $568.1 figure
calculated above as the target low point. While these numbers are
close to the target, they take on added importance when

13
cognizance is taken of the fact that the minor waves in the
correction have completed an adequate Elliott Wave corrective
sequence.

I recently calculated a figure of $562.5 as a possible London PM

fixing low for wave C by utilizing an analysis of the minor waves in
wave c of wave C. These minor waves are marked (i) to (v) in the
above chart. The analysis of wave c of C is as follows:

Analysis of minor wave c within corrective wave C:

Wave (i) $654.4 (2 Aug) to $613.9 (18 Aug) - -$40.5

(ii) $613.9 (18 Aug) to $637.7 (5 Sep) - +$23.8
(iii) $637.7 (5 Sep) to $573.6 (15 Sep) - -$64.1 (largest wave in
sequence)
(iv) $573.6 (15 Sep) to $603.0 (28 Sep) - +$29.4
(v)* $603.0 (28 Sep) to $562.5 ( ? ) - -$40.5 (same decline as
wave (i))

* Forecast assuming wave (v) is the same size as (i) at - $40.5

This target of $562.5, determined by a different method involving

minor wave forecasts, is also exactly in the range of lows seen in
the past few days on both COMEX and the London PM fixing on 6
October. The $562.5 target is exactly $1.80 from the PM fix on
Friday 6 October of $560.7. It would thus not be a surprise if the 6
Oct PM fix of $560.7 was the actual low.

The confluence of targets in the $560 to $568 range suggests that

the gold price lows on 6 October 2006 marked the end of wave C
and also the end of the first major correction (wave TWO) of this
gold bull market. If this is so, we should see the gold price move
rapidly upwards in a strong impulse move, starting almost
immediately. The next major wave is wave THREE, the strongest
of the upward waves, implying some dramatic action on the
upside.

Targets for the end of major wave THREE are vastly higher than
the current gold price. We should wait for confirmation that we are
actually in wave THREE before calculating the upside potential for
this wave. What we are looking for is:

1) immediate strong upside impulsive action and,

2) a breakout from downtrend from the May peak. This will
probably be evidenced by the gold price knifing upward through
$610.
 
Gold Update IX indicated that there was a high probability that the
5 month correction in the gold price finished at the $560.7 London
PM fixing on Friday 6 October 2006. That is exactly what

14
happened.

Update IX was written over the weekend following the $560.7

London PM fixing and that article was published before the
markets opened on Monday, 9 October. The forecast of the exact
low of the correction, literally to the day, was thus produced in real
time. This accurate call once again confirms the efficacy of the
Elliott Wave technique as applied to the gold price.
 
The chart below shows the gold price action since the $560.7 low
point of Wave TWO. The twin requirements of immediate upside
action followed by a break through the downward trend-line from
the May 2006 peak have both occurred. Even the requirement for
"knifing upward through $610" has been achieved.

 
Data updated to 24 November 2006
 
 
As promised, we can now allow ourselves the luxury of speculating
on the heights to which major wave THREE might soar and,
perhaps more importantly, the shape and structure of wave
THREE. Fortunately we have a lot of useful information that can
be gleaned from the rhythms and structure of major wave ONE
that can assist in formulating this template.

We know that wave THREE cannot be the shortest wave in the

sequence. We also know that third waves are typically the longest
and strongest in a sequence. Thus major wave THREE should be
at least as large as major wave ONE in terms of magnitude and

15
will probably be much larger than wave ONE.

In this forecast template it is assumed that wave THREE will

achieve the minimum requirement which is to be equal in
magnitude to wave ONE. Wave ONE commenced in April 2001 at
a PM fixing of $255.9 and finished on 12 May 2006 at $725. Thus
the peak of wave ONE was 2.83 times the staring level. ($725
divided by $255.9).

Assuming that it is merely the same magnitude as wave ONE, the

minimum peak for wave THREE should thus be 2.83 x $560.7, the
latter price being the starting level of wave THREE. This gives a
target for the template peak of wave THREE of $1,586, which
could perhaps be rounded off to $1,600.

We also know that wave THREE will consist of three separate but
smaller upward waves separated by two corrections of about 16%
each. This magnitude of correction is derived from wave ONE.
Using conventional technical analysis, the likely point of first major
resistance in wave THREE should be at the 1980 peak level of
around $870. A 16% correction from $870 would cause a decline
to $730, a typical support level under conventional technical
analysis being the peak of major wave ONE. This is how the
magnitudes of waves I and wave II of wave THREE have been
arrived at in this template.

The other waves have been determined by assuming that wave III
of wave THREE will be the strongest and will include the "Point of
Recognition", i.e. that point in time when the majority of
participants in the gold market collectively realise that the gold
really IS in a new bull market. Wave V of wave THREE is assumed
to be similar in size to wave I of wave THREE.

Using these inputs we can make the following guess as to the

shape and magnitude of major wave THREE:

These numbers cannot be expected to be precisely accurate (they

may well be exceeded) but they are provided in the expectation
that they will be an approximate guideline as to what may be
expected in terms of structure and price movement in wave
THREE.

Each of the smaller uplegs, i.e. waves I, III and V, will also break

16
down into smaller waves in similar fashion, but obviously with
lesser dimensions than in wave THREE. Thus the two corrections
within each of waves I, III and V, should be of the order of 8%,
give or take a percentage point, as compared to 16% in the wave
THREE corrections.

This means that the current rise in wave I, which is expected to

extend from $560 to $870, should contain two corrections of
approximately 8% each. It will be easier to estimate the
magnitude of wave I of THREE once the minor waves have started
to unfold. That will be the subject for the next Gold Update article.

Update XI contained a warning that if gold performed sluggishly as

the price approached $680-$700 (instead of acting powerfully as
anticipated) that there was the possibility of a B wave peak at that
level, which could be part of the ongoing correction since May
2006. The gold price was sluggish when it got above $680 in
February and soon started down. This raised concerns about a
gold price decline to possibly below $600 and maybe a test of
$560.

Fortunately there is another possibility that has very bullish

connotations and which looks as if it has a high probability of being
the correct interpretation. This interpretation calls for an immediate
strong 3rd wave upward move in both silver and gold. Under this
interpretation gold should knife through the resistance in the $680-
$700 area without a problem and rise to levels in excess of
previous forecasts for the peak of wave 3 of $760. A target of a
minimum of $800 is now possible for the peak of wave 3.

What has created this bullish scenario is the formation during the
past 3 months of what looks like an irregular ABC correction. An
irregular correction is one where the peak of the B wave is above
the starting point of the A wave.
 
To complete the picture, the following chart depicts the
movements in the London PM gold fixes:

17
 
 
The proportions in the A and C waves of the London PM gold fixes
are not as precise as those found in silver and in Comex gold.
They do nevertheless support the thesis that what the precious
metals have experienced over the past 3 months has been an
irregular correction in wave 2 of the current sequence. The strong
upward wave 3 has probably just commenced.

The degree to which the PM fixings chart has been skewed to the
upside is even more dramatic than in the Comex gold futures. This
suggests that the demand in the physical market must be very
strong and that physical demand is the most important driver of the
current gold price move. The conclusion is that this is about as
bullish as it is ever likely to get in the precious metals markets. The
word "explosive" certainly comes to mind.

The forecast in Update XI targeted $760 as the peak of wave 3.

The current formation will require the measurement of wave 3 to
start from a higher level ($637 as opposed to $608), thus the peak
of wave 3 should be at least $40 higher than previously forecast.
That pushes the new forecast for the peak of wave 3 to at least
$800.

18