The 5th Wave Advance in Gold

Guest Commentary by Edward Gofsky
December 15, 2003

 

 

I became interested in the financial markets at a young age. I read my first book, The Wealthy Barber at age 17. Since that time I have dedicated my life to real estate and the financial markets, reading dozens of books focused mostly on technical analysis, specifically Elliott Wave Theory. I read the classic, Technical Analysis of Stock Trends by Edwards and Magee at age 21 and stumbled across Elliott Wave Theory a few years later. After reading Frost and Prechter's Elliott Wave Principle, it changed the way I view financial markets.

I have since read most of Prechter's books and I subscribe to his newsletters. I believe that Elliott Wave Theory allows precise calls on market behavior. I have found the same Elliott patterns in stocks and commodities of all types and sector classes, from tech stocks to the price of cocoa, bank stocks and gold. I fully believe R.N Elliottís theory that the emotions of humans (greed and fear) are woven into the waves of price patterns of financial assets. The more emotional the market, the clearer the pattern. This very brief intro is the basis of my essay.

Recently, I read an essay about the long term Elliott Wave pattern of gold from 1970 to 2003 (see chart below)

 

 

As you can see, there is a clear Elliott pattern here. The first 3 waves comprise the huge bull market of the 70's, with the 1980 $850 peak at the top of the 3rd wave. The 4th wave is composed of the 21 year bear market from 1980 to 2001. Since the 2001 bottom of $252, gold has been in a bull market, rising to its current level of over $400. Gold finally broke its 21 year bear market down-trend in 2002.

The purpose of my essay is to show that the probabilities of a 5th wave move in the price of gold are extremely high. This is backed not only by my interpretation of Elliott Wave Theory, but by a number of other indicators as well. When all of these indicators are put together, they make a stunning case that some time over the next 10 years, the price of gold with surpass the 1980 high of $850, rising well over $1000 in a huge 5th wave surge.

 

Since the 2001 bottom in gold and silver, precious metals stocks have exploded in price. The HUI index of unhedged gold stocks has risen over 300%, and some gold and silver stocks have risen over 600%. Gold stocks, in my opinion, are confirming the new bull market in gold. As you can see in the two charts below, the HUI has broken out and the XAU is forming a massive head and shoulders reversal pattern.

 

 

 

Another positive indicator is the DJIA Gold Ratio. This is my favorite indicator as it clearly shows all the bubble tops in stocks, and also the three best times to buy gold over the last 100 years. As you can see below, all three major market tops (29, 66, 2000) are clearly visible. When the ratio finally bottoms, somewhere below a 5-1 ratio (meaning that it takes five ounces of gold to buy the DJIA), the market as a whole is close to a REAL BOTTOM and the price of gold is at a significant TOP.

So where are we today in this ratio? A very high 25-1. Looking at the chart, it is obvious that we have a long way to go to get close to the historical bottom, meaning that either the DJIA has to fall significantly or the price of gold has to explode in price, or a combination of both. For example, even if the DJIA fell to 5000 and gold hit $ 1000 the ratio would be just 5-1. The two previous bottoms happened in 1942 at a ratio of 2.7-1 and in 1980 at 1.3 -1.

 

In summary, best buying opportunity for gold and silver was in 2001, but this opportunity should last until the DJIA Gold Ratio gets close to the 5-1 ratio. This indicator tells me that 2001 was the true 4th wave bottom, and that there is a high probability of a huge 5th wave advance.

 

The chart below compares the price of gold and the U.S dollar between 1972-2003. As you can see, the dollar has been in a 30 year down trend, and gold has been in a 30 year up trend. Gold and the dollar seem to move in opposite directions, but in the intervening 30 years there have been both bull and bear markets for both the dollar and gold. In 2001 gold hit the BOTTOM of its 30 year uptrend channel and the dollar hit the TOP of its 30 year down trend.

Since hitting the bottom of its 30 year uptrend line at $252, gold has risen dramatically and the dollar has fallen hard. It is also easy to see the clear Elliott waves in the gold chart, and note that the 4th wave bottom was when gold hit its 30 year uptrend line in 2001. This chart offers more evidence that 2001 was the final low in the price of gold, and the final high for the U.S dollar. In my opinion gold has a lot of room to run since it is still very close to its bottom channel.

 

Finally I will look at the fundamentals that give evidence for a massive 5th wave rise in the price of gold. As you can see from the chart above, the U.S dollar is very weak. In my opinion it will stay very weak due to a number of factors including the huge federal deficit and the record amount of consumer, corporate and government debt, etc. I will not go into further details, as they are already widely known and I donít have enough space in my essay to go into greater detail. But all of these well known problems will only help to propel the price of gold higher.

 

Last but not least, here is my best evidence of the current wave count. I know that there are other followers of Elliottís theory that believe gold is in a bear market rally and that we will fall below the $252 before rising (I obviously donít agree). Take a look again at my first chart of the current 30 year Elliott pattern in gold, then take a look at another Elliott pattern that is so uncanny in shape and wave count. I believe this gives us a good indication of how the 5th wave will form in the current gold bull market. The other chart, by the way, is from the last gold bull market of the 1970ís, between 1976 and 1978.

 

I would welcome all comments and views on my essayÖ

 

My e-mail is eddy_gofsky@yahoo.com

 



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