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December 12, 2005

Gold Update
by Roland Watson

Finally, after a near eight-month correction, we have entered the next great wave in the great gold bull market. In Elliott Wave terms, this is statistically the big one called wave 3 and it should outdo the wave 1 we watched unfold from early 2001 up to November 2004.

In this wave, we normally see the bull really snort those terrible nostrils, angrily stomp his great hooves against those who call this price move a mere fad and charge with a venom which will send the shorts and naysayers scurrying for every corner of the great gold field. No doubt a few will be sent flying over the fence if they don't cover their short positions quick enough!

As some readers may know, Elliott Wave Theory postulates that great bulls move in three advances with two pullbacks. The first advance is finished, as is the first correction. What about the second thrust forward into even greater price territory?

This bull has a long way to go and we are just getting into gear for the great charge upwards into $600, $700 and beyond. Indeed, I do not see this bull finally heading for the barn until early next decade. I wouldn't want to be any brass-necked rider trying to tame this monster until then!

So, as the second phase gets underway, we note how the bull has progressed since wave 3 began on Friday 15 th July 2005 at a price just under $420. The main premise of Elliott Wave is that waves are made up of smaller waves. So as our diagram below shows, our big wave 3 is near to completing one of its first sub-waves. That's 3 advances (waves 1, 3 and 5) and two pullbacks (2 and 4).

And just to show you how fractal this pattern is, we have labelled in the 1,2,3,4,5 sub-sub-waves to show you how it all fits beautifully together.

Anyway, when a wave approaches the end of its sub wave 5, a correction of a higher degree is on the cards. As you can see, this wave 5 has exceeded even wave 3 and came racing out of the gates on November 4 th with a fantastic $75 move to $530 to date.

But has it finished? At this point, let me introduce anyone not familiar with them to Fibonacci numbers. This is a tool often used with Elliott Wave premised on the fact that market moves reflect ratios seen in nature. In other words, when traders act as a herd, they repeat certain predictable sets of patterns.

The number 0.618 is called the "golden mean" and when we add whole numbers to it (such as 1.618 in the table above) we get interesting results. The table gives the actual dollar moves of the advances and retreats in this gold wave since July. The red numbers are the predicted Fibonacci results got by multiplying previous waves to it.

For example, wave 1 moved $31.35 dollars up. The ensuing wave 2 pulled back $20.06. If we multiply $31.35 by 0.618 we get a predicted pullback of $19.4. The actual pullback was only 3% bigger!

Now if we multiply the size of wave 1 by a Fibonacci number, it is theorized that this can predict the size of future waves in the same group. So, we multiply $31.35 by 1.618 we get a possible size for wave 3 of $50.72. The actual move was $50.88 or only 0.3% greater than the predicted move!

However, when we apply the 0.618 multiplier to the wave 3 move of $50.88, we do not get the $24.92 wave 4 correction. But, as seasoned chartists know, pullbacks can often retrace only 50% of the previous move. The most famous recent example of that was the S&P500 bear market of 2000-2003 that retraced 50% of the prior bull mania. So, 50% of the $50.88 wave 3 is $25.44, which is only 2% greater than the actual move!

Bringing it all together, what can Fibonacci suggest for the final wave 5 of the current move? If we multiply 1.618 by wave 3 ($50.88) we get $82.32. This suggests this wave 5 will finish at $455.50+$82.32 or $537.82.

And how big will the ensuing correction be you may ask? Well, it may retrace 0.618 or 0.500 of the entire move up from July 15^th 2005. This would give us corrections down to $478 or $464 respectively. Indeed, it may retrace (1 - 0.618) which is 0.382 that takes us down to $492.

In conclusion, the current surge will soon end with a somewhat sharp correction, possibly down to $478 or $464. If so, this will be your last chance to load up the boat because after this correction is over and the dollar bear resumes to stoke the furnace, gold is going to rocket even more.

Roland Watson writes the investment newsletter The New Era Investor that can be purchased for an annual subscription of $99. To view a sample copy of the New Era Investor newsletter, please go to www.newerainvestor.com and click on the "View Sample Issue Here" link to the right. Comments are invited by emailing the author at newerainvestor@yahoo.co.uk

Roland Watson
http://silveranalyst.blogspot.com

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