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June 28, 2006

Gold and Metals - Where are we?
by Francis Bussiere

With the recent sharp corrections in the Metals group, many are wondering what it means for Gold in the near and far future. This correction did confirm some Price and Time geometry that might yield some clues of what to expect going forward. As always it is best to start with the greater picture and zoom in to the near term detail of the Waves and Forces at work. A chart of the last 100 years shows that Gold and Silver, like Equities have been in a well defined Bullish channel since the turn of the century. Since Gold was under government control, I used Silver to delineate the parallel channel. A 20 year oscillation in Silver is apparent and we should consider 2020 as our target date for what appears to be Wave 5 of this Precious Metals Wave. It is also evident that this correction occurred as both Gold and Silver touched the median line of the parallel channel. The last time this occurred was in 1973-74 when both Gold and Silver broke above the median line and consolidated around the line. If Precious Metals are to rise into the 2020 target date, I would expect Gold and Silver to consolidate around the median line and not stay away from it for too long before starting the next wave up. This would probably mean a low of around 400-500 for Gold and 8-10 for Silver.

Fibonacci numbers and Gold
A look at Gold since its release from government control shows that it behaves according to Fibonacci rhythms of 3, 5 and 8 years. I have been watching the 3, 5 and 8 year boundaries since 2001 and Gold turned down on cue in early 2006 as it did at the 3 year boundary in early 2004. As each boundary goes by the odds of a major correction increases, but so far the Price gains compared to the 1970-75 move are 50% too low and that could mean a weak trend or it is unfinished and more upside is to come. In 1973-74 there were at least 2 sharp corrections before the major top of 1975, so far we have seen only one since Gold went parabolic, so more upside is not to be ruled out. The next 8 year boundary is in early 2009, but if we start the Gold Bull in 1999, then the next 8 year boundary would fall in mid 2007. Something to keep in mind since if we made a double top in Gold near 900 by breaking above the median line and then consolidated, it would duplicate the behavior last seen in the 1970-75 Wave up. If Silver acted similarly, we could see it spike multiple times to the 30-40 level.

A closer look at Gold and the 8 year cycle
We can clearly see the regular highs in 1980, 88, 96 and 2004 where the pullback was shallow, a clear sign the 20 year cycle was at work pushing prices up. Again we see Fibonacci at work in the Gold Waves, since each series of lows is 8 years apart, but they are 2.5 years from the start (5/2) and 3 years from the end of the 8 year cycle. One of these lows is due in July this year, while the other one is due in April 2009 and is already one of our boundary dates from above. The July 2006 low could give us the lift necessary to climb above the median line and even challenge the all time highs in Gold before we head lower into the next cycle low in April 2009. Since Gold failed to decline much past its 8 year cycle high and proceeded much higher instead, the next two lows in July 2006 and April 2009 will likely be excellent buying opportunities. For those inclined to learn about Wave patterns, we see on this chart a near perfect example of a symmetrical triangle preceding the last move down before a change of trend.

Click on any of the following images to open a larger version in a new window.

What about Silver?
The Waves are even more regular in Silver with a clear 4.25 year cycle at work, and while the highs in 1991, 95 and 99 were disappointing, the last one in 2003 was very good, and the next one in 2008 that started from the low in 2005 has already beaten it even with the deep correction. Since this decline from the highs of 30% is within the 25-35% of the last three cycle lows in 1997, 2001 and 2005(4), we could see Silver eventually resume its uptrend from this level towards the next cycle high in June 2008.

July low for Gold?
The larger cycles are opening the possibility of a July low in Gold, and the 4 month cycle in Gold certainly support this scenario with a cycle low due in late June to coincide with the Fed meeting. Maybe the Fed's actions or its statement will raise inflation concerns and cause Gold to rise significantly.

How about Gold and Silver stocks?
The XAU index has been consolidating near its 20 year resistance near 150, but is likely to break higher eventually on its way to its 6 year cycle high in May 2008. The shorter seasonal 11-13 month cycle of the XAU and its cousin the HUI are both suggesting we could see the group rising out of oversold this summer. Because of the pressure on Equities from the 4 year cycle low, Gold stocks are sure to pullback with the rest of equities from time to time until next year.

All charts courtesy of StockCharts.com

Francis Bussiere
AstroCycle.net

Disclaimer: I am not a registered investment advisor and the information and opinions offered on this site are for educational use only. They should not be interpreted as a recommendation to buy or sell any securities discussed on this site.