It's Always Darkest Before The Dawn
The above proverb refers to the fact that it is always darkest one hour before the sun rises has metaphorical meaning, in that a situation may seem bleak or about as dark as it possibly could get...but soon is about to get better (i.e. Light will pour open and remove all feelings of despair). At present, I think it is safe council to state that every gold bug on the planet is probably sick and tired of waiting for the first glimmer of light on the horizon, hoping that it will soon illuminate and drive away all despair...many on the other hand probably feel a similar feeling to Charlie Loman in the Death of a Salesman who "Remembers the good ol' days" (2001-2003, 2005-2007) as he crashes his car. There are many "shades of grey" out there for how people feel at present (no, the reference has nothing to do about Anastasia or Christian).
There are many different problems in the financial system, with many locked into their own unique patterns...how these "interact"with each other can have interesting repercussions that many would not have otherwise expected. Although many of these interactions at present seem to be leading into a full blown deflation with no hope for anything, some bits of technical analysis suggest otherwise. Rather than an inflation or deflation trend in singular terms, the present economic landscape has inflation and deflation occurring simultaneously (stagflation), with a sought balance between the two for some form of stability.
The type of market phase we are in at present is very typical in the evolution of a democratic society. Democracies always start out with an uprising from the serfs against their masters demanding equality and a chance at life. Governments are generally small at this point in the cycle as there is not enough financial draw for anything aside from foreign relations and military to protect interests. As a work force becomes established and the ability for taxation is seen, slowly and incrementally, taxes are raised, along with societal safety nets to protect those who become down and out. When economies reach a tipping point, many individuals become down and out, along with those who expect to have a free lunch on society...safety nets are soon cut due to a lack of funds. Controls and regulations seem to exist everywhere at this point in the cycle, with government regulation for everything....sound familiar? Democracy shifts to a socialist society, where forms of a quasi-democracy are in place. Rich become richer, poor become poorer...a rebellion occurs and the cycle repeats anew.
Last July I made an observation that the broad stock markets were trapped in a Contracting Fibonacci Spiral (http://www.safehaven.com/author/21/david-petch). The most important observation was that highs were noted to occur within 61.8% ±5% of the time the previous time segment took...this would mark a high, with no indication of time required before a sharp decline occurs. Think back to 1987 for how short a duration that decline was, yet the magnitude of the drop was huge...it was short and soon the markets recovered and went until the next CFS top of 2000 and yet again in 2008. The CFS for the S&P 500 Index is ideally due on December 5th, 2012, with the furthest top due no later than March 6th, 2013. In an article published earlier this year, I noted that gold was in its own CFS, due for a top around September 2nd 2013. This date did not sit well with me as I could not rationalize how things would unfold with gold taking longer to put in a top than expected. At our present point in time, all analysis that I have done places a top in the US Dollar sometime in August/early September, with gold moving higher that point in time.
The situation developing appears to be a similar setup as 2003/2004, with different time frames...the S&P is likely to test 1500-1550 between the noted time frame above, with gold topping some 7-9 months later. Somewhere in between is the AMEX Gold BUGS Index, which is having pattern analysis indicating a top around June 2013. The backdrop of economic growth going forward will be financial stimulation from governments, which in turn will quickly fade and require a greater amount of heroine to stop the economic twitching and convulsions. Further injection of liquidity at some point in time will cause a rush into tangible assets in order to preserve capital and use proceeds to pay off debt. Be warned however, because between 2013 and 2016 CFS tops lies a bottom that will likely take broad stock markets down by at least 30-40% (all time points of the CFS have this as a minimum decline).
How can the above thoughts regarding individual sectors be woven into a hypothesis? Individual examination of a given sector or commodity will generally not aid in providing enough information to see what is occurring in its entirety within the financial system. By use of Inter-market analysis, examination of various markets with each other can lead to interesting observations and conclusions that otherwise might not have been known.
It is always darkest before the dawn, and hopefully the following technical analysis will provide some light on how markets are expected to behave over the coming 6-12 months. Although some of the technical information may be Greek to most, focus on the thought pattern each Index or Commodity is thought to be forming and where things are headed.
AMEX Gold BUGS Index
The mid-term Elliott Wave count of the HUI is shown below, with wave E of an expanding triangle with reverse alternation thought to be forming at present (wave (B smaller than wave D). Wave E could have an internal pattern consisting of a double combination with a non-limiting triangle underway to conclude the pattern. There will be a retracement of some form for the current move up...whether or not wave (Z) has started or wave E.(XX) is still nearing its conclusion has yet to be seen. The pattern being tracked back in March had the potential for a break out to 1000-1050, but we required conclusion of the pattern before any buy's could be warranted...it broke the triangle and reverted to the downside so no purchases could be warranted until a definitive bottom was put back in place (as per last month). Triangles are extremely tricky because of their internal complexities and ability to morph into a variant that further confounds things. I could try and go deep to label wave E...there are numerous possibilities and will simply leave it as is for now. Bottom line: an Orthodox bottom (higher low) is expected to complete sometime in August that sets the stage for a multi-year bull market trend. The minimum price objective for the move lasting until around this time next year is 800-850...if gold can reach $2500-3000/ounce later next year, then 800-850 would be far cheaper than at present levels with $1600/ounce gold.
S&P 500 Index
The mid-term Elliott Wave count of the S&P 500 Index is shown below, with the thought pattern forming denoted in green. Wave [b] is thought to be forming at present, with a diametric pattern forming for wave [b]. The pattern could extend into late July/early August, but overall, expect sideways price action to last the course of the summer. Wave A.(Z) was retraced beyond 61.8%, suggestive that classification of a flat for wave (Z) is probable. Wave (Z) is likely to last for 4-5 months, which suggests a top between December 5th, 2012 and March 6th, 2013. A breakout above the March high of 1421 would suggest a move to 1500-1550.
The long-term Elliott Wave count of the S&P 500 Index is shown below, with the thought pattern forming denoted in green. Although a move to 1500-1550 is expected, there remains the chance of a move to 1650-1700. Should this upper level be reached, the subsequent decline from the expected top should reach down to at least 800-850 by late 2014. A move to 1500-1550 would see a minimum downside move to 750-800. The top around December 2012 should complete wave [B], which will either see wave [C].c decline as an impulsive structure or as the third leg of a terminal impulse for wave c lasting to near 2020. It is important to note that the year 2000 and 2008 CFS tops each end a wave structure of one lower Degree, as will the anticipated top later this year. Should this continue then as expected, volatility will become greater per unit time until we reach a point of singularity in 2020.
US Dollar Index
The short-term Elliott Wave count of the US Dollar Index is shown below, with the thought pattern forming denoted in green. Wave (E) thought to be forming at present. Internal wave A.(E) completed in early June, with wave B.(E) likely forming. Wave (E) could be forming a flat (3-3-5), which would see wave B.(E) retrace between 50-80% of wave A in an equivalent or longer period of time than A...potentially mid July. This would be followed by wave C.(E) that could last until mid to late August. If a triangle is forming, then the time line extends into late September. Wave [E] is presented as a triangle which so far is in no violation of NeoWave rules. If wave (E) extends beyond wave (C), then the pattern changes to a double combination ( (C) becomes (W), (D) becomes (X) and wave (Y) is presently underway. The relentless advance of the US Dollar Index in May created a very overbought condition that could result in the next move up failing to reach the former level (Orthodox top)...this would create the potential for a very sharp reversal.
The mid-term Elliott Wave count of the US Dollar Index is shown below, with the former thought path denoted in green (shift ahead four months and it fits what happened rather well) as is the thought path lying ahead. A long-term triangle is thought to have been forming since 2008, with termination nearing within 2-4 months. As an aside, the Contracting Fibonacci Spiral top for the broad stock market indices ideally is set to complete on December 5th, 2012 and no later than March 6th, 2012. Gold's CFS top is slated for an ideal date of September 2nd, 2013 but could occur as early as May 2013 (The initial leg of its cycle was longer than anticipated). Taking into account the above information, along with future broad stock market CFS tops due in 2013, 2016, 2018, 2019 and 2020 and that lows in the US Dollar Index are likely to occur at these time points...I proposed that the US Dollar Index could form an expanding triangle between later this summer and 2020. Each swing that occurs with the US Dollar would likely be larger than the prior wave, so if this occurs, price swings could become quite volatile. As per analysis from other charts of the US Dollar Index, wave [E] is thought to be nearing completion sometime between mid to late July and even potentially extending into September if a triangle for the latter portion of wave [E] develops.
The mid-term Elliott Wave count of gold is shown below, with the thought wave pattern forming denoted in green. It is thought that a diametric triangle is forming for wave Y at present, based upon time equivalency so far. Wave [d] must complete higher than the starting point of wave [c] and requires one more week of sideways to upward price action before any sort of downward trend can start. If this does not occur, then the proposed count must be revised. With the present count, waves [d], [e], [f] and [g] must be equivalent in time and complexity, but can vary in price. Based upon the above assumptions, the end of the corrective phase in gold is not due for completion until mid to late September.
Although things may seem dark, governments around the globe are on the verge of embarking on multiple rounds of Quantitative Easing or "QE to Infinity" as Jim Sinclair states. Failure to do so would be the equivalent of someone in water refusing to swim. This would result in death and human nature is to fight for survival, no matter what the consequence...Expect the theories of Darwin to be remain an integral behaviour for economies going forward. We may not see the sun on the horizon, but with the passage of time, it should soon be visible.