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[ThatHawaiiGuy]

Gold: Elliott Wave and the Gold Price

Alf Field

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August 26, 2003

Robert Prechter's forecast that the gold price would drop below $250 (and possibly even below $200) has caused a degree of angst amongst gold bulls. Bob has made so many astonishingly accurate calls in the past, especially relating to the stock market in the 1980's, that one should consider his views very carefully.

I venture into this discussion with some trepidation but feel that my views may be helpful to understanding what motivates Bob's call and why he may be wrong. The gold market is approaching a point of resolution and it will be useful set out the relevant critical points.

I have some minor credentials for entering this debate. I was using the Elliott Wave Principle (EWP) years before Bob popularised it with his books on the subject and his accurate calls in his monthly publication "The Elliott Wave Theorist". During the 1970's I had a degree of success using the EWP in the gold market. For some reason, possibly the huge emotional element in this market, I found that the EWP produced its best results in the gold market.

I am not a gung ho advocate of the EWP. I discovered not only its strengths but also its weaknesses. I prefer to have fundamentals, technicals and the EWP all in place (if possible) before committing myself to an investment. The EWP does have the tools to provide a magnificent guide to potential future market movements and turning points, these being its major strengths.

The weaknesses of the EWP are as follows:

1. An incorrect reading of even a single minor wave can put one on the wrong side of the market for some time.

2. Corrective waves are notoriously difficult to evaluate and often their conclusion can only be determined after the event.

3. The exceptions, e.g. 5th wave failures and wave extensions, can lead to some serious mistakes and major lost opportunities.

4. Often the minor waves are confusing, difficult to interpret and conflict with EWP rules.

5. It is difficult to comprehend by other than seriously devoted students.

For purposes of this analysis I will use only the London PM Gold fixing prices. In the Futures markets the participants with the deepest pockets can control the market because settlement is invariably in cash. Futures' trading is almost always on a highly leveraged basis and the strongest player can push prices around to trigger forced stop loss trades by smaller players. In the gold fixings, to be a seller one must actually have physical gold for delivery and the price must be paid in full. The PM fix is the one where time differences allow both European and North American traders to participate. The PM fix is thus the "real" gold price in my opinion.

The following is a weekly chart of the London PM Gold Fixings for the past 5 years.


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