As a 26 year old investor 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 the financial markets and real estate reading dozens of books and now focusing mostly on technical analysis and more specifically Elliott wave theory.
I read the classic book technical analysis of stock trends by Magee and Edwards at 21 and stumbled across Elliott wave theory a few years later. After reading Prechter and Frost’s Elliott Wave Principal it really changed the way I viewed the financial markets. I have since read most of Prechter's books and I do subscribe to his and his partners newsletters.
I believe without a shadow of a doubt that Elliott wave theory is the best form of T.A. there is no other form of T.A. that allows the investor to make very precise calls that are very stunning based on the movements of Elliott waves. I have personally 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 to gold.
I fully believe R.N Elliott’s theory that the emotions of humans (greed and fear) are extrapolated onto the price charts of financial assets in waves. The more emotional the market the clearer the wave pattern ( DJIA, gold stocks, tech stocks, gold, silver).This very brief intro is the basis of my essay, a while back 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 was the big 1970’s bull market having the 1980 $850 peak the top of the 3rd wave. The 4th wave was the 21 year bear market from 1980 to 2001. Since the 2001 bottom at $252 gold has been in a bull market rising all the way to the current (Sept 6 2003) level of $379.
Gold broke the 21 year bear market down trend in 2002. The purpose of my essay is to prove that the probabilities of a 5th wave move in the price of gold are extremely high and is not only backed by Elliott wave theory but by a number of other indicators that solidify my research as well.
When all the indicators are put together they make a stunning case that some time in the next 10 years the price of gold with surpass the 1980 high of $850 and rise over $1000 in a huge 5th wave surge. Below is another long term chart of gold showing the 21 year down trend line being broken and the possible future path of the gold price in the next ten years…
Since the bottom in 2001 gold and silver stocks have simply 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 are in my opinion 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.
One of the other indicators that I will discuss first is the DJIA Gold Ratio.
This is my all time favorite ratio as it clearly shows you all the bubble tops in stocks and also the 3 very best times to buy gold over the last 100 years. As you can see on the chart below all 3 major market bubble tops (29, 66, 2000) are clearly visible.
It is also interesting to note that when the ratio finally bottoms at a 5-1 ratio or lower 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…25-1 so if you look at this chart below it is very obvious that we have a long way to go to get close to the historical bottom in this chart meaning that either the DJIA has to fall significantly or the price of gold simply has to explode in price to bring the ratio down to where all the previous bottoms occurred as an example even if the DJIA fell to 5000 and gold hit $ 1000 the ratio would only be 5-1. The two previous bottoms happened in 1942 at a ratio of 2.7-1 and in 1980 at 1.3 -1.
So in summery of this chart below the last best buying opportunity in gold and silver was in 2001 and it is expected to last until the DJIA Gold Ratio get close to a 5-1 ratio or lower. This ratio tells me that 2001 was the true 4th wave bottom in the gold price and that a huge 5th wave advance is a major probability.
In the another chart that I have to show you there is a comparison between the price of gold and the U.S dollar these two chats go back to 1972-2003. As you can clearly see that the dollar has been in a 30 year down trend and that gold has been in a 30 year up trend. Gold and the dollar seem to move in opposite directions but in between those 30 years there have been bull and bear markets for both the dollar and gold.
As you can see on the charts 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 in 2001 gold has risen dramatically and the dollar has fallen very hard. It is also very easy to see the clear 4 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 is 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 here since it is still very close to its bottom channel.
And finally I will look at the fundaments that also give evidence for a massive 5th wave rise in the price of gold. First as you can see from the chart above the U.S dollar is very weak and in my opinion will stay very weak because of a number of factors including the huge federal and state budget deficits, the record amount of consumer, corporate and government debt.
The massive mortgage and housing bubble the re-flatting stock market bubble and the cost of fighting global terrorism. I will not expand my thoughts on these topics any further because they are already widely known and I don’t have enough space in my essay to go into greater detail. But all of these problem will only help and propel the price of gold higher.
In summery I believe that a coming 5th wave advance in gold is highly probable due to the fact the Elliott wave pattern is in sync with all of my other charts and indicators and that the old high of $850 will be broken sometime before this decade is over. Last but not least here below is my best evidence of the current wave count.
I know that there are other followers of Elliott’s theory that believe this is a bear market rally and we will fall below the $252, 2001 bottom (I obviously don’t agree).
Take a look again at my first chart of the current 30 year Elliott pattern in gold and then take a look at another Elliott pattern that is so uncanny in shape and wave count that I believe it gives us a good indication of how the 5th wave will form in this current gold bull market.
And the chart below by the way is from the last gold bull market of the 1970’s from 1976 to 1978.