Here’s Why Gold is Still Headed Higher

Gold’s (NYSEARCA:GLD) bull market from 1999 is not over, and a huge rally leg remains in its future. That future is not far off. This article presents why the market is telling us gold could reach 3,000 before the bull market ends.

Above we show the big picture for gold. Gold bottomed on July 20, 1999, wave II’s bottom. Since then, wave III up has been one of the all-time greatest bull markets in gold. The question this weekend is, is the big bull market from the July 20, 1999, low of 252.80 over? Our Elliott Wave analysis shown above says no. Wave III so far has taken the precious metal up 1,670 points to its September 6, 2011, all-time high of 1,923, which was a 761-percent gain in 12 years.

There are many reasons I do not believe gold has topped. Wave threes that are not part of a triangle pattern (sometimes they can be) are impulsive, meaning they move the price vertically. These impulsive wave threes (in this case wave III) are made up of five subwaves. Above we can clearly see that wave III so far has only produced four subwaves. This means there has to be a fifth wave coming, a rally leg.

In stocks, typically wave threes are the most dramatic. In precious metals, typically, wave fives are the most dramatic. Above we see that wave 4 is mature, and wave 5 up is next. I believe the consolidation over the past two years has been a wave 4 pattern, which includes a descending triangle pattern. It has been forming for 19 months.

Wave 2 shown above was a zigzag decline. The principle of alternation suggests that the patterns for corrective waves 2 and 4 should form different patterns. Clearly that has occurred, which legitimizes the above count, and supports the need for a coming wave 5 within wave III…

If the coming wave 5 is to be the most dramatic move, then it will have to take gold higher by more than the 750 points that wave 1 produced, and likely more than the 1,200 points wave 3 up produced. It suggests gold should head for a price target of 2,700 to 3,000 when the coming wave 5 up finishes.

Above we get a closer look of corrective waves 2 and 4. They should be proportional in either time or price regression, or both, for this mapping to be correct. Wave 2 down took about 7 months and saw gold fall a bit over 300 points. So far, wave 4 down has taken 19 months and taken 450 points off.

In terms of time, since this is a 14-year bull market from 1999, those two waves pass the proportionality test, lending validity to the wave count. In terms of price decline, 300 points and 450 points are closely relative to the 1,600 points gold rallied from 1999 to 2011. In percentage terms, wave 2 took gold down 30 percent, and so far wave 4 has taken it down about 24 percent. Again, close.

So we conclude that all waves from 1999 to 2013 are proportional as labeled, which supports the scenario that the decline from September 2011 is a wave 4 corrective decline inside a mega-rally bull market, that by definition of an impulsive wave’s required subwaves, will be followed by a huge wave 5 up rally.

Next, we want to study the pattern from 2011, labeled wave 4. We want to understand it, label it accurately, and project when it will end, and at what price it will end. Initially it looked as if wave 4 down was simply forming a five wave descending bullish triangle…

However, the nearly 100-point plunge on Friday, April 12, broke decisively below the support shelf for such a triangle pattern, meaning something else is going on. There are a ton of overlapping waves in this pattern from September 2011, so we know it is corrective, and not the start of an impulsive bear market. Gold has not topped, and is not in a bear market. Let me be clear about that. What is happening is that wave 4 has decided to become more complex. Wave fours and wave b’s are notorious for acting unpredictably, having a mind of their own, and metamorphosing from one pattern to another.

However, by breaking the bottom boundary of the descending bullish triangle, a horizontal shelf that has served to stop declines several times over the past 19 months, clarity has arrived. Wave 4 has formed an a-down, b-up, c-down move, with a-down a smaller version of the descending bullish triangle, wave b-up rallied out of the triangle upon its conclusion in a three-wave {a}-up, {b}-down, {c}-up simple flat, followed by an impulsive wave c-down move which will bring about the conclusion of wave 4.

Where and when will wave c-down of 4 bottom? One possibility is the intersection of the declining trend-channel for wave c-down we show in the second chart with the bottom boundary of the rising trend-channel from 1999 to 2013. That projects a bottom for gold around 1,375ish to 1,400ish, around June, 2013, possibly sooner. The above labeling suggests wave {iii} down is underway, and waves {iv} up and {v} down are needed before gold’s wave 4 bottoms…

While this is disappointing for gold bugs, the good news is that once wave 4 completes, going long on the metal should produce excellent returns.

There is another reason I believe gold is bottoming, and that is the position of the Weekly Full Stochastics, shown below. The current levels are supportive for a bottom in gold soon, and the start of a powerful rally.

According to the above chart, gold is about to start a strong rally. Since 2007, every time gold’s weekly Full Stochastic fell to the 20ish level, and the Fast crossed above the Slow, gold began a rally that lasted at least two months, some times lasting longer, and rallied at least 150 points, at least 10 percent. Gold could rise 250 points during this next rally, the first leg of a five wave rally for wave 5-up.

Gold is a safe haven during times of crisis. Political, military, financial, disease, or natural disaster events serve to boost gold’s value. The perception that these threats are likely serves to create demand for the metal. Fiat currency hyper-creation from central banks, as we see going on now, also serves to boost its value. Economic crises that jeopardize the value of currencies serve to boost the value and demand for gold. Should one nation decide to move its currency to a gold standard, demand for the metal could exceed ready supply quickly. Fiat monetization of sovereign debt borders on the irresponsible. These fundamental issues bode well for gold’s long-term value.

Originally written for www.technicalindicatorindex.com by Robert McHugh, Ph.D. McHugh is President and CEO of Main Line Investors, a registered investment advisor in Pennsylvania. The statements, opinions, buy and sell signals, and analyses presented here are provided as a general information and education service only. www.technicalindicatorindex.com is currently offering a FREE 30-Day Trial Subscription, which can be accessed here.

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