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Gold Stocks and Elliott Waves

Ralph Nelson Elliott, a professional accountant, developed a financial market model that he called The Wave Principle. He published his views of market behavior in the book The Wave Principle (1938), and in a series of articles in Financial World magazine in 1939. Elliott proposed that market prices unfold in specific patterns that he called waves. The wave principle begins with the premise that collective investor psychology (or crowd psychology) moves from optimism to pessimism and back again. These swings create patterns, as evidenced in the price movements of a market and clearly demonstrated in the dramatic swings of the gold and silver markets.

In 1946 Elliott published his final major work, Nature’s Law, which “includes almost every thought Elliott ever had concerning the theory of the Wave Principle.” Elliott believed this law to be “the secret of the universe,” and said that “because man is subject to rhythmical procedure, calculations having to do with his activities can be projected far into the future with a justification and certainty heretofore unattainable.”

Critics claim it is too vague to be useful, since it cannot always identify when a wave begins or ends, and that Elliott wave forecasts are prone to subjective revision. Skeptics also say that if the theory is true, widespread knowledge of it among investors would lead to distortions of the very patterns they were trying to anticipate, rendering the method useless. This same argument is made against other predictive methods that are based on public, market-wide data.

Plenty of gold stock investors, writers and pundits have used the Elliott Wave Theory to explain the market trend or predict the next move. But they all seem to have a different take on where exactly we are on the wave. So dependent on whose interpretation you believe, any possible price movement can be predicted using the theory. So the critics have a point. And while we agree with the vagueness of it all, it might be going a bit too far to label it “useless.” Information has value, even if there isn’t widespread agreement on what the information is telling us.

elliott_wave_2.jpgWe don’t claim to be able to pinpoint where gold is currently positioned from an Elliott Wave perspective. With plenty of signs of market manipulation, the wave theory is likely distorted beyond any clear recognition. But with most analysts agreeing that the peak of Wave 1 was $725 gold on May 12, we can clearly see that the gold market has yet to feel the explosive impact of wave 3, which is traditionally the longest and strongest of the Elliott Wave uptrends.

Dr. Clive Roffey supports this view in a recent article where he writes about where gold sits on the wave and what the future holds. His conclusions are very bullish for gold investors:

– It first implies that the gold shares have not even really started their true bull market run.

– The correction from the start of this year is over and we can expect a very strong gold bull market going into 2007 and for most of that year.

– It also implies that as wave 3 is usually the longest and strongest that gold shares are likely to have a very powerful upside charge for the next few months before the onset of the 3-4 minor correction.

– It also implies that once the 3-4 correction has ended the final kick into wave 5 will also be a typically euphoric buying spree that will accelerate gold stock prices dramatically before the onset of the serious 3-4 correction.

– The time frame for the move to the top of wave 3 could well be towards the end of next year so 2007 looks likely to be a real golden year.

– Once the 3-4 correction is over it indicates that there is still a huge wave 5 still to come in the future.

– The serious 3-4 correction could well last at least 9 months or even up to 18 months before the turn into the final wave 5.

– I am looking for at least another 4 to 5 years of a major bull trend in the gold market before we hit the ultimate bull market top of wave 5 and the final end of this long term gold bull market.

– There will be serious corrections along the way but I would place a 4 to 5 year time frame on this market to the top of wave 5 for long term investors.

– At this stage I am not inclined to postulate on any final level for the gold price at the end of wave 5 but I certainly expect to see the previous $850 January 1980 high exceeded and an attack on the $1000 level as a certainty.

– I would expect to see the final top of wave 5 well above $1000.

– This analysis also indicates that the shares are likely to start outperforming bullion and to break upside out of their long term negative relative trend.

– This will promote a totally new attitude to gold shares as a long term investment and not just as a minor safety factor or trading vehicle.

– Institutional attitudes will change and gold shares will become integral elements of serious portfolios.

Alf Field also presented an Elliott Wave Gold Update in June of this year. His analysis concluded:

We reached the peak of major wave ONE at $725 and can make some guesses as to the peak of the big major Wave THREE which will follow once the current Wave TWO correction is completed. We now know that the $725 level is 2.83 times the $256 start of the bull market. We can project that the peak of Wave THREE will be at least 2.83 times the low point of this correction. As Wave THREE could be the strongest of the bull market, it is possible that the multiple could be higher, possibly 1.618 x 2.83 = 4.58.

If the low of wave TWO turns out to be, say, $545, the recent intra-day low, the following would be the targets for the peak of wave THREE:

$545 x 2.83 = $1,542.00

$545 x 4.58 = $2,496.00

While we don’t have a perfect consensus, the prognosis comes out more or less the same. Either we started the uptrend this summer and just experienced the first minor correction or we are finishing the wave 2 downtrend and are about to enter into wave 3. Either way, the most explosive action in the gold bull market is still ahead of us and fortunes will be made by those with the patience and nerve to jump onboard, while sentiment is negative and most passengers are getting off. The train has yet to leave the station.

By | 2017-03-23T14:06:43+00:00 October 2nd, 2006|Gold & Silver Commentary|

About the Author:

Jason Hamlin is the founder of Gold Stock Bull and has been investing in precious metals for over 20 years. Jason spent nearly a decade in analytics for the world’s largest market research firm, before finding success investing full time. He launched Gold Stock Bull in 2005 and turned his focus from helping fortune 500 companies to helping individual investors. Jason is a student of Austrian economics and a proponent of cryptocurrencies such as bitcoin and ethereum.