Friday, March 10, 2006


A Technically Bearish View Of Gold & Silver

As promised, here is some commentary from Elliott Waves short term update Wednesday night. When it comes out later today, I will post the Friday update for comparison. "Gold declined initially from its $575.80 high to $534.50 (basis spot). A failed rally attempt carried prices to a lower high of $571.25 on March 3. The pattern of the advance unfolded as an 'A-B-C,' a countertrend move, while investor optimism remained near previous extremes; the 10-day Daily Sentiment Index hit 84.3%."

"Gold refused to join silver at a new recovery high (above the February 2 high), creating an inter-market bearish non-confirmation between the two metals, and daily momentum remained weak, completing a pattern of three lower highs since December (see chart). Since October 2005 when gold was at $480, large speculators (hedge funds), which had provided the 'fuel' for gold’s speculative rise up until that point, started scaling back their net-long positions."

"The final rise from late November 2005 when gold was at $490, has been almost entirely driven by small traders, which is 'the public,' typically the ones 'holding the bag' at significant trend changes. Finally, and most importantly, the Elliott wave pattern from August 1999 is complete at the early February high, having traced out an impulse wave. All the subdivisions are in place at the top, which means that at the very least, an 'A-B-C' decline is underway that should correct the entire rise from the 1999 low. This is the recipe for a COLLAPSE in gold prices."

"The first target in the decline is the midline of the parallel trendchannel. Depending upon when it is reached, it crosses just above $500. There is more bearish potential once the area surrounding the midline is breached. The .382 retracement of the rise from the August 1999 low is $452 (basis spot)."

"Let’s wrap up gold tonight by coming back to the trees (the near term) for a second. It’s possible to consider the decline from the $572.50 high of March 2, basis the April contract, to today’s $543.50 low (basis April) as a complete (or nearly so) five-wave decline. This would be wave one down of a larger five-wave decline. So the short-term subdivisions allow for a bounce back toward $555-$560 in wave two, prior to more selling pressure. I am not certain this bounce will develop, prices may extend lower immediately, based on the larger position within the pattern. Bu if a bounce does develop, we would view it as a prime opportunity to add to or to establish a bearish stance in gold, using the March 2 high as the 'key level' in order to keep risk to a minimum."

"May Silver has topped. The decline that started at Friday’s $10.330 high is likely to be even sharper than gold’s for the simple reason that silver sports a higher 'beta' relative to gold. The first target surrounds the $8.950 level, which is the .382 retracement of the entire rise from the August 30, 2005 low and (arguably) the bottom of a previous fourth wave. Near term, prices are either ending the fifth wave down of the initial impulse wave, or are in a third wave, via the close-only chart. It’s not clear at the moment. We would use any periods of near-term rally to position for additional selling pressure toward the first downside target cited above."

I'm not advocating the EWI position nor am I denying it. I thought it would be instructive for readers to look at the lingo and how these tech guys size things up. For the record, EW is a hard-shell deflation group and they have been right and wrong, like most of us. Check back later and hopefully get an idea of how tech outlooks change with events.
I dunno. This trend analysis stuff seems like a bunch of mumbo jumbo to me. It is not an analysis of fundamentals, which in my mind would include demand from individuals (e.g. Asian and Indian private holders), industry (gold-tagged antibodies, anyone? perhaps anti-bacterial silver threaded clothing?), and national and/or central bank accumulation (I think I heard that Russia is hoarding metals). This wave business has been around for decades, but from what I've seen it hasn't been much of a predictor. What good is a model if it isn't predictive?

Ben, what's your opinion on this wave analytical stuff? I wonder if these guys have applied the good old Fourier transform to their "waves" :)
geekden said:
"I wonder if these guys have applied the good old Fourier transform to their "waves" :)"

If they did that, they'd determine the frequency of the spikes, wouldn't they? ;)
exactly - then you can perfectly time your investments. hey, this might work for stocks too!

I just don't buy this wave analysis stuff. It's like palm reading, near as I can tell.
Thanks for posting this,Ben. I've been curious about Elliot Wave for a while. It will be good to see how accurate their wave readings are.
I've read "Conquer the Crash" and it's fascinating stuff. The occurrences of the Elliot wave patterns at every level is apparent. However, everything I've observed since suggests that the magnitude of these waves are only truly discernible in hindsight.

Here's my take...

Everybody -- and I mean everybody, including EWI -- thinks gold will ultimately skyrocket. The EWI folks just think it'll dive deeply sometime before it goes ballistic. I don't plan on missing that ride, so I'm locked in accumulation mode. If it dips, well, I'll just get even more for my money. I'm in this for the long haul.
I'm with you on accumulation mode. This is the only way to approach it.
I am usually bored after 3 sentences of EWI reading.
I said that before and I say it again:
there is a good chance of gold going to 200dma ( currently around $500).
Ben! I myself, would be more interested in your gold investing philosophy. At some point you mentioned that you buy and sell gold for 20 years. I am curious how you survived in bear market.
How did you know where to accumulate and liquidate?
One concern I have with gold is that the carrying cost seems really high these days. If you look at quotes, October 06 Gold is about 15 points higher than April 06 Gold. This amounts to 3% or so. This time a year ago, October 05 Gold was only 8 points higher than April 05 Gold, which is about 2%.

I am assuming that the higher interest rates are making gold more expensive to carry and this is bound to have a very negative impact on the returns one can get in the futures market.

Would you think it would be better to buy gold on the spot market instead?
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