Monday, March 23, 2009

Elliott Wave Count on Gold

Gold prices have done nothing in the last six months. Gold is one of the few asset class which has not declined in price compared to massive decline in other asset classes. From being a long term bull in gold and maintaining the view that gold prices are headed to $1200 over a period of time, I have become cautious of the rising bearishness in the underlying gold market. I have expressed this opinion in my intermarket articles which called for a top in gold when it touched $1000 few weeks back. See this link

The continuous flow of funds to ETFs has been taken as a big positive for gold's bullish case. I don't share that view. The mass investments always don't do good in terms of returns. Gold price in terms of Asian currencies have been very strong and especially in terms of INR. Gold priced in INR terms has made higher highs continuously and still looks like it is forming a consolidation inside a flag. The INR depreciation has played a pivotal role in the current rise in gold prices in India.

My last elliott wave count involved the probability that gold was forming an ending diagonal in the double zig zag final upleg 'c'. However that proved dead wrong as gold first declined nearly $80 and then gave a strong upward rally negating the formation.

I am revising my long term wave count in gold. Primarily I think gold is still in the wave four forming the second leg of a ABC-X-ABC double zig-zag pattern. Take a look -

The current move in gold being the intermediate corrective wave can rise disproportionately. The wave structure in gold prices is quite complex and the fall should happen in simple ABC correction once the intermediate 'x' completes.

The view that gold prices might break to new highs before declining comes from the fact that prices have again broken out of consolidation. A giant broadening formation has been successfully tested in gold which gives an expected target price of around $1210. See the graph below -

The short term wave count looks like we have entered the wave 'c' in the double zig-zag abc wave. Take a look -

Gold has been viewed as safe haven and it has risen quite well relative to the financial sector in the US. The S&P Bank index relative performance to the S&P 500 has been quite useful in understanding the short term strength in the risk aversion sentiment. S&PBank Index/S&P500 has been moving inversely to gold prices since the crisis began and shows how market is pricing in the risk sentiment in two different markets.

The financial media and other market participants are focusing attention on making a bullish case for gold. When markets price in deflation expectation, gold prices are 'expected' to rise due to risk aversion and in inflationary expectation buildup it is the inflation hedge that makes gold attractive. However, gold prices have done very little to make that case for itself.

Gold prices stand at $950 at present and a blow-off rally can actually take place if investors run wild in buying all the gold they can. This might happen if gold pushes to new highs, but a large upmove sustaining its head for long looks less probable. From where the market stands, it looks an attractive counter to go short if it breaches $880 again. That would in time lead to the biggest sell-off that the current crisis has unfolded. Meanwhile, let the price resolve out of this trading band

Sahil Kapoor