Despite its "ultimate safe-haven" status and the worsening European debt crisis, gold has only gone down in December. On December 12, the precious metal plunged more than 3% in its steepest single-day drop in three months.
Are gold bulls' days numbered?
Well, today (December 13), I am sitting down with EWI's Financial Forecast Service co-editor Pete Kendall to discuss the move.
Nico Isaac: Last week, a raft of supposedly "good-for-gold" news events prompted many mainstream analysts to shore up their bullish precious metal outlooks; namely: The move by several global central banks to increase their purchases of gold bullion, AND decrease their interest rates paid on "swaps." In the words of one December 6 news source, "A close look at recent developments provides considerable encouragement for gold bulls." (Associated Press)
What role do such "fundamentals" play in your analysis?
Pete Kendall: They don’t. At EWI, we believe it’s the market itself -- or, more precisely, the shifting mood behind every market -- that "creates the fundamentals." So, we study that and what history tells us about the market's next most likely turn.That's why, despite these "bullish" events, EWI's December 7 Short Term Update (the near-term sister correlate of Financial Forecast Service) presented a decidedly bearish outlook for the gold and wrote:
"Gold should be at or near the end of a bounce which has unfolded over the past two days."
Nico: That December 7 Short Term Update reinforced its analysis with this price chart of gold. I've circled the near-term wave count in blue to spotlight the a-b-c rally off the December 7 low for wave (ii). Are there any Elliott guidelines for second waves that enabled you to calculate where the move might end?
Pete: While gold prices did see another leg up before falling out of bed, the wave (ii) labeling did remain intact. These specific Elliott wave guidelines helped to pinpoint the end point of wave (ii):
- Wave two can never move beyond the start of wave 1.
- Wave two subdivides into a three-wave, a-b-c pattern. In this case, a zigzag occurred, where the end of wave b is noticeably higher than the start of wave A.
- Additionally, wave c of zigzags often experiences equality -- i.e. travel the same distance as wave a. This aids in determining where the final wave c of wave (ii) would terminate.
Nico: The heart of Short Term Update's bearish outlook was the end of wave (ii) and start of wave (iii) down. Can you explain why the onset of a third wave decline was such an Elliott "slam dunk"?
Pete: Ralph Nelson Elliott himself described third waves as a "wonder to behold." They are strong and broad and the trend at this point is unmistakable. The fact that a wave (iii) was in store for gold fostered the December 7 Short Term Update call for "the onset of another wave of selling."
Nico: Now that gold prices have crashed and burned, what signs are you watching for to indicate whether the decline is a brief blip in a larger bull leg, or the start of a major drop?
Pete: Mostly we’ll be looking at the Elliott wave pattern, as well as sentiment and momentum. Also, there are several key price levels that will help us determine when the move is ready to accelerate or take a breather.
You can see Pete's objective analysis and original price charts of gold today as part of a risk-free Financial Forecast Service subscription.
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