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Elliott Wave Analysis and Forecast - Gold Boom and US Dollar Bust

Commodities / Elliott Wave Theory Apr 16, 2007 - 07:43 PM GMT

By: Joseph_Russo

Commodities

Introduction
After a short tirade inspired by the financial alchemy surrounding the world's reserve currency, we will quickly shift our focus to more stable realities.

Through a briefing of price charts, we will speculate on just how far the dollar can fall, and to what heights Gold may climb. In addition, Elliott Wave Technology will share with readers precisely how we have kept our trading clientele on the right side of a rather challenging Gold market from the print high of 730.40 in May 2006, through the violent, and choppy, year-long consolidation experienced since.

Gold Boom / Dollar Bust
As the U.S dollar threatens a two-year double-bottom re-test of its 2004 low, it serves as a timely reminder that the dollar remains firmly entrenched in a century long secular bear market. Some 15-years ago in 1992, the dollar hit it lowest levels striking prints south of 78.50. Last week, it slipped back below 82.00 breaching lows most recently recorded last year in December of 2006.


The Dollar Index has approached and tested the 80 level five times in the past thirty-years: 1978, 1990, 1992, 1995, and 2004. Unless the situation turns truly horrific, the long-term dollar chart above, suggests that a tradable bottom may be forthcoming in the not too distant future.

Since the start of the Federal Reserve System in 1913, the U.S dollar has lost more than 95% of its purchasing power. One can only conclude that the Federal Reserve System evolved not to tame inflation, but rather to control “faith” in an ever-valueless unit of exchange to which it has significant share of monopoly advantage.

Faith as such, is apparently in abundance along with its cohort liquidity. This shall remain “standard fair” until the financial spheres' growing monopoly on money and credit creation either implodes, or somehow spawns a formidable alternate competitive force. Until then, the current system assures the world of an endless supply of continually depreciating paper and debt.

At first thought, one might assume that the system keeps extending itself, making larger and larger promises, with no intention of truly making good on them.

From another perspective however, there are vast numbers of individuals and corporate beneficiaries who are rather complicit in this grand illusory ponzi-like charade.

Amid an unprecedented tripling of home values since 1999, “Joe-Homeowner”, aka “consumer-Joe,” is one such beneficiary. As long as he purchased his home prior to the price-surge post 2003, he is sitting pretty with huge unrealized profits, and has plenty of downside cushion to break-even should he need it.

If the surge stops here, real estate purchases made after 2005 will no longer appreciate, and possibly depreciate considerably over time. Soon after, designs on buying real estate for investment or future wealth effects will become passé.

It many aspects, it is the very demise of the reserve fiat dollar, which continues to feed bull markets of every stripe around the globe.

Record levels of debt, equities (public and private), real estate, and commodity values, as well as never-ending wars, are all beneficiaries financed by the slow-motion, multi-generational ongoing dollar bust.

It is with sheer disbelief, and utter amazement that the real world accepts such an empty unit of exchange to start with. To fathom a possible reason for such collective behavior, one need not go any further than studying the experiment of Pavlov and his dogs.

More astonishingly, the entire world, which has been built and financed from such empty illusions of exchange, will require exponential infusions of the same, with every imaginable variant accelerator to keep faith alive, and the ponzi-scheme on sound footing.

All this begs the grand philosophical question of who is fooling whom, and who really cares? The answer is quite simple. Nobody cares so long as the majority feels no pain. So long as the global system alongside the majority of its citizenry remains flush with the sensation of wealth, everything else sells itself.

Gold has awakened from a 21-year bear market, which ended with a double bottom in 1999 and 2001. Remarkably, amid the dollars three crashes into the 1990, 1992, and 1995 lows, Gold was miraculously subdued and eerily dormant .

Nearly two months ago, the Dow Jones Industrial average dropped just 3% from all-time historic highs, and the calls for bailouts, interest rate cuts, and rescue packages for the US real estate market rang loud and clear. The last time we checked, U.S home values have declined just modestly on balance, and nowhere near back to their 2003, or 1999 “break-even” values.

In our view, this type of hair-trigger fear, and persistent pessimism, resonates due to the flawed systems necessity for sustained perpetual growth with minimal and preferably no interruptions.

For the system to continue sustaining itself, debt, and money creation must continue to accelerate at ever-faster rates simply to maintain balance and neutrality.

Frankly, we are quite done with attempts at making sense of this age-old madness. It is very old hat, and “is what it is.” Until the paradigm shifts, we play the hand as dealt.

On to the Charts…

We will now shift our focus to the charts and our variant perceptions as to the long-term future prospects for both the Dollar and Gold.

First, we'll provide a quick grand strategy overview of each of the markets, and then we will share some archived charts from Elliott Wave Technology's Near Term Outlook .

Broke-Back Dollar:

We begin counting the century old dollar bear at the Super Cycle B wave crest in 1985. , In our view, the most fitting and likely “flexible” pattern for managing the faith of a fiat currency (whose ultimate destiny is its intrinsic value of $0.00) would be that of a massive ending diagonal. In this case, the “ending” part of the diagonal may become a quite literal description. The massive pattern we describe is not visible in this short 25-year span. Instead, this chart captures the essence of Cycle Waves A and B , terminating respectively in 1991 and 2001. The Cycle Degree Pattern is that of a descending triangle. Since the crest in 2001, the dollar is in process of descending toward Cycle wave C. Cycle wave A took 6-years, Cycle wave B 10-years, and we are now into our sixth year of Cycle wave C . There is no certainty as to when Cycle C will terminate. It can occur as early as 2007, or it may stretch into the next decade or beyond. The larger Super-Cycle C wave down, could also morph into five vs three waves at Cycle Degree, adding a D and E wave to the current Cycle Dimension.

Such a prolonged pattern would likely be viewed as the most preferred, least painful, and most “flexible” manner in which to manage the total destruction of a sovereign fiat currency. In the best case scenario, if managed with supreme luck and total efficiency, by the time (2325-3000AD) Super Cycle E gets around to collapsing the currency, we could be looking at a 100,000 Dow, $8000 Gold, median home prices of 5-million dollars, and fuel costs for personal transportation at around 500 dollars per fueling. To get there, the dollar will have “halved” numerous times, and likely be trading under 8.00 vs the 80.00 level . More immediately however, the current Cycle wave down can terminate anywhere between 80.00 and 45.00

The Gold Case File:

The case for Gold begins with the print high of $875 in 1980. We are viewing this as the crest of Wave A at Cycle Dimension . Of particular note is an inverted synchronization of the Dollar and Gold upon their respective Cycle Degree B wave terminals in 2001. The PRIMARY DEGREE bear market in Gold lasted 21-years. We are now into year six of Cycle Wave C . Apart from the natural retest of the $875 high , the current wave at Cycle dimension can launch Gold north of $1500 before all is said and done. If aligned with the postulated collapse of the dollar, we'd be looking at a $7000-$8000 Gold price. To get blow by blow interpretation for the dynamic evolution of wave structures as they unfold, subscribe to Elliott Wave Technology's Near Term Outlook.

The Gold charts that follow come from the archives of Elliott Wave Technology's Near Term Outlook. They represent a brief cross-section of our market guidance and forecasting services.

No guidance, technical analysis, or forecasting method is flawless. Any inference of “perfection” at every twist and wiggle of a price series is likely not an accurate account of the real world trading experience.

Elliott Wave Technology's approach to markets is a contrarian one. We provide traders with unrivaled navigational guidance as to low risk entry and exit levels for counter-trend trade set-ups.

Yes, we try to catch tops and bottoms. We do it all the time. Sometimes we get lucky and grab them on the first go, but more often than not, it requires a managed campaign of multiple offensives to get the big pay-offs. This is especially true for a market like Gold, which has been in a wide consolidating trading range for nearly a year.

What makes or breaks traders, is first the adoption of good strategy, followed by the prudent management of trading campaigns. It is our job to provide a sound road map from which traders can profitably navigate, manage risk, and book profits.

As you follow the charts below, you will note that wave counts rarely remain fixed. Particularly in shorter periods, wave structures like markets, evolve dynamically. As the markets adjust, so does our guidance and interpretations.

Comments below will be brief and highlight points associated with each of the charts from our archives. However, subscribers receive a full compliment of commentary, explanation, and guidance with each of our timely publications.

From Elliott Wave technology's near Term outlook Tuesday May 9 2006

At this juncture, Gold had been trading near vertical for over two months. We were near about done counting the last sub-divisions of the spike, and began issuing our first counter trend sell probe notifications when gold moved above the 700 level. For position traders, early accumulation is a pillar of success. Those with shorter time horizons, are advised to take measured bets when attempting to launch counter trend offensives. This was an “early” stab at catching a top. Note the 628, 590, and 545 levels at the right. They are pre-determined support targets for the imminently anticipated reversal.

From Elliott Wave technology's near Term outlook Thursday May 11, 2006

Two days later, Gold continued its parabolic run- tacking on another $26.00 from our recent sell signal. The persistent spike revealed some shorter-term confirmations, but the larger readings continued to warn of exhaustion. Note the last extended fifth wave of our smallest and only remaining sub division. Though we held additional targets above the 744 level, at this stage the move was getting so insane, and impressive, it appeared as though it had done all it could possibly do. If it moved higher any faster, it would have gone backwards! As such, we issued a secondary sell probe against the 726 high.

From Elliott Wave technology's near Term outlook friday may 12, 2006

Just when we thought, we had seen a top, Gold continued to press higher by another $3.75. This move did little to impress, and provided additional evidence that the move had possibly exhausted. This was the third and final probe, which caught the top in Gold at the May '06 high of 730.40

From Elliott Wave technology's near Term outlook friday may 19, 2006

Within a week's time from our third attempt in grabbing top, Gold showed clear signs it was beginning to surrender. The first of four viable downside targets had been achieved with the breach below 671. Four power up trend lines were staunchly in place to support the remaining three downside capture targets. Note the momentum support level in the lower panel. It is here that we are expecting Gold to find a bottom, and possibly make a quick run back up to print another fresh high.

From Elliott Wave technology's near Term outlook thursday june 8, 2006

One-month later two things occurred. First, Gold breached our second level downside target at 618, and secondly, the momentum support line we anticipated showed signs of failing. This in concert with the smaller wave structures, suggested Gold had high probability of entering our downside capture window between 571 and 513 before a tradable bottom would occur. Note only three power up trend lines remain. Again, rarely fixed at shorter-term intervals, we continually attempt to adapt potential degrees to major wave terminals.

From Elliott Wave technology's near Term outlook Tuesday june 13, 2006

A couple of days later, Gold gives way big time to the downside. Down $38.80 and 6.42% on the DAY! At this point, with only two power-up trendline supports remaining, and the market nearing full on oversold, we began to advise subscribers of a pending bottom. The last remaining common retracement level of 560.40 was still not captured!

From Elliott Wave technology's near Term outlook Thursday june 15, 2006

Within a day or two, the bottom was in. Our 560.40 target achieved, and only one remaining power uptrend line remained to hold the 542.27 low.

From Elliott Wave technology's near Term outlook thursday sep 28 2006

This chart provides example of shorter-term trade set-ups within heavily congested markets. Here we highlighted a short-term bullish pattern buy trigger at 582 with a predefined upside capture target between 601.98 and 607. Take note of the high and low for the day. Not bad for a quick $20 move up in the Gold price. You can see how we are beginning to carve trendline parameters over the price action. All of which provide ongoing visual guidance to key support and resistance levels along with price targets attached to many of them.

From Elliott Wave technology's near Term outlook Friday october 6, 2006

In early October, we issued a clear buy signal against the 559.30 low. We hit this particular low on the first go round. PS. Note what the market did post the last pattern buy signal containing the 601-607 price targets. It dropped like a stone from the 607 level! Upon doing so, we were in “buy” mode all over again.

From Elliott Wave technology's near Term outlook tuesday nov 28, 2006

Nearly two months after the buy signal from $559, Gold was up nearly $100 and looking overbought. Earlier that week we issued an sell alert from the 648 level. This one proved to be early in very short order.

From Elliott Wave technology's near Term outlook thursday nov 30, 2006

Within a couple of days after our first sell probe, Gold tacked on another $10.00 striking above a smaller 5th wave price projection. It did so upon a bullish break out pattern targeting $712 on the upside however, a commonly missed “price” divergence occurred in process. Despite this and an upside capture window of 686-724, we advised traders to fade the 654 high with a secondary sell probe. Note the changing evolution of the wave labels and associated “degrees” as time and price unfolds.

From Elliott Wave technology's near Term outlook tuesday jan 9, 2007

In a little over a month, the previous guidance to fade the 654 high paid off handsomely! By January 9, Gold touched down below 607 into a resting capture window. Another “price” divergence flagged a fresh “buy probe” against the 603 in January of 2007. Note the introduction of concurrent alternate counts in the faded color labels.

From Elliott Wave technology's near Term outlook friday feb 23, 2006

Our long position guidance against the 603 low at the start of 2007 was performing brilliantly into February. At a retest of the July high in early February, we were again early with a sell probe from the 680 level. This guidance gave some quick downside to the tune of 10.00, but popped right back up to fresh highs within a day's trade! Shortly thereafter, we issued another sell alert against the 691 high. This one turned out to be the money shot.

From Elliott Wave technology's near Term outlook Friday mar 2, 2007

Our last chart shows the market did print a marginal high above the 691 sell signal on 2-23, but by less than a dollar. Within five days of our guidance, Gold was off its signal high by nearly $50.00! NOTE: Do be advised; though the above chart is fairly recent, THE NEAR TERM COUNT HAS CHANGED significantly.

In closing, it is important to recognize that we do not “predict markets;” instead, we take ownership of the dynamic price action as it unfolds, and do so in such a way that no black box algorithm could possibly match. Doing so impartially, allows us to anticipate direction and formulate astute and measured guidance based on the daily evolution of price. As evidenced in the above presentation, the resultant competitive advantage is priceless.

By Joseph Russo
Chief Editor and Technical Analyst
Elliott Wave Technology

Copyright © 2007 Elliott Wave Technology. All Rights Reserved.
Joseph Russo, presently the Publisher and Chief Market analyst for Elliott Wave Technology, has been studying Elliott Wave Theory, and the Technical Analysis of Financial Markets since 1991 and currently maintains active member status in the "Market Technicians Association." Joe continues to expand his body of knowledge through the MTA's accredited CMT program.


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