By Robert P. Balan
Head of Financial Markets Strategy Price of gold may reach at least $435, probably $450 in 2Q 2004; we expect to see $500 by 1Q2006
Published: Oct. 24 2003, 17:42 GMT
Gold futures touched a one-month high at 393.00 in the December contract on Friday, Oct. 24, sending investors on a tizzy as they moved to hedge losses in the stock market somewhere else. Gold and the major currencies have been the main beneficiaries of this flight from U.S. corporate assets.
The yellow metal is also being underpinned by a bullish backdrop of an improving economy (increased inflationary pressures), a weaker dollar and the continued uncertainty resulting from the war on terror. The dollar weakened against the yen and euro in the past few days, boosting investors' interest in gold, which is seen as an alternative currency and a hedge against stock market losses. And judging from a jump in positive sentiment, the "unstable and nervous" will likely continues to provide the "catalyst" for support in the gold market.
So just how long this uptrend in gold prices can be expected to last? A look at Elliott wave patterns and a projection of the trading cycles in gold show that the present uptrend may keep for a few months more, and that the trend for the next five years at least may have turned upwards.
In the chart shown below, we have shown a graphic illustration of what could be the likely course of gold (futures, continuation) over the next three years, and by implication, to as long as five years. We have identified the bull market's point of origin as the low at 253.80 on Aug. 1999. In the following discussion, we will use Elliott wave projections and cycle analysis to determine the course of the metal and its likely targets at every stage.
Comments:
1) The bull market is presently on a third wave sequence -- the longest phase of the entire bull phase, which I think will end in late 2Q2004, probably at 430 - 435 area. I am deliberately trying to be conservative with these projections. But the hyperbolic rate of ascent seen since the end of the II wave phase suggests that the rally will probably go higher (450 - 460 range). Now, assuming only that a top occurs at 430 in April 2004, we should then see a corrective phase (wave IV) bring back the metal's prices to 380 - 375 area by the middle of 2005. The last phase in the bull market, wave V, (terminus not show) should aim at ideal 480 - 500 targets by 1Q2006.
2) Gold prices display the interplay of a 3-year and 4-1/2 year cycles. Furthermore, the cyclical dynamics are made even more complicated by an underlying 7-1/2 -yr cycle that governs the investment stages. The smaller cycles are sub-sets of the main 7-1/2 yr cycle. As can be seen in the chart, the low in Aug 1999 at 253 is the bottom of the 7-1/2 yr cycle. It also happened right in the middle of a 3-yr cycle. A projected low in the 380 - 375 area (Wave IV) in 2005 is an expression of the 4-yr cycle. This 4-yr cycle was also seen in the lows made in 1993 and 1997. The 3-1/2 yr cycle lows were seen in 1997 and 2001. Since the 7-1/2 yr cycle low was manifested last in late 1999, then the next low for this investment cycle should appear in the middle of 2007.
Putting all these projections together, we expect several things to happen so that the cyclical tendencies may be expressed properly:
a) a quick rally to the top of V from the 2Q2005 low of IV -- perhaps a 10.00 dollar rally in less than a year.
b) a quick, and sharp decline from the wave V top at, say, 480, to around 375 by the middle of 2007. This augurs well with the Elliott principle that corrections of a major bull market at its early stages might show a 50 per cent correction tendency. It also follows the tenet that the corrective move will tend to seek the previous major support. In this case, it will be the 375 ideal trough of Wave IV.
Conclusions: There will probably be trading opportunities over the next few months, as the bull market in gold seeks the conclusion of Wave III, and that will probably be at the 480 - 500 range. From an inflation perspective, if we make a hypothetical direct correlation betwen gold prices and net inflation, there is only a moderate rate on increase, which may be expressed at its height in 2005-2006. . In fact that projected sharp rise in gold prices may be caused by external factors, like international tensions. But if the price projections are to be believed, there won't be any wide-scale shooting war in the next 4 years.
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