Gold Cycles In Every Time Frame

by: Andrew McElroy

 
Summary
 
- Gold cycles help us visualize and map out expectations.

- No asset trades in a vacuum; the cycles of related markets must reconcile.

- Medium-term upside targets and longer term direction.

 
The precious metal (GLD) bottomed a bit earlier than I thought, but the move up is not unexpected from a cycle perspective.
 
In this article, I will look at what we can expect in terms of upside moves for the precious metal. Is it the start of the move to a new high, or simply a re-test of the breakdown point?
I use Elliott Wave and fractals to identify patterns and cycles of buying and selling. More on Elliott Wave can be found here. It is a very useful way of identifying stages in trends and mapping out expectations. I also use historical comparisons, correlations and fractals to identify which of the many alternative counts is most probable.
My Position
Allow me to get this out of the way first as I notice some readers fixate on an author's position or previous calls.
 
I stopped out of my gold short for a $70 gain at $1,264 as tweeted at the time. The market constantly provides us with new information and it is up to us to figure out how it changes the bigger picture. We must be adaptable and have no bias when viewing the market. Gold was not moving down as far as I expected and its stability next to a rising Dollar showed its strength. Gold is currently trading at $1,297 so I am happy with closing my shorts when I did.
 
I also called gold to new highs and a Dollar (UUP) decline in this article on October 26th. I am not long gold, but I am short USD/JPY which, as you can see, is a very similar trade:
 
Source: Google finance
 
 
I just want to make it clear that I have no bias. This is essential when viewing charts as there are many different methods and counts and it's possible to make a chart say whatever you want.
Short Term
 
The chart below shows gold's cycle from the July highs.
 
Wave C was exactly 161.8* wave A at $1,241. It's the perfect Fibonacci based measurement for a wave C and the reaction at this point suggests the cycle completed there.
 
However, this chart only shows us one part of the picture. To give it context and to figure out what could happen next, we need to view the longer term charts.
 
Long Term
 
Firstly, let's check the gold cycle on the weekly chart:
 
I know some people expect gold to fly to new highs, but at this stage, it is all a matter of opinion. I personally don't think gold has fully corrected the long wave III and it has only completed the first leg down of wave IV. A four-year correction is not at all proportional to the previous bear market of 1980-2000.
 
This suggests we are in a 'b' wave rally that will eventually reverse and make a new low in a wave 'c'. If this decline takes us back to the 1980 highs is not clear at the moment. I've only mapped it there as a logical area to test at some stage in the future.
 
The point is I am not expecting new highs in gold quite yet.
 
I have read some quite persuasive arguments about how gold is likely to double and triple from here due to hyper inflation and even the fall of fiat currency. I personally don't want to bet on something that has never happened before. I believe there will be an inflationary spike in gold, and this could take it as high as $2,500, but things are never as straightforward as we imagine.
 
The Fed will have a tough job juggling inflation and interest rates without crashing related markets, but I believe they can keep things relatively stable. At least for now.

As a very rough guide, this is the kind of large range we could expect in gold and related markets in the years to come:
 
 
Of course, I don't expect the red lines to be respected exactly, and not every market will move concurrently, but I want to illustrate how interrelated markets will have correlated cycles. I believe they could all trade in a large range for many years to come.
 
For those who believe gold isn't correlated to bonds and the dollar, I will remind you of this chart: gold compared to 30yr T-bonds divided by the dollar.
 
Actually, there is an interesting short-term divergence in recent sessions which suggests gold may be getting a bit ahead of itself. It may well retrace the recent move up and bonds could get a bid to narrow the discrepancy.
 
The main takeaway is gold is not going to double or triple without massive moves in related markets. I don't see this happening for some time.
 
Since 2011
 
The view from the weekly chart is given more weight by the daily chart, which shows one completed wave down in 5 waves.
 
 
The blue channel has clearly broken and now gold is recovering from this wave 'A' in a corrective rally with 3 waves (wave "W").

The first leg of the recovery tested the red trendline, but it should be noted this type of trendline is not really significant; it merely connects three high points and doesn't represent a trend channel like the blue lines. Therefore, I'd expect a break of the trendline on the next attempt. A few small down bars below the trendline (now in the $1,330s) would signal gold is coiling for the break.
 
After the break, there are a number of options. A clean break and a move up for wave 'Y' targets a minimum of 90% of wave 'W' at $1,537.
 
However, this assumes a clean break and gold likes to surprise. If the Dollar and yields have another rally in 2017, like I think they will, it will dampen gold's rally and there may be a more complex correction like this -
 
This is my preferred count for now. It delays the next part of gold's rally and will likely stop out short-term players of the break-out. A move to $1,460 is a 161.8* extension of the recent move down and is nearly a 50% correction of the bear market decline. Depending on where bonds and the Dollar trade, I will reassess my view there.
 
Conclusions
 
Cycles are a way of mapping out moves in different time frames and visualizing what is possible and probable. They are a useful tool, but should not be viewed as some sort of crystal ball to foresee where the market will go.
 
Based on my interpretation, and what I see as probable in related markets, I expect gold to rally to $1,460. There is the possibility of $1,537, but I think this is less likely. I will update if and when there are further developments.

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