WATCH: The 4 Stage Stock Market Cycle


Is Gold Carving a Path to $1,500?

By Costas Bocelli September 12, 2013 Facebook Logo Twitter Logo Email Logo LinkedIn Logo

It’s time to revisit the gold story, because the precious metal's price action continues to carve a compelling path.

You see, I’ve been following gold and gold stocks very intently. I have subscribers in my options newsletter service, Profit Skimmer, actively engaged in trading bullish positions in the precious metals sector.

And just last month, we tabled the debate as to whether gold had finally hit a bottom when it traded down to a three-year low of $1180 an ounce in late June.

If you recall the August 15, 2013 Tycoon Report article, Will Gold Keep Riding the Wave?, we discussed the Elliott wave principle and how price action tends to follow market cycles or patterns along a trend.

And at that time, it was admittedly premature to declare that a new bull market was underway, but the price chart was showing a clear sign that a third wave was developing.

For quick reference, I pulled the gold price chart from the previous article...

We were keeping a close watch on $1350, which was acting as short-term technical resistance.  And shortly thereafter, gold did continue higher and traded as high as $1434 on August 28.

That’s right, once that key level was taken out, gold had risen another $100 an ounce in less than two weeks.  If you recall, we mentioned that the third leg of an Elliott wave is usually very strong.  And it was also strong enough to cumulatively produce a 21% gain from the late-June trough at $1180, which usually is the signal that a shift has occurred from a long bear market to the emergence of a new bull market.

But since the peak in late-August, gold has been in retreat after hitting excessively overbought conditions in the near-term, and has settled just above that key level of $1350, which now becomes an interesting level of support.

What has transpired is a completion of three waves, with the corrective fourth leg that is currently underway.

Here’s the updated chart on the December gold futures contract, which settled near $1364 an ounce yesterday.

If we are indeed in the process of producing a complete five wave cycle, then we should be on the verge of hitting a short-term bottom not too far from here.

This is because the $1350 level is technically important for the wave cycle, and if any forthcoming weakness should happen to drop the price action meaningfully below, then the selling pressure will need to be quickly exhausted and a prompt return to $1350 and beyond would need to transpire.

Sometimes, a tricky shake-out reversal is exactly what’s needed to clear the way for the next big move.

And if we are going to make that fifth wave, it’s going to be a strong one, perhaps even stronger than the third wave.

Referring back to the chart, a fifth wave can take gold prices to $1500 an ounce or higher.  The third wave peaked at $1434, so clearing that level could bring another $100 or more above the previous peak.

September is a big month for Gold

Gold serves many purposes.  But as a store of value for investors, it’s a safe haven asset and a hedge against inflation and dilutive currency exposure.

And both are definitely in play right now.

The Syrian situation has lifted geo-political tensions and could potentially spiral into a destabilization of the entire Middle East.  The third wave peaked as investors became nervous that a US led military strike against the Syrian regime was imminent.

But as the developments have now quickly evolved to perhaps include a diplomatic solution, gold prices have retreated and are charting the presumptive fourth corrective wave in the cycle.

The plan, which involves the Syrian regime relinquishing control of its entire chemical weapons stockpile, is still far from a done deal and many officials remain skeptical that military force can actually be averted as this plays out.

Gold will also be keenly sensitive to the Fed’s upcoming decision on monetary policy when they meet next week.  The policy statement will be released on Wednesday afternoon and will include updated economic forecasts from the members of the FOMC.  Also Chairman Bernanke will hold a live press conference to elaborate on policy and answer questions.

The expectation is that the Fed will announce some measure of a reduction to their monthly asset purchases.  Currently, the Fed is buying a total of $85 billion a month in longer-dated US treasury bonds and mortgage-backed securities.  The consensus is that $10 to $15 billion will be trimmed off the monthly purchases, which is currently discounted into the markets and likely priced into gold too.

If anything, I think the Fed will continue to signal a much more accommodative stance than the markets may have otherwise been reacting to, which could lead interest rates lower from levels that are now approaching two-year highs.  If the US ten-year yield backs off from 3.00% and recedes because of the Fed’s dovish signals, then that should be a bullish driver for gold and could be the start of a potential fifth wave.

The bottom line is that gold had been in a bearish downtrend for two years, and now with the latest rise of over 20% from the late-June trough during a confirmed three wave formation, the shift to a new bull market looks to be upon us once again.

And if we are currently experiencing that corrective fourth wave, then we should be close to finding a near-term bottom, carving the way for a fifth wave which could surge like the force of a tsunami.