Monday, July 8, 2013

Gold & Silver Elliott Wave Count

by Pater Tenebrarum

A Wave Count Update Ahead of the Jobs Data

We occasionally show wave counts by different practitioners here, and thought it would be a good time to update the gold and silver wave structure. Keep in mind that it is of course always possible that a wave count will have to be altered and replaced by an alternate count, since these exercises are probabilistic. However, one of our 'guest Elliotticians', P.N., did quite good job with his last wave count update on gold which some readers may remember (the chart can be seen here). We'll see if the part that hasn't played out yet will also play out as anticipated at the time. Incidentally, P.N.'s SPX wave count  update made at the same time also continues to look good so far.

On Thursday we had the ECB and the BoE doing their 'dance of the doves', which has helped the US dollar to strengthen a bit (maybe they just wanted to annoy Bernanke by showing him they also know how to devalue their currencies?), so gold enters the trading day with a slight handicap. However, as we have pointed out last week the reaction to the payrolls report will be of interest, and not even necessarily the immediate reaction, but rather what transpires over the next week or so. In other words, we don't even believe that the report as such will matter much, unless it is an extreme outlier far beyond expectations.

In this context, we want to show two slightly different gold wave counts by another occasional  guest e-waver, B.A. Both of them have gold in the latter stages of a C-wave of a large A-B-C correction. One of them (the first one shown below) has a missing 5th wave, which if it were to eventuate would likely produce a low in the $1,150 region. That is incidentally a target that was inter alia mentioned by Martin Armstrong and a few others if memory serves. Of course, if we are considering such technical targets one could just as well argue that the recent dip to just below $1,180 may have been enough (it is not possible to make such a forecast with precision). Anyway, here is what the chart looks like that is implying one more wave down to complete wave C:

Gold wave count-1

Gold wave count by B.A., a large A-B-C correction, with the 5th wave in C still missing – click to enlarge.

An alternate count of gold offered by B.A. shows the possibility that wave C may have found its low already. What speaks in favor of this interpretation is how deeply oversold the gold stocks have recently become, but one must be careful, since it is not yet certain that the sector has really made a durable low. The sector has recently been subjected to serial downgrades – in fact it was such a barrage of downgrades that one felt reminded of someone stomping on a victim he has just killed to make absolutely sure nothing but a red stain on the asphalt remains. If the index fails to make new lows in the wake of that, it would actually buttress the idea that a significant low has been put in. However, confirmation is obviously still lacking (see also the HUI chart further below).

Gold wave count-2

Here is the alternate wave count gold bulls will probably hope is the correct one. This one does contain one 5th wave of lesser degree that is a bit long relative to the other waves in that subdivision (the gray colored labels), but then again, gold has a habit of  producing long 5th waves and is isn't against the rules as long as wave three isn't the shortest in the sequence. We must admit though that the first wave count at the moment look like the one with the higher probability to us – click to enlarge.

One reason why wave count number one (incomplete wave C) looks somewhat more likely is that silver too appears to require one more wave down, as can be seen on the weekly chart below. It did on the other hand dip into an area of very strong lateral support, namely the region from whence it broke out prior to its 2011 blow-off rally. It is possible that after a wave 4 upward correction it will dip again toward the lower channel rail (which will by then be below the recent price low), but we'll have to wait and see. If this support area is very strong, the fifth wave could end up truncated, as a 'retest' of the previous low.

Silver wave count

Silver weekly, another big picture wave count by B.A. that is looking at the bear market since the 2011 high – click to enlarge.

Regarding the HUI index, the recent low occurred in conjunction with notable momentum divergences, then the biggest up day in an eternity was seen, but subsequently initial gap resistance once again couldn't be overcome. We have marked out the 'downgrades' day on the chart and the subsequent 'inside day', which denotes uncertainty.


The HUI index. The best thing about this chart are the divergences between price and momentum oscillators. Other than that it is still inconclusive – click to enlarge.

Obviously the index has to rally quite a bit to overcome even the first level of technical resistance. This looks like it could become a long hard slog, but we'll see.

Addendum: Producer Hedging?

We recently came across the idea expressed by several people that producers have allegedly begun to hedge again. This would be quite idiotic considering current low interest rates and the consequently squashed forward curve of gold; not to mention that if someone who didn't hedge at $1,900 starts doing it at $1,200, he really needs his head examined anyway. However that is not the point we actually wanted to make.

The main point we want to make is that even if it turns out to be true (and according to industry sources it isn't – we picked this up grapevine-wise), it would hardly matter to the gold price. Total annual production by mines adds about 1.4% to the world's existing stock of gold. If 20% of it were sold forward, the supply of gold would temporarily increase by 0.28% in one year. We wouldn't think this to be a very good reason to be shaking in one's boots. Incidentally, the same irrelevance attaches to various stories about big buyers, like e.g. central banks. The amounts involved are ridiculous relative to the total stock of gold. In fact, we regard central bank buying as a contrary indicator. The proof is in the pudding – as long as they remained net sellers, the gold price kept going up. Ever since they have become net buyers, it has either gone nowhere or down. Don't get distracted by such stories – what matters to gold's price can only be inferred from the fundamental drivers we have previously discussed.

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