🔸6.3 Gold

Gold in the recent past has often moved "contra-cyclically" to the stock market. A reversal in the price of gold to the upside after a downtrend often occurs concurrently with a turn for the worse in stocks, and vice versa. Therefore, an Elliott reading of the gold price has upon occasion provided confirming evidence for an expected turn in the Dow.

In April 1972, the U.S. government raised its long-standing fixed price for gold from $35 an ounce to $38 an ounce, and in February 1973 increased it again to $42.22. This "official" price used by central banks for currency convertibility purposes and the rising trend in the unofficial price in the early seventies led to what was called the "two-tier" system. In November 1973, the official price and the two-tier system were abolished by the inevitable workings of supply and demand in the free market.

The free-market price of gold rose from $35 per ounce in January 1970, reaching a closing "London fix" peak of $197 an ounce on December 30, 1974. The price then started to slide, and on August 31, 1976, reached a low of $103.50. The fundamental "reasons" given for this decline were U.S.S.R. gold sales, U.S. Treasury gold sales and I.M.F. auctions. Since then, the price of gold has recovered substantially and is trending upward again.

Despite the efforts of the U.S. Treasury to diminish gold’s monetary role and the highly charged emotional factors affecting gold as a store of value and a medium of exchange, its price has traced out an inescapably clear Elliott pattern. Figure 6-11 is a graph of London gold, and on it we have indicated the correct wave labels. Note that the rise from the free-market liftoff to the peak at $179.50 an ounce on April 3rd, 1974 is a complete five wave sequence. The officially maintained price of $35 an ounce before 1970 prevented wave formation prior to that time and thus helped create the necessary long-term base. The dynamic breakout from that base fits well the criterion for the clearest Elliott count for a commodity, and clear it is.

The rocketing five-wave advance forms a nearly perfect wave, with the fifth terminating well against the upper boundary of the trend channel (not shown). The Fibonacci target projection method typical of commodities is fulfilled in that the $90 rise to the peak of wave ③ provides the basis for measuring the distance to the orthodox top. $90 x .618 = $55.62, which when added to the peak of wave III at $125, gives $180.62. The actual price at wave V’s peak was $179.50, quite close indeed. Also noteworthy is that at $179.50, the price of gold had multiplied by just over five (a Fibonacci number) times its price at $35.

Figure 6-11

Then in December 1974, after the initial wave Ⓐ decline, the price of gold rose to an all-time high of nearly $200 an ounce. This wave was a wave Ⓑ of an expanded flat correction, which crawled upward along the lower channel line, as corrective wave advances often do. As befits the personality of a "B" wave, the phoniness of the advance was unmistakable. First, the news background, as everyone knew, appeared to be bullish for gold, because the legalization of American ownership was due on January 1, 1975. Wave Ⓑ, in a seemingly perverse but market-logical manner, peaked precisely on the last day of 1974. Second, gold mining stocks, both North American and South African, were noticeably underperforming on the advance, forewarning of trouble by refusing to confirm the assumed bullish picture.

Wave Ⓒ, a devastating collapse, accompanied a severe decline in the valuation of gold stocks, carrying some back to where they had begun their advances in 1970. In terms of the bullion price, the authors computed in early 1976 by the usual relationship that the low should occur at about $98, since the length of wave Ⓐ at $51, times 1.618, equals $82, which when subtracted from the orthodox high at $180, gives a target at $98. The low for the correction was well within the zone of the previous fourth wave of a lesser degree and quite near the target, hitting a closing London price of $103.50 on August 25, 1976, the month just between the Dow Theory stock market peak in July and the slightly higher DJIA peak in September.

The ensuing advance so far has traced out four complete Elliott waves and entered a fifth, which should push the gold price to new all-time highs. Figure 6-12 gives a near term picture of the first three waves up from the August 1976 bottom, where each advancing wave divides clearly into a five-wave impulse. Each upward wave also conforms to an Elliott trend channel on semilog chart paper. The slope of the rise is not as steep as the initial bull market advance, which was a one-time explosion following years of price control. The current rise seems mostly to be reflecting the decline in the value of the dollar since in terms of other currencies, gold is not nearly as close to its all-time high.

Figure 6-12

Since the price of gold has held the previous fourth wave level on a normal pullback, the count could be a nearly completed five-wave sequence or a developing third wave extension, suggesting coming hyperinflationary conditions under which both the stock market and commodities climb together, although we offer no definite opinions on the subject. However, the Ⓐ-Ⓑ-Ⓒ expanded flat correction implies great thrust in the next wave into new high ground. It should be remembered, though, that commodities can form contained bull markets, ones that need not develop into waves of higher and higher degrees. Therefore, one cannot necessarily assume that gold has entered a giant third wave from the low at $35. If the advance forms a distinct five-wave sequence from the low at $103.50 adhering to all Elliott rules, it should be regarded as at least an interim sell signal. Under all cases, the $98 level still should be the maximum extent of any important decline.

Gold, historically speaking, is one of the anchors of economic life, with a sound record of achievement. It has nothing more to offer the world than discipline. Perhaps that is the reason politicians work tirelessly to ignore it, denounce it, and attempt to demonetize it. Somehow, though, governments always seem to manage to have a supply on hand "just in case." Today, gold stands in the wings of international finance as a relic of the old days, but nevertheless also as a harbinger of the future. The disciplined life is the productive life, and that concept applies to all levels of endeavor, from dirt farming to international finance.

Gold is the time-honored store of value, and although the price of gold may flatten for a long period, it is always good insurance to own some until the world’s monetary system is intelligently restructured, a development that seems inevitable, whether it happens by design or through natural economic forces. That paper is no substitute for gold as a store of value is probably another of nature’s laws.

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