-- Posted Monday, 18 June 2007 | Digg This Article
A Fire Alarm went off in the markets last week.
If the “Cash is Trash” and “Fiat currencies are headed for oblivion” arguments for holding gold and other tangible assets are correct, the least desirable asset category that one would wish to own would be long term bonds.
On the other hand, if the deflationists who argue that the world is on the verge of a debt implosion leading to a deflationary depression are correct, “Cash will be King” and long term US Government bonds will be the most desirable form of investment.
This is why it is vitally important to watch events in the long term 10 Year US Government Bond market because that is where the initial scenes of this drama will be played out. Last week a fire alarm signal sounded in the 10 Year US Government Bonds, as can be seen in the following monthly chart of these bonds.
Data updated to 15 June 2007.
This chart goes back to 1983 and shows that the steeper 23 year down trendline was broken in 2006. Since then the bond yields have traded under a less steep trendline that goes back to early 1995. Note that bonds trade inversely to the yields. A declining trend in yields, such as that displayed above, indicates a bull market in bonds – bonds appreciated in value during that period. When interest rates are in a rising trend, bonds depreciate in value.
The fact that bond yields have now broken above both these two trendlines suggests that US Government bonds are in a bear market. This is the fire alarm signal that sounded last week. It would require a yield over 5.50% to absolutely confirm the start of the bear market in bonds. The recent action appears in far more dramatic fashion in the daily chart of 10 Yr US Government Bonds, as depicted in the following chart:
Data updated to 15 June 2007.
The US bond bear market scenario is replicated in bond markets around the world. It seems that the bond bear market is a world wide phenomenon. Rising interest rates imply Stagflation ahead with pressures emerging in multiple areas that will require Ben Bernanke’s electronic money producing helicopter gun ships to come to the rescue. The surge of “store of value” investment into gold and other tangible investments should gather a strong head of steam.
Turning now to the gold price action, in Update XIII the following chart and comments were presented:
Data updated to 16 May 2007.
Quote from UpdateXIII:
“If this interpretation is correct, then we have an extremely bullish outlook immediately ahead as the most powerful move, wave iii of wave 3 of wave THREE, should soon get underway. In a wave iii of 3 of THREE situation, such as this, one can anticipate a sling-shot upward movement in excess of $100 per ounce for gold, without any significant corrections.
Markets spend 90% of the time making up their minds what to do – and then only 10% of the time actually doing what they have to do in terms of dramatic moves. It is now more than 12 months since the $725 wave ONE peak was reached in gold in May 2006. The gold market has spent this time coiling and twirling, building up strength and momentum for the rapid move to the upside. Gold has spent the 90% of the time building this launch pad. It seems ready for lift-off in the dramatic move occupying 10% of the time. This would be a perfect fit for a wave iii of 3 of THREE type wave, generally the strongest in any sequence.
An analogy could be that of a hammer thrower in athletics. The athlete twirls around in the launch cage, going faster and faster until maximum momentum is achieved. At that point the hammer is released and flies the maximum distance possible from the momentum that has been generated. Gold has spent a year twirling and building momentum. The time has come for the gold market to launch itself upwards to points well above the old $725 high point of a year ago.”
The assumption a month ago was that the gold market was experiencing the first minor correction (an expected 3% to 5% decline) in the anticipated strong upward wave 3 of wave THREE move. The correction at that time had already reached 4% from the $691.4 peak and it was stated that the decline needed to hold within 1% of that level, i.e. 5% from the peak, which was a limit of $656.8.
As things have turned out, the decline was greater than expected and the lowest PM fixing (to date) has been $647.2 on 12 June 2007. That represents a decline of 6.4%. In the Comex 2 Month Forward Gold price the decline has been larger, from $697.4 to $648.7, a decline of 7.0%. This requires us to discard the first wave correction (wave ii of wave 3) analysis formulated last time. Something different is going on that requires deeper examination.
The following is an updated chart of the PM Gold Fixing chart:
Data updated to 15 June 2007.
What seems to have happened is something most unusual and very intriguing. It looks as if the C wave of the A-B-C correction making up wave 2 of wave THREE has itself formed a smaller irregular a-b-c correction!
As explained in Update XII, an irregular correction is one where the peak of the B wave is above the starting point of the A wave. Irregular corrections, especially ones that are skewed upwards (as in the gold chart) are indicative of a very strong underlying market that should soon give way to rapid upside advances.
To have an irregular correction followed by a smaller irregular correction at the next lesser degree of magnitude is something extremely rare. What it means is that the ultra bullish outlook expressed in Update XIII has in no way been diminished by the recent correction to below $650. In fact, if anything, the ultra bullish scenario has been reinforced.
The following is the chart of the Comex 2 Month Forward gold price:
Data Updated to 15 June 2007.
The smaller a-b-c irregular correction is easily discernible. The b-wave peak at $697.4 is above the start of the a-wave at $693.7. The a-wave decline is 7.7% while the c-wave decline is 7.0% to date. These two declines are sufficiently close in magnitude to suggest that they are part of the same corrective formation, hence the smaller irregular correction analysis.
There is a possibility that the formation might turn into an irregular FLAT correction. That simply means that the c-wave may get down closer to the $639.9 low of the a-wave. In the gold PM fixings, a flat correction could result in the c-wave reaching the low point of the a-wave, which is $636.7.
If the gold price declines significantly below these low points for a flat correction, (say below $630) then we would have to consider the possibility of more serious downside corrective action.
If, however, the smaller irregular a-b-c corrective pattern is the correct analysis, then we should experience a very strong upside move, possibly a $100 upside catapult, commencing very soon.
The fact that the “fire alarm” has been ringing in the bond markets around the world suggests that the “Cash is Trash” and “Fiat currencies are headed for Oblivion” camp will prove to be correct. A new wave of “store of value” investment in gold and other tangibles should now gather momentum. This might well be the trigger that gives rise to the sharp upward move in the precious metals that the Elliott Wave analysis suggests is imminent.
Alf Field
18 June 2007.
Comments to: ajfield@attglobal.net
Disclosure and Disclaimer Statement: In the interest of full disclosure, the author advises that he is not a disinterested party in that he has personal investments in gold and silver bullion, as well as gold, silver, uranium and base metal mining shares. The author’s objective in writing this article is to interest potential investors in this subject to the point where they are encouraged to conduct their own further diligent research. Neither the information nor the opinions expressed should be construed as a solicitation to buy or sell any stock, currency or commodity. Investors are recommended to obtain the advice of a qualified investment advisor before entering into any transactions. The author has neither been paid nor received any other inducement to write this article.
-- Posted Monday, 18 June 2007 | Digg This Article
