First off, let me explain gold's 4-wave pattern (and no it has nothing to do with Elliot wave). Gold moves in an ABCD wave pattern, driven not just by gold market fundamentals (which I will cover in a minute) but also by the emotions of gold investors and the thin nature of the precious metals market.
The A-wave is an advancing wave that begins and is driven by the extremely oversold conditions created during a D-wave decline (more on that in a second). A-waves can often test the all time highs but rarely move above them. Usually they will retrace a good chunk of a D-wave decline. The B-wave is a corrective wave spawned by the extreme overbought conditions reached at an A-wave top.
The C-wave is where the monster gains are made. They can last up to a year or more. The current C- wave is now almost two years old. They invariably end in a massive parabolic surge as investors and traders chase a huge momentum driven rally.
As we all know, parabolic rallies are not sustainable. So, the final C-wave rally ends up toppling over into a severe D-wave correction as the parabola collapses. This is about the time we hear the conspiracy theorists start crying manipulation. The reality is that smart money is taking profits into a move that it knows can't be sustained. Then, the entire process begins again.
Next, I'll show you the fundamental driver of the secular gold bull. It's probably no surprise to most that the Fed's ongoing debasement of the USD is one of the main drivers of this bull. But let me take this a step further and show you how the USD's three-year cycle drives these major C-wave advances and how the move down into the dollar's three-year cycle low always drives a final parabolic C-wave rally.
Let's begin with a long-term dollar chart. I've marked the last seven three-year cycle lows with blue arrows. The average duration from trough to trough is about three years and three months. The USD isnow moving into the timing band for that major spike down in the next two to three months.
The extreme left-translated nature (topped in less than 18 months) of the current cycle gives high odds that the final low—when it arrives—will move below the last three-year cycle low. So, sometime between now and the end of May we should see the dollar fall below the March '08 low of 70.70.
That crash down into the final three-year cycle low will drive the final parabolic move up in gold's ongoing C-wave advance. Every major leg down in the dollar has driven a major leg up in gold since the bull began. I really doubt this time will be any different.
Over the next couple of months, I'll be watching the dollar for signs that the three-year cycle low has been made. Once the dollar bottoms and begins the explosive rally that always follows a major three-year cycle low, it will initiate the severe D-wave correction in the gold market. Gold investors will want to exit at the top of the C-wave if at all possible and avoid getting caught in the D-wave decline.
There is a developing pattern on the gold chart that once it reaches its target will be a strong warning for traders and investors to exit so they don't get caught in the D-wave profit-taking event as the parabola collapses.
This T1 pattern is a four-part pattern with the first and second legs up being almost equal in magnitude, separated by a midpoint consolidation that allows the 200-day moving average to 'catch up.' The current T1 has a target of roughly $1,650ish once gold breaks out of the consolidation zone.
The fourth part of the pattern is the D-wave correction, which should retrace to test the consolidation zone between $1,300 and $,1425. At that point, the next A-wave will begin and the process will repeat all over again.
Let me be clear—I have no desire to buy gold. I doubt I'll ever buy another ounce of gold again. The real money will be made in silver during this final C-wave advance and in the miners (I prefer silver miners).
During the gold market's last major moves higher, miners, which are leveraged to the price of gold, stretched 35%–45% above the 200-day moving average. At the latest peak, the HUI was only 25% above the mean—a strong clue that this was not the final C-wave top.
I expect we'll see the HUI stretch 40%–60% above the 200 DMA at the final top later in spring. As I said, I have no desire to buy gold or major gold miners. The real money will be made in silver and silver miners.
Silver's been exhibiting exceptional strength compared to gold for seven months now. Consolidation on the silver chart is much larger than on the gold or gold miner charts. I expect that massive consolidation to drive silver up to test the old 1980 high of $50/oz. by the time gold puts in its final C-wave top.
Get on board is before gold breaks out of the consolidation. Once it does, the parabolic move should be underway and the chance of a significant pullback entering the market will decrease considerably.
I've been helping investors time the gold and silver bull for several years. If you're the kind of person who needs a coach to keep focused on the big picture, someone to cut through the meaningless noise of myriad top callers and bubble proponents and show you how these long- and intermediate-term cycles operate so you can actually make money from the gold bull, I have an invaluable offer for you—a special 15-month subscription for the regular price of one year (which includes the daily and weekend reports). Choose a username and password and enter goldscents15 in the promotional code box, then click continue. You will be taken to a page with the 15-month offer.
Now's the time to act before the bull comes roaring out of the gates and the golden fireworks begin.
Toby Connor
Gold Scents
