The Problem With Elliott Wave Theory Proved Right Again, 8 Days Later

Posted by Doug Eberhardt on Nov 16, 2009 in Gold | 1 comment

Expect the unexpected.

When investing, it is difficult to plan for the unexpected. But as an investor, one must always keep in mind that the unexpected can occur. Case in point, the most recent positive news for gold coming out of Vietnam.

When Elliott Wave Theorists draw their lines and make calls today based on similar patterns from decades ago, in their desire to predict what will occur next, they do pretty well in a perfect world. But if you look at what’s happening in the gold market, it’s been far from perfect.  There’s still the problem of “external influences.”

November 3rd we had the Reserve Bank of India buying 220 tonnes of gold and a subsequent jump in the price of gold by $22 to $1,062 an ounce.  Gold continued higher from there pushing the price of gold to just over $1,100 an ounce as this purchase by India represented half of the gold the IMF held and there was speculation that other Central Banks (China and Russia) may also buy more gold.

No sooner had the speculation waned on India’s purchase allowing Elliott Wave Theorists to continue calling for a fall in the price of gold and we find that another “external influence” came into the play over the weekend pushing the price of gold to around $1,140 an ounce.

Just eight days after India announced its purchase of 220 tonnes of gold from the IMF, Vietnam announced that they are lifting the 1 1/2 year ban on gold imports and will allow certain large companies to import unlimited quantities of gold to “prevent speculation.”

According to the Reuters article, “Traditionally, the Vietnamese use gold for savings, jewelery and real estate transactions but when inflation is high, many choose gold or the U.S. dollar to hedge against inflation.”

The Vietnamese Have a Tradition the U.S. Should Get Used Too

Read that quote above from Reuters one more time.  Notice the Vietnamese not only have used gold as savings and a hedge against inflation, but they have also use gold for real estate transactions.  But why would they use gold to purchase real estate?  The answer is that the Vietnamese currency, the Dong,  fluctuates so much that it is not trusted in such transactions.  Presently, gold is reaching new highs priced in the Dong and that is why we’ll be seeing the Vietnamese entering the gold import market again, to stabilize prices.

In the U.S., gold is also breaking to new highs priced in U.S. Dollars.  Coincidence?  Do the Vietnamese citizens know more than U.S. citizens in choosing gold over U.S. Dollars as protection against inflation? Anyone think that real estate in the U.S. at some point will be transacted with gold in the future?

One interesting storyline in the article above is Vietnamese shops that sell gold are not allowed to charge over 5% to their customer.  This is one regulation I could go for!  In case you didn’t know, outside of some Patriot Act requirements in dealing with cash, Gold Dealers are not regulated.  Anyone find it interesting that our government doesn’t regulate an industry that they tax 28% on capital gains?  The financial product industry is heavily regulated but not the gold industry?

Reason: The government doesn’t want to put a spotlight on competition to their almighty dollar!

The Elliott Wave Theorists Will Eventually Say They’re Right

Nothing goes straight up or down.  Elliott Wave Theorists will draw another line and predict a different result while choosing a similar pattern from the past to explain what just happened.  I never hear them say anything about the “external influences” as reason for the change from one pattern to another.  They always have to draw upon past patterns.

Our nation can learn from past actions and patterns of our government to predict future results.  For example, during the Great Depression era our government instituted government spending programs that prolonged the Great Depression.  What our government is doing today (both sides of the political aisle) is prolonging the inevitable result.

While there are current “green shoots” that portray a positive outcome, the underlying rotten roots have not yet been exposed.  Once exposed, the green shoots will wither and die.

You could consider these “external influences” in gold to be green shoots at present.  The underlying Dollar Index has not yet confirmed its March 2008 low of just under 72.  Eventually the dollar will bounce and gold will pull back.  Eventually Elliott Wave Theorists will claim victory.  It’s just difficult to trade the tail ends of their predictions, let alone account for “external influences.”

Marc Faber called for gold to go to $800 last Monday with gold priced at $1,117 an ounce.  Jim Rogers just today said he is recommending physical gold now over mining stocks.  These are the gold experts most quoted.

It’s not easy to time the gold market because of these external influences.  Holders of physical gold care not that gold falls to $800 an ounce on its way to $2,000 and higher.