The Gold Price and the Problem With Elliott Wave Theory

Recently I wrote an article October 8th called, “Is Gold Peaking For Now?” Gold at that time was $1,058 an ounce and gold proceeded to fall to around $1,031 an ounce.  At the same time, the dollar index had bottomed and was continuing its trend higher.  Elliott Wave Theorists were calling for the next leg down and they were content with their call.

But the Elliott Wave folks miss one thing when they do their prognosticating, and that is “the unexpected.”   In a perfect world with no outside influence, the ABCD patterns of Elliott Wave Theory seem to fall in place naturally.  But Elliott Wave Theory doesn’t take into account external influences that can affect these patterns like what occurred with gold earlier this week.

What Are These External Influences?

They can be anything from Fed intervention with interest rate cuts, Congressional bailouts, wars, threats of war, bombings, business bankruptcies, etc. etc.

When these external events occur, the Elliott Wave Theorists have to redraw their lines and then make a new prediction of price movement….based on their newly drawn charts.

What Occurred Earlier This Week?

In the case of gold, the unexpected occurrence was the Reserve Bank of India buying 200 tonnes of gold from the IMF on November 3rd.

The price of gold closed on October 30th at $1,040 an ounce and jumped $22 an ounce on Monday November 2nd, to close at $1,062 despite the dollar being stronger that day.  This was confusing to say the least, but my speculation was that someone had leaked out the information what the India Reserve Bank was going to do.  Obviously I can’t prove that, but something was fishy.

The announcement by the Reserve Bank of India on November 3rd caused an immediate $20 spike in the price of gold as seen in the following chart.

The Problem With Elliott Wave Theory Are These  Short Term External Influences

So when things like the India Reserve Bank action occur, the Elliott Wave Theorists have to go back to the drawing board and make a new prediction to take into account current price action aberrations from their prior prediction.

So instead of following just one “theory” when making investments in gold, it’s best to look at many different theories and tools to arrive at a more convincing conclusion as to how to invest, and be willing to admit external influences can change the game at any moment.

One of these other tools, from a short term perspective, and I mean really short term, was the fact that the price of gold went up on Monday with the Dollar Index also being up.  This was a signal that something was up.  A bullish trade with could have been made on this information.  Elliott Wave Theory couldn’t give you this kind of a signal.

Without any more external influences, the The Elliott Wave Theorists will eventually claim victory when the price of gold starts its leg down.  Yes, there could be some more movement up as Peter Schiff for example is saying that other Central Banks that possess U.S. dollars may want some of the IMF gold or desire to buy gold from others in the open market.  But without the Dollar Index breaking down below that 72 level, I won’t be convinced that gold is ready to take off just yet.

The Gold Price Action Today

The price of gold today, November 4th, peaked out around $1,094 an ounce and is presently hovering around $1,092 as we await the Fed announcement on interest rates.

Of course, some of the rising price of gold today has to do with the Dollar Index presently declining by .50 today and about 1.00 in the past two days.  But the Dollar Index still hasn’t taken out its March 2008 low of just under 72.

I said that the price of gold could be peaking when it first hit $1,058 an ounce based on the theories and tools I follow.  Gold had a nice run up to that point from its November 2008 lows and the dollar a nice fall approaching its March 2008 lows.  But the Dollar Index hasn’t confirmed and I thought it was time to lock in profit and rein in the emotion of greed.

Call Me Conservative

Call me conservative at least until the Dollar Index breaks to new lows.  But in reality, as I said in the October 8th post, if we get this downturn in gold and a rise in the dollar, we could be setting up for the trade of a lifetime possibly sometime next year.

Long term I am extremely bullish on gold.  Let’s hope we get a drop in price so more people can buy gold lower.  And be weary of the bull trying to knock the most recent buyers of gold off like it did last year.  I’ve seen the nice calm horse rides at the beach or a local fair.  I’ve never seen the nice calm “bull ride” option.  I’ve only seen “bullfights” and they can be pretty bloody.

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About Doug Eberhardt

Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534


Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don’t trade with capital you can’t afford to lose. This is neither a solicitation nor an offer to Purchase/Sell futures or options. No representation is being made that any account will or is likely to achieve gains or losses similar to those discussed in this outlook. The past track record of any trading system or methodology is not necessarily indicative of future results.

All trades, patterns, charts, systems, etc. discussed in this outlook and the product materials are for illustrative purposes only and not to be construed as specific advisory recommendations. All ideas and material presented are entirely those of the author.

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