Posts Categorized: Alf Field

Posted by & filed under Alf Field.

Dear CIGAs,

Late Friday afternoon in New York (April 12, 2013) gold plunged through the critical support level around $1525 level that has held resolutely since the start of this 19 month correction from $1900 in September 2011. In the process of this sudden drop, confidence in gold by long term investors has been badly shaken.

The sad thing is that this late afternoon selloff was an orchestrated event by people wishing to see the gold price lower so that they could cover short positions in the paper gold markets. Proof of this is that London PM fixing on Friday was $1535. Once the London physical market closed, the orchestrated selling in the paper markets gathered momentum. By the close of the Comex paper gold market, gold had dropped $60 in just the last couple of hours on very high volume.

This is not something new. Observers of the gold market have been aware of many other occasions where similar events on a smaller scale have taken place on Friday afternoons. There is little point getting one’s knickers in a knot about this because every short sale in the paper market has to be covered by a corresponding purchase in due course. Thus if people who bought into the selling spree simply hold onto their positions, a short squeeze will eventually develop as the short sellers try to cover their positions, causing the gold price to rise.

Often the physical markets come to the rescue as the lower prices generated by the Friday selloff sparks increased buying in the physical markets, helping to spur the recovery. The result is that the price of gold recovers fairly quickly after a Friday afternoon selloff. The coming week will show whether this happens again this time.

In January this year I published an article indicating that there seemed to be a reasonable chance that the long gold correction was over. That article indicated that if gold dropped below $1636, that the analysis was incorrect and that something else was happening. Gold did drop below $1636 and has continued to decline, proving that the January analysis was faulty.

At that time last January I had assumed that the rise from $1540 to $1790 in 2012 was the first upleg of the new bull market and that the correction to $1636 was the first minor correction of the new bull market. These were incorrect assumptions. The big correction from $1900 in September 2011 was still under way. The low had still to be reached.

In my Keynote speech to the Sydney Gold Symposium in 2011 I had a target of $1480 for the low of the expected correction. Despite several plunges into the low $1500’s, the price never achieved that $1480 target. The low price for Comex was $1523 and the lowest PM fixing was $1531 in late December 2011.

It bothered me from time to time that gold had not achieved my target. Now the late Friday selloff last week has driven the gold price to a closing level of $1477, finally reaching the target of $1480 set 19 months ago. What remains to be seen is whether this target holds and that the bull market resumes. The coming weeks should indicate what is happening.

What we need to look for is a swift recovery to above $1500 and an ongoing strong up-move in a truly impulsive manner. The fundamentals for holding gold are as strong as ever. Gold is an insurance against a range of financial disasters that we don’t need to go into now. You do not cancel your fire insurance when you can see fires burning all around you.

Certainly confidence in gold has been shaken and sentiment indicators are at record lows in some cases. This is exactly what one would expect at a major low in the market after a brutal 19 month correction. The conclusion is that factors are now in place which could support a major low in the gold price.

Posted by & filed under Alf Field.

Dear CIGAs,

There is a high probability that the correction in the gold price that started in early October at $1797 has been completed.

All the minor waves are in place and the A and C wave portions are approximately equal at -$120 each. The chart below depicts the action on Comex via the 2 month forward chart:

clip_image002

The analysis of wave C is as follows:

a. 1758 to 1687 -71

b. 1687 to 1727 +40

c. 1727 to 1636 -91

C. 1758 to 1636 -122

Wave a. at -$71 is 78% of wave c. at $91, an Elliott relationship.

Even the smaller c wave portion of wave C has 5 small waves which have a neat Elliott configuration, as follows:

Analysis of wave c of C:

i. 1727 to 1681 -46

ii. 1681 to 1706 +25

iii. 1706 to 1664 -42

iv. 1664 to 1680 +26

v. 1680 to 1636 -44

Wave c. 1727 to 1636 -91

Note that the corrective waves ii and iv are +25 and +26, confirming that they are part of the same wave. The downward waves are within $2 of -$44 each. All pretty neat.

The following chart of the PM gold fixings was prepared a couple of weeks ago to indicate the possible target low of $1642 for the end of the correction:

clip_image004

Note that $1642 was also the 61.8% retracement level as well as the point where waves A and C would have been equal. That target of $1642 was not achieved, the lowest PM fix being $1650 on Dec 20, 2012. There was a slightly lower morning fix the next day, but there is enough evidence when combined with the Comex gold chart to conclude that the correction from $1797 has been completed.

Obviously a decline to below $1636 would render this analysis valueless and we would have to reconsider the situation. The PM fix on Jan 2, 2013 was $1693, so there is already some upward movement on the scale that one should now expect.

Once $1800 is taken out on the upside, the gold chart will look tremendous. A beautiful “cup and handle” base would then provide strong support for a vigorous upward climb in the precious metal. At this stage there is no reason to abandon the rough target of $4500 for this coming upward wave. Once we have the next upleg above $1800 in place, it will be possible to start refining this target.

It seems that gold is well set up for a spectacular year in 2013.

Alf Field

3 January 2013

Comments: ajfield@attglobal.net

Disclosure and Disclaimer Statement: The author has personal investments in gold and silver bullion, as well as in 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 by & filed under Alf Field.

My Dear Extended Family,

I have known Alf Fields for what seems like forever. I have long held that the best technicians simply know the market of their interest and use TA as a point of focus.

The prices of $3500 – $4000 and $4500 are now in the market’s focus.

Stay the course.

Regards,
Jim

Dear CIGAs,

There are no certainties in the investment universe. Investors are forced to weigh up the various risks and assess the probabilities involved before committing themselves to a course of action. Current Elliott Wave and technical studies suggest that the probabilities now favor a strong rise in the gold price.

It may be helpful to consider my personal assessment of the various probabilities at different points in the recent gold market correction. On 23 August 2011 when gold pushed above $1910 my guess was that there was a 90% probability of a severe correction. The target for the decline, as given in my keynote speech at the Sydney Gold Symposium in November, was circa $1480, the point at which the explosive extension in the gold price had started.

Extensions have a good record of retracing to the approximate point from which the extension began, in this case $1480. Market action during the decline is used to fine tune a more accurate end of the correction. Gold never got down to target of $1480, stopping not very far away at $1523 in late December 2011. At $1523 all the minor subdivisions suggested that there was a 75% probability that this was the low and that the market would move into a strong upward move, probably the most vigorous of the bull market. A lesser alternative considered was that $1523 might only be the A wave of a larger A-B-C correction.

clip_image002

Subsequent events proved that the lesser alternative – that $1523 was only the low point of the A wave – proved to be the correct diagnosis. The A-B-C correction is shown in the above chart.

The upward move from $1523 through January and February 2012 to $1792, a gain of $270 in just 2 months, looked exactly like the vigorous upward move that had been anticipated. From $1792 a correction in the 6%-8% range was expected. That meant a maximum retracement to $1650 could be tolerated. A decline below $1650 would indicate that something was wrong with the analysis and would necessitate examining alternative possibilities.

Gold did drop below $1650, throwing a spanner in the works of the expectation that the market was in the early stages of the massive third of a third wave with a target of $4500. Once the 61.8% retracement level at $1626 was also broken, the strongest probability was that the rise to $1792 was the B wave and that the market was declining in the C wave. At this stage it began to look as if gold might still achieve the original downside objective of $1480.

The decline halted at $1528 and then started rising in a desultory fashion. The above chart was produced at that time showing that the A wave decline had lasted 88 trading days while the C wave decline had lasted 55 days. In addition the C wave decline of $264 was 66.5% of the A wave decline of $397, as depicted on the chart. The 2/3 relationship between the A and C wave declines plus the ratio of 88 days to 55 days absorbed by the respective waves, a neat 8:5 Fibonacci ratio, improved the odds that $1528 was the end of wave C. It would thus also mark the final end of the correction that had lasted since late August 2011.

The above positive assessment was not published at the time. Additional confirmation from further market action was required to be sure of the call. The required evidence of a rapid and large upward surge in the gold price plus the break of the prominent downtrend did not emerge. Gold simply churned within a relatively narrow range below the declining trend line.

A number of readers have urged me to pay more attention to time. In the past I had found that the magnitude of the waves was a much more important factor than the time involved. I had never been able to make an accurate call using only time elements and cycles. Every time I made a forecast based on time, I got it wrong. Nevertheless, I resolved to examine the time elapsed by the different moves more closely.

That gave rise to recognizing that the 88 and 55 days absorbed by the A and C wave declines respectively was the interesting Fibonacci ratio of 8:5. With the gold market churning and going nowhere, I developed an alternative theory that $1528 was not the final low point of wave C but only the low point of wave a of an a-b-c move making up the C wave.

That would explain the desultory sideways trading in the gold price and implied that the final low was still somewhere in the future. An extension of this theory was that the decline in the smaller and final wave c to the low would last 33 trading days. This would extend the previous 88:55 ratio to 88:55:33, and would mean that the time absorbed by the two small c wave declines would total 88 days (55 +33), identical to the 88 days absorbed by the wave A decline.

This was pure hypothesis. There was no real basis for this theory, but it seemed worth testing it. If it was possible to predict the day of the final low ahead of time, that would be a significant achievement. Gold had rallied to $1640 on 6 June 2012 and then started churning sideways with a downward trend.

Projecting ahead 33 trading days from 6 June 2012 produced a date for the forthcoming low of 23 July 2012. I didn’t have any idea of what the low price would be. The chart below depicts what happened on 23 July 2012.

clip_image004

The low gold price on 23 July 2012 was $1564, certainly not a new low. Yet the gold price started rising almost immediately. Within a couple of days the gold price had broken upwards through the downtrend line that had been in place since the end of February 2012. This is a very positive development which will be greatly enhanced if the gold price continues to move strongly upwards over the coming days and weeks.

The bottom line is that we now have a really strong probability that the correction which started at $1913 on 23 August 2011 has been completed both in terms of Elliott waves and also in terms of time elapsed. If this is correct, the gold price should soon be expressing itself in violent upside action as it moves into the third of third wave which is still targeted to reach $4500.

Alf Field

31 July 2012 Comment to: alffield7@gmail.com

Disclosure and Disclaimer Statement: The author has personal investments in gold and silver bullion, as well as in gold, silver, uranium and other 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 by & filed under Alf Field.

Dear CIGAs,

clip_image002

What happened to gold on 29 February 2012? The precious metal dropped from $1792 to a low of $1686 in one day!

How does this shape up with our Elliott Wave expectations?

The answer is that the market is tracking well in line with expectations. Before dealing with the current move, it is an idea to go over what our expectations are. What we know so far is that Intermediate Wave III started at $1523 and that we have a target of $4,500 for the end of Wave III. We also know that Wave III will consist of five regular waves which we will label 1 2 3 4 and 5. Regular waves 2 and 4 will be the anticipated 13% downward corrections described in my speech to the Sydney Gold Symposium. Link at: http://www.jsmineset.com/2011/11/14/keynote-speech-at-sydney-gold-symposium-14-15-november-2011-by-alf-field/

Regular wave 1 will consist of 5 minor waves which we label (i) (ii) (iii) (iv) and (v). Waves (ii) and (iv) will be downward corrective waves one degree small than the regular waves. Thus they should be about half the magnitude of the 13% of the regular sized declines, say about 6%.

Minor wave (i) should consist of five minuette waves which we can label i ii iii iv and v. Again the minuette waves ii and iv will be downward corrective waves about half the size of the minor wave corrections of 6%. Thus the minuette corrections should be approximately 3%.

The following is the analysis of minor wave (i) showing the five minuette waves:

i 1523 to 1665 +142 +9%

ii 1665 to 1620 – 45 -2.7%

iii 1620 to 1765 +145 +9%

iv 1765 to 1706 – 59 -3.3%

v 1706 to 1792 + 86 +5%

(i) 1523 to 1792 +269 +17.7%

The two corrective waves are approximately 3% as expected. Waves i and iii are equal at 9% while wave v is almost exactly 61.8% of waves i and iii. This wave count is as perfect as one could wish for. Thus we can conclude that minor wave (i) was completed at $1792.

As described above, minor wave (ii) should be a correction of approximately 6%, but could range from 5% to 8%. A decline of 6% from the $1792 peak gives a target of $1685. In after hours trading yesterday gold reached $1686.

The Comex chart, however, shows a low point of $1696.

It is possible that the entire correction in minor wave (ii) occurred in one day. A rally followed by a further decline to test the $1685 area is a more likely outcome. An 8% decline would bring the $1650 area into play. If gold drops below this level we will have to consider other possibilities.

Once the bottom of minor wave (ii) is in place in a convincing fashion it will be possible to make some more accurate longer term gold price forecasts.

Alf Field
1 March 2012
Comments to ajfield@attglobal.net

Posted by & filed under Alf Field.

My Dear Friends,

Since my apprenticeship with Bert Seligman in the 1950s, I have felt that no matter what tool a person uses in the market, the consistently successful have a mercantile sense for the subject of their attention and it is that mercantile sense that distinguishes them as much more than the tools they use. This answers the question of why two people of equal intelligence and emotional control can have different results in investing and trading. I will assure you I am a Gold.

Having set this foundation and suggesting you hold on to your hat, here is Alf’s answer to the question of what happens to silver if gold trades at $4500. You know my overall feeling that silver is a game, but one hell of a good game if you get it right. I am not a Silver which means I do not feel the impulse of the silver market in a mercantile manner.

Regards,
Jim

New EW Silver Discovery
By Alf Field

I have received numerous emails asking about silver. This article was prompted by a question enquiring what the silver price might be if my gold forecast of $4,500 proved to be correct. The question caused me to take a closer look at silver.

The reason why I have written very little about silver in the past was because the beautiful Elliott Wave (EW) symmetry and predictable relationships visible in gold were not to be found in silver. This article reveals a new EW discovery that proves that EW is alive and well and living in silver.

I first wrote about silver in December 2003 in an article titled “US Dollar Implosion – Part II”. The link to this article is at: http://www.gold-eagle.com/editorials_03/field120503.html. The brief piece on silver was tacked onto the end of that article. In view of its brevity, the 2003 silver piece is reproduced in full below:

SILVER

clip_image001

“In past crises, the wealthy protected themselves by purchasing gold and gold related assets. Ordinary people, by far the greater number, could rarely afford to buy gold. Being far cheaper, they previously had to buy silver. This metal became the poor man’s choice as an asset to protect their savings. Silver has so far lagged gold in the early stages of this bull market, but that situation seems about to change.”

“Throughout recorded history the average relationship between silver and gold has been 15oz silver to 1oz gold. The ratio at present is a far higher 75:1 ($400/$5.30). This is massively out of line. If gold were to double to $800 per oz, it would not be unreasonable to expect the silver/gold ratio to decline sharply, possibly as low as 40:1. With gold at $800, this would position silver at $20.

Thus a 100% increase in the price of gold could possibly be accompanied by a simultaneous 400% increase (perhaps more) in the price of silver. This offers significant opportunities both in silver bullion and silver mining shares.

The above graph of the price of silver has been borrowed from an excellent recent article by Dan Norcini entitled “A Technical Look at Silver – Update”. What is quite clear from the graph is that silver’s 22-year bear market down trend has come to an end. As Dan Norcini says, a new bull market in silver has been born. It is difficult to argue against this contention and I have no intention of doing so. A silver price above $6.80 would complete a fabulous head-and-shoulders base formation. With this as a foundation, it would be possible to project a very large rise in the price of silver for the future.” – end of the December 2003 quotation.

Silver did reach $20.68 in March 2008 at the same time that gold peaked at $1003. The silver to gold ratio was thus 48.5 in March 2008. The lowest this ratio has reached SINCE 2001 is about 32, achieved at the end of April 2011 when gold was around $1570 and silver peaked in the $49 area. At that point gold had experienced a 6-fold increase from its bull market starting point of $255 while the silver price rose 12-fold from its starting point of $4 in November 2001.

The quick answer to the question of what the silver price will be when gold gets to $4,500 is to pick your favorite silver/gold ratio and divide it into $4500. The current ratio incidentally is about 51. If you choose the lowest ratio achieved since 2001 of 32 that would produce a silver price of around $140 ($4500 divided by 32).

This is not a satisfactory answer, so I decided to approach the Elliott Wave analysis of silver from a different angle. Instead of working upwards using the analysis of the minor waves, which was the technique used in the gold calculations, what if we worked backwards in silver starting with the larger waves?

Gold and silver tend to move in tandem, not in an exact synchronization, but enough to suggest that the Major waves of both metals should coincide from a time perspective. We know that in gold the Major ONE wave peaked in March 2008 at $1003 and that Major TWO declined to $680 in November 2008.

Silver also had a peak in March 2008 at $20.68 and declined to an important low of $8.77 in November 2008. If we assumed that the peak at $20.68 in March 2008 was the end of Major ONE and the decline to $8.77 the end of Major TWO, how would the various percentages work out? When I did these calculations I was astonished at the relationships and wave counts that emerged.

The chart below is the monthly spot silver price shown in log scale so that the percentage changes are visible. The bull market started in November 2001 at a price of $4.02. From that point to the suggested peak of Major ONE at $20.68 there are five clear waves visible, marked 1-2-3-4-5. The prices at the various turning points are also displayed.

clip_image003

The analysis of the suggested Major ONE wave is set out in the body of the chart. The typical impulse wave relationships are immediately apparent. Both corrective waves 2 and 4 are similar (-33.7% and -35.9%). Whenever two corrective waves are similar it is a signal that they are part of the same larger wave structure. On its own, this fact would confirm that the 5 wave move from $4.02 to $20.68 was a complete wave of larger degree.

There is further corroborating evidence. Waves 1 and 5 are similar at +106% and +115%, a usual EW feature. Wave 3 should be the longest wave, and it is at +171%. In addition, if one multiplies the gain in wave 1 of +106% by 1.618 it produces 171.5%, exactly the gain in wave 3. These relationships are evidence that the rise from $4.02 to $20.68 is a completed impulse wave and that we can call it Major ONE.

Having completed this 5 wave up move, the next correction in Major TWO would be expected to be one degree larger than the two corrections of 33.7% and 35.9% in Major ONE. As shown on the chart, Major TWO declined from $20.68 to $8.77, a loss of -57.6%. The two corrections of 33.7% and 35.9% are close to the Fibonacci 34. The next higher number in the sequence is 55, close to the actual decline of 57.6% in major TWO. Incidentally, if we take the 35.9% decline and multiply it by 1.618, it gives a figure of 58%, very close to the actual decline of 57.6%.

These relationships suggest that silver has completed the same shaped bull market as gold has and that it is at the same stage in its development. Thus silver has probably also completed the first intermediate up wave of Major THREE, in this case from $8.77 to $49.52, a gain of +$40.75 or +464% and has also completed intermediate wave 2 of Major THREE, being the decline from $49.52 to $26.39 or -47%.

How does this decline of -47% measure up in terms of EW relationships? As with gold, where the corrections in Major THREE were shown to be larger than the corrections in Major ONE, the same applies to silver. The corrections in Major ONE shown in the chart above were close to -34%. If we multiply 34% by another Fibonacci relationship of 1.382 we get 47%!

This is mind-blowing stuff for an analyst who did not believe that EW applied to silver!

We can now attempt to make some price forecasts. Silver, as with gold, is starting intermediate wave 3 of Major THREE, which should be the longest and strongest wave in the bull market. It should certainly be longer than intermediate wave 1 which was the gain from $8.77 to $49.52, or +464%, as shown above.

Thus the gain in wave 3 of Major THREE should be larger than +464%. It should be a gain of at least 500%. Starting from the $26.39 low, a gain of 500% would produce a target price of $158.34 for silver. That is the number which equates with the $4500 price forecast for gold and produces a silver to gold ratio of 28.4 ($4500 divided by 158.34).

The gain in gold was forecast to be 200% for this move while the forecast rise in the silver price is 500%. Silver is again predicted to perform better than gold based on these EW calculations.

A word of caution is appropriate at this stage. All EW studies are based on probabilities. While the wave counts may provide a high degree of confidence in the forecasts, one cannot be 100% certain of any forecast. It is necessary to have a point at which it is obvious that the forecasts are wrong. In the case of this silver study, the line in the sand is at $26.00. If the silver price drops below $26.00 the odds are that the above calculations will not work out.

A further word of caution: silver is not for the faint hearted. Silver is considerably more volatile than gold and the corrections are much larger. Silver corrections can and do happen quickly. They are emotionally gut-wrenching and it is easy to get shaken out of one’s position near the bottom of a large correction.

Alf Field
1 February 2012
Comments to ajfield@attglobal.net

Disclosure and Disclaimer Statement: The author has personal investments in gold and silver bullion, as well as in 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 by & filed under Alf Field.

Jim Sinclair’s Commentary

If Alf is right concerning the accordion chop, the large downside risk of buying gold on reaction is over.

Gold Correction Is Over
By Alf Field

There is a strong probability that the correction in the price of gold has been completed. This article has four separate sections. They are:

1. The Elliott Wave (EW) justification for thinking that the correction in gold is over.

2. Why corrections happen in gold from a fundamental viewpoint.

3. The extent to which manipulation affects the gold price.

4. A possible “black swan” event that could trigger a gold price surge.

Justification for the end of the gold price correction:

In EW terms, the correction consists of three waves, an A wave down, a B wave rally and a final C wave decline. There is usually a relationship between the A and C waves. Often they are equal or have a Fibonacci connection. The chart below is of the gold price using PM fixings:

clip_image002

In this case, the A and C waves are equal in percentage terms at 14.5% and 14.7%. The overall decline from $1895 to $1531 is -$364 or -19.2%. My speech to the Sydney Gold Symposium last November – link at http://www.symposium.net.au/files/4ec58abcb729a.pdf – showed that the largest corrections in the previous Intermediate wave from $700 to $1895 were about 12% in PM fixings. The forecast was that the current correction from $1895 would be one degree of magnitude larger than 12%. A decline of 19.2% qualifies as one degree larger than 12%.

An interesting observation is that if 12% is multiplied by the Fibonacci relationship of 1.618, the result is 19.4%, very close to the actual 19.2% decline for the correction. The chart below is of the gold price in Comex 2mth forward prices:

clip_image004

The Gold Symposium speech suggested that the correction would be between 21% and 26% in spot gold prices. The actual decline was from $1920 to $1523, a loss of -$397, or -20.7%. This is just below the target range but qualifies as one degree larger than the 14% corrections in the previous up move from $680 to $1913.

The C wave of the correction in the chart above reveals some symmetrical subdivisions which confirm that the C wave was completed at $1523 on 29 December 2012. With all the minor waves in place and with the correction being of the correct size, that should be the end of both the correction and Intermediate Wave II.

The probability of this analysis being correct is high, perhaps 75%? Smaller probabilities allow for: (i) this to be an A wave of a larger magnitude correction; (ii) the current correction becoming more complex, perhaps reaching the lower price targets (e.g. -26%); and (iii) the possibility of deflation, defaults and depression emerging, also testing lower price targets.

The up move just starting should thus be Intermediate Wave III of Major Wave THREE, the longest and strongest portion of the bull market. The gain in Intermediate Wave I from $680 to $1913 was 181%. The gain in Intermediate Wave III should be larger, at least a 200% gain. A gain of this magnitude starting from $1523 targets a price over $4,500. The largest corrections on the way to this target, of which there should be two, should be in the 12% to 14% range.

Why Gold is prone to numerous corrections:

Gold is unique amongst metals, partly because it is not consumed, but also because it has some unusual qualities. It has no utility value. One cannot eat it or drink it. It earns no income, does not corrode and does not tarnish. Other qualities include divisibility (a quantity of gold can be divided into smaller quantities) and it is fungible, (one ounce of gold can be substituted for another ounce of gold of the same degree of fineness). There are large stocks of gold available and new annual production has generally been less than 2% of the stock of gold. These are the very qualities that caused gold to be used as money over the millennia.

Other metals and commodities are produced for consumption. When their stocks build up due to supply exceeding demand, holders become forced sellers due to the cost of storage or due to spoilage. Thus the price of the commodity drops to a level where marginal producers go out of business until demand exceeds supply. Then stock levels decline until they are exhausted and conditions of shortage prevail. This results in sharply rising prices for that commodity, eventually attracting new suppliers. In soft commodities, weather conditions can also play havoc with stock levels, causing dramatic price changes.

The point is that with all commodities other than gold, stock levels are important determinants in the price of the commodity. Gold has been accumulated over the years because it was money or as a hedge against a range of fiscal, economic and political risks. The stock of gold relative to new annual gold production has always been high.

In 1971, when the $35 per ounce link between the US dollar and gold was severed, it was assumed that all the gold produced throughout prior history was about 90,000t. This is a rubbery figure and should probably be a higher number. As it is not important to this discussion, we will use 90,000t as a starting point. Over the centuries some gold was lost or was no longer available to the market. If we assume that about 15,000t was lost, it means that in 1971 about 75,000t of gold was available to the market. New production in 1971 was 1,450t, less than 2% of the available stock of gold.

One reliable figure available in 1971 was that gold held by central banks and official institutions was about 37,000t. By deduction, the remaining 38,000t of the available stock must have been owned by investor/hoarders in the form of bullion, coins or jewelry. New production of 1,450t in 1971 was meaningless when compared to stocks of 75,000t. The future gold price was going to be determined by what existing holders of gold did with their stocks and what the level of demand would be from new buyers. For several reasons there was considerable new buying of gold during the 1970’s, resulting in a sharply rising gold price.

Fast forwarding 40 years to our current situation, new mine production over this past 40 year period may have been about 90,000t, of which perhaps 10,000t has been lost or consumed by industry or in jewelry not suitable for reclamation. That leaves 80,000t to be added to the 1971 estimated stock level of 75,000t, giving a current total gold stock of 155,000t. Recent annual production has been about 2,500t, which is still under 2% of the available stock.

Whereas the gold owned by central banks and official institutions in 1971 was a reliable amount of about 37,000t, we no longer have accurate figures for gold held by official sources. We know that central banks have reduced their holdings over the years, either by selling or leasing.

Central banks no longer publish accurate figures of their gold holdings, but for purposes of this discussion, let us assume that the current level is 30,000t, a decline of 7,000t from 1971 levels. The central bank sales of 7,000t must have been absorbed by the investor/hoarders, taking their adjusted total to 45,000t before adding the 80,000t of new production since 1971. That means that new buyers have entered the market over the past 40 years and have swelled the total gold held by investor/hoarders to perhaps 125,000t. (38,000+7,000+80,000). That is a lot of gold!

These numbers are guesstimates as there is no way to substantiate them. The important thing is that the trend indicates that investor/hoarders must own a considerable amount of gold, at least several times larger than the quantity held by central banks. Whenever gold goes to new all time high prices, all investor/hoarders have a profit on their holdings of gold. When the gold price rockets $400 per ounce from $1500 to $1900 in just seven weeks, as it did last July and August, the profits available to investor/hoarders are vast and mouth watering. Not surprisingly, many decide to take some profits while new buyers become cautious due to the rapid price rise.

The result is a correction in the gold price. This is a normal occurrence and will happen from time to time, especially when the gold price pushes to new highs. The natural result of a large stock of gold held by investor/hoarders is that occasional corrections must be expected.

Extent of manipulation in the gold market:

It is hard to visualize much manipulation in the physical market for gold when investor/hoarders own 125,000t and the volume traded is large. The futures market is another story. Gold futures trading became popular in the 1970’s when the price was freed from its $35 per ounce collar. It was possible to control a large amount of gold for a deposit of 10% or less, enabling punters to gear up their positions substantially.

There are many similarities between casinos and futures markets. In a casino the house holds the punter’s money and issues plastic chips for them to gamble with. The odds offered by the casino always favor the house so that there are always more losers than winners, the difference being the profit margin for the casino. In the futures market, every transaction requires someone else to take the opposite bet. Both parties put up the necessary deposits which are held by the market operator. Again losses will always exceed gains, the difference being accounted for by the brokerage and market costs.

In a casino, if one had an unlimited amount of money, one could devise a method of escalating bets so that when one eventually had a win, all prior losses would be recovered plus the desired percentage profit. For example, in roulette over a lengthy period all columns or dozens (the 2 to1 shots) come up slightly less than 33% of the time. A player betting on one of these with unlimited funds would know that sooner or later a winning bet would occur. When it does, the player recovers the cumulative losses plus the desired percentage profit. A foolproof system? Not quite. Casinos impose limits on each table for every bet, which prevents this.

In the futures market it is possible for players with unlimited funds to operate a similar system on the short side of the gold market. As explained in the previous section, corrections do happen in the gold market, especially after the price has risen to new highs. If the player knows that a correction will occur eventually, with unlimited funds he can increase his short position at higher prices until the correction happens. Then he closes his position, hopefully banking a profit.

This could be circumvented by imposing limits on the size of the position that a player can build, just as the casinos impose limits on each type of bet. This is extremely difficult to regulate and monitor in the futures markets. The authorities probably rely on the knowledge that every contract sold short has to be bought back at some time, thus the position is self-correcting. This is true, but the manipulation aspect occurs when the correction has started and the player with the big short position gives the market a nudge on the downside, triggering stop loss orders.

Most players on the long side are operating on margin. That is the attraction of the futures market, to gear up profits. These players are operating with limited funds, so they either have stop loss orders in place, which become market orders when triggered. Or they fail to provide additional cash when their brokers ask for more margin, which causes the broker to sell out their positions, once again placing sell orders “at market”.

“At market” orders are sold at whatever the best buying price is available at that time in the market. If this happens when markets are thin and the major markets are not operating, this can cause an avalanche of selling. The sharp downward spike on 26 September last year is typical of what can happen in these circumstances. That is the time when the “deep pockets” player will probably be covering his short position.

It should be obvious from this that the futures market is an extremely dangerous place in which to participate in the gold market. There are other risks that have only recently come to light regarding futures markets. Sticking with the casino analogy, assume that you have had a bit of luck in the casino and decide to cash in your plastic chips. When you get to the cashiers counter it is closed with a sign saying “Run out of money. Come back tomorrow morning”. You return the next day only to find a sign saying that the casino is bankrupt and is closed! Enquiries elicit the information that the cashier took all the casino’s money, went to a nearby casino and lost the lot.

In the futures market, the operator holds all the cash while the punters have contracts. The operator uses the cash to pay out the winners and cover expenses. Assume that the futures operator decides to take a risky position for the operator’s own benefit in another market but uses the cash contributed by the punters. The risky venture goes sour and the operator goes bankrupt. The punters are left high and dry. While all the facts have yet to emerge, it seems that this is possibly what caused the demise of MF Global.

As the world navigates this period of great financial and economic crisis, we need to be extremely vigilant and cautious with our investments. Be wary of paper claims on gold and always be conscious of the old saying: “Gear today, gone tomorrow”. Limit investments to what one can afford to pay for in cash.

A possible “black swan” event that could trigger a sharp gold rally:

To achieve the EW target of $4,500 on the next upward move will require something to trigger substantial new buying of gold. What could that event be? By definition, it will be a surprise to all market participants, a “black swan” event. That doesn’t prevent us from making a guess.

One likely area from which problems could emerge with very large numbers are derivatives. The Bank for International Settlements produces a list of outstanding derivatives twice a year. The latest report can be found at: http://www.bis.org/statistics/otcder/dt1920a.pdf. This reveals that the total notional value increased from $601 trillion (with a “t”) at December 2010 to $707 trillion at June 2011. Nearly all of the increase was accounted for by interest rate contracts which now have a notional value of $553 trillion, some 78% of the total.

As we discovered in 2008, derivatives are benign until losses occur. Once losses emerged from credit default obligations, it was game on for the GFC. Interest rate derivatives protect banks from interest rate rises. Most banks borrow short but have large loan books at fixed rates for long periods. Thus a big rise in interest rates could trigger claims on these derivatives.

For the time being, rates seem to be locked at virtually zero in the USA, but this is not the case in Europe. Europeans are learning the lesson that rates rise when investors become concerned that the borrower can’t repay the amount borrowed, let alone the interest on the capital. When we drill down further into the BIS statistics at http://www.bis.org/statistics/otcder/dt21a21.pdf we discover that $219 trillion of the interest rate derivatives are denominated in Euros, compared with $170 trillion denominated in US Dollars.

If just 10% of the interest rate derivatives in Euro’s produce losses, the world’s banking system would be looking down the barrel of a loss of $22 trillion. That is enough to bankrupt the entire world’s banking system, something that the politicians of the world could not tolerate. What would a bail out of $22 trillion do to financial markets? What would it do to the gold price?

If it is not interest rates, there are $64 trillion of foreign exchange derivatives and a “mere” $32 trillion of credit default swaps outstanding that could produce “black swan” surprises.

Alf Field

12 January 2012

Comments to ajfield@attglobal.net

Disclosure and Disclaimer Statement: The author has personal investments in gold and silver bullion, as well as in 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 by & filed under Alf Field.

My Dear Friends,

You know I have great respect for Alf Fields both as a master of his methods (there are very few) but also for having a mercantile sense which cannot be taught. You know of his accuracy during the two major bull markets for gold.

I fully agree with Alf on the potential of the next move. I feel confident the accordion chop that Kenny points out did complete itself on the day of the longest predicted period of consolidation.

I see gold headed into the $2000, but only as another steep on its way to Alf’s number.

Respectfully,
Jim

The Skinny:

"Once this correction has been completed, Intermediate Wave III of Major THREE will be underway. This should be the largest and strongest wave in the entire gold bull market. The target for this wave should be around $4,500 with only two 13% corrections on the way."

KEYNOTE SPEECH AT SYDNEY GOLD SYMPOSIUM 14-15 NOVEMBER 2011
BY ALF FIELD

THE MOSES PRINCIPLE

The Moses Principle is an irreverent theory based on the question of why Moses spent 40 years traversing the Sinai desert before leading the Israelites to the “promised land”.

God was powerful enough to send numerous plagues to devastate the Egyptian economy until Pharaoh allowed the Israelites to leave Egypt. Later God caused the Red Sea to part so that the Israelites crossed on a dry sea bed. When the pursuing Egyptian army and their chariots were in the sea bed, the waters crashed back and drowned them.

If God was powerful enough to do all of these things, why not allow the Israelites to go straight to the “promised land”? Why did Moses spend 40 years traversing the barren desert before leading the Israelites to the “promised land”? Here is the irreverent theory. Every Israelite over middle age when they left Egypt probably died during the ensuing 40 years. The younger people were born in the desert or spent their adult lives in the desert. After 40 years the life experience of the survivors consisted of living in the desert. When they finally got to the “promised land” it appeared to be “flowing with milk and honey” when compared to their prior desert existence.

A total generational change had taken place so that the survivors had no knowledge of anything other than the desert. There was nobody who could remember what Egypt was like. The Moses Principle recognizes the fact that over any 40 year period, a generational change takes place.

What has this got to do with gold? Recently we passed the 40th anniversary of 15 August 1971, the date when the last link between currencies and gold was ended by President Nixon. This launched an era of floating “I owe you nothing” currencies. Money was what any government deemed it to be, generally something that the government could create in unlimited quantities. That system, plus the fractional reserve banking system, launched an era of ever increasing debt and credit. It was an era where debt was desirable and money lost its purchasing power.

Everyone in this room has spent their adult lives living under this system. Most have had no exposure to monetary history or what money really is. The new “Moses” generation will have to re-learn the lessons of monetary history before the world can enter a new era of sound money and stable economic growth. The impact of this generational change will be discussed later.

The 15 August 1971 was an important date for me personally. I had grown up in South Africa and in early 1970 started a funds management company with a good friend of mine. The first 18 months was a struggle as we were buffeted by a vicious bear market. By August 1971 our clients were largely in cash awaiting the end of the bear market or an inspirational idea.

That inspirational idea came on 15 August 1971 when I heard that President Nixon had decreed that the USA would no longer exchange US dollars held by foreign governments for gold at $35 per ounce. Gold had limited downside but appeared to have good potential for substantial gain. Gold shares were deeply depressed after 37 years of a fixed $35 gold price, another “Moses Principle” period. We bought gold shares aggressively. This proved to be an astute move and our funds management business was launched on a successful path.

Having locked ourselves into a big position in gold shares, we needed to have some idea of how the gold price might perform and how high it might rise. We ran into the conundrum that has confounded fundamental analysts since 1971. How do you value something that has no utility value, no earnings or net asset value, does not spoil or corrode and is not used up?

Other commodities such as copper, soya beans and corn etc., are priced using a combination of demand, supply and stocks. If demand exceeds supply, stocks diminish, shortages develop, prices rise and new production comes on stream. Eventually supply exceeds demand, stocks build up, prices decline and marginal producers go out of business. The cycle then repeats itself. Other commodities are produced for consumption while gold is accumulated.

Consequently large stocks of gold exist in official hands as central bank reserves. There are also large stocks of gold in private ownership, in vaults around the world, in homes, buried in gardens, in coins and gold jewelry. New mine production of gold is tiny compared to available stocks. In 1971 official holdings of gold were about 37,000t. Cumulative world gold production throughout history up to 1971 was estimated to be about 90,000t, so investors/hoarders must have owned at least as much as the official holdings. In 1971 world gold production was a mere 1,450t, or less than 2% of the estimated amount of gold held in the world at that time.

The fundamental conclusion was that the owners of the large stocks of gold would determine the future of the gold price. If they became net sellers, the gold price would decline. If they became net buyers, the gold price would rise. There were reasons to believe that they would be net buyers. The world had been launched into an untried experiment where all countries were subject to Government fiat currencies and, in addition, there was a latent group of buyers in the wings. Americans had been prevented by law from holding gold since 1933. With the collapse of the gold exchange standard on 15 August 1971, there was no reason for this prohibition to continue. On 31 December 1974 (another Moses generation period from 1933) the largest and wealthiest nation on Earth allowed its citizens to buy and own gold.

The obvious conclusion was that it was necessary to resort to technical analysis to find a way to predict movements in the gold price. I experimented with a variety of technical systems and then got lucky. I discovered that the Elliott Wave Theory (EW) gave superb results in predicting the gold price. I couldn’t get the same great results using EW in other commodities or markets. EW is a complicated system with many difficult rules, but I will try and explain it in simple terms.

The technique is to concentrate on the corrections. In terms of EW, the sequence in a bull market is as follows. The market rises, has a 4% correction, rises, has a 4% correction and rises again. At this point the next correction jumps from 4% to a larger degree of magnitude, say 8%. The market then repeats the sequence. A rise, a 4% correction, a rise, 4% correction, a rise and another 8% correction. When the market is eventually due a third 8% correction, the magnitude of that correction jumps from 8% to 16%. This sequence is repeated until two 16% corrections have occurred when the size of the next big correction jumps to 32%.

The beauty of EW is that the corrections in gold are remarkably regular and consistent. Early in 2002 I picked up the 4%, 4%, 8% rhythm in the gold market which convinced me that a new bull market had started in gold. Another feature of EW is that once one is confident that these percentages have been established and one has some idea of the approximate size of the up moves, simple arithmetic allows one to calculate a forecast of the future price trend.

Using this method I calculated that the gold price should rise from the $300 ruling in 2002 to at least $750 without having anything worse than two 16% corrections on the way. That was valuable information at that time. Furthermore, from the $750 target a big 32% correction could be expected to about $500. Then the bull market would resume, rising to perhaps $2,500 before another 32% correction occurred. The final up-move would take the gold price to much higher levels, possibly $6,000. Once again, a valuable insight when gold was $300 in 2002.

clip_image002

The gold price actually got to a shade over $1000 in March 2008, a four-fold increase instead of the expected three-fold rise to $750. That was the point at which the 32% correction was due. Over the next seven months the gold price in the spot market declined from $1003 to $680, an exact 32% correction. Using PM gold fixings, the numbers were slightly different. The high was $1011.0 and the low $712.5, making the correction slightly less than 30%, but quite adequate.

The above chart depicts the monthly spot gold prices since the start of the gold bull market in April 2001 when gold was $255. The 32% correction in terms of spot gold is clearly shown. The high at $1003 and the low at $680 established the extremities of the first two major waves of the bull market, shown in the chart as Major ONE and Major TWO. The gold bull market is in the process of working its way upward through Major THREE, often the longest and strongest wave in the bull market. There have been a number of interesting and unusual developments in Major THREE which will be discussed later.

I would like digress at this point to share with you the reasons why I started writing articles on Gold, EW and monetary history. The reason I am standing here today is the direct result of writing those two series of articles published on internet web sites. I am a self-funded retired person managing my own investments. Unlike most people posting articles on the web, I was not trying to sell subscriptions to a newsletter or get people to buy something. Nor was I writing to big note myself. So if I was not after fame, glory or riches, what was my motivation? The following two stories will explain where I was coming from.

These stories are intensely personal. Even close friends and relatives have not heard these stories. They are not meant to infer any self-aggrandizement nor are they an attempt to alter anyone’s personal views. The two stories are linked and relate eventually to gold. Together they are the reason why I wrote the articles posted on the web.

The first story starts with an awful event where my son Richard was attacked by a lion. He and his fiancée Rebecca were managing a game lodge in northern Botswana. He took a couple of guests out on an early morning game drive. They followed the tracks of a lioness and three cubs down a dry river bed but lost the trail. When Richard got out of the vehicle to find lion tracks, the lioness launched herself at him from nearby shrubs. The lioness landed with her paws on his shoulders, dislocating one shoulder and driving him to his knees. She then whacked his head with her paws, virtually scalping him and nearly ripping his ear off. She then bit him on the back of the neck. Any person or animal subject to such an attack would almost certainly be dead.

Richard survived this vicious attack as a result of a series of miracles. The first miracle was that the bite on the back of his head had missed the vital arteries, missed the spinal column and had not penetrated the skull. If the lioness’ bite had been fractionally deeper, higher, lower or sideways, that would have been the end for Richard.

(In the speech, I skip to the story of the beggar’s sign. You can do likewise.)

The second miracle was that the couple in the vehicle reacted instantly. The wife yelled at the husband to get into the driver’s seat and drive at the lion, blowing the horn and making a noise. This caused the lioness to back off. Richard was still conscious and managed to get himself into the vehicle. He was able to work the radio to warn Rebecca of what had happened.

The third miracle was that a couple of weeks prior to this event the local team of paramedics had visited the safari lodge to give the staff a lesson on what to do in the event of a lion attack. Rebecca remembered everything that they had said. She reacted with astonishing calm. She assessed the wounds, called the paramedics by radio, got what she needed from the First Aid cabinet and then stayed with Richard staunching the blood flows until the paramedics arrived.

The fourth miracle was that after being flown to hospital in Gaberones, the capital of Botswana, Richard was allocated a doctor who fully understood how to treat lion injuries. He knew that he could not stitch Richard’s head for several days due to the threat of infection. Lions do not use Colgate’s tooth paste! Richard was given a full anesthetic on four consecutive days while the doctor cut away the portions that were infected.

Richard required very large amounts of blood. The paramedics had warned Rebecca that she should ensure that Richard was only given blood which was certified HIV negative. There was blood available but none of it came with the necessary certificate. How the vital blood was obtained was another miracle, but that story is too long to discuss now.

When the stitches were removed from Richard’s skull, he was still left with a gaping wound at the back of his head. A skin graft from his thigh to the back of his head was required. A visiting plastic surgeon was able to do the necessary graft, but Richard had to later fly to Johannesburg for the surgeon to check that the graft had “taken” and to have the stitches removed.

(Story of the Beggar’s Sign begins here.)

When we visited the surgeon he pronounced that the graft had “taken” and that Richard was absolutely OK. All he needed was rest and recuperation to be as good as new. Any parent who has lost a child will understand the anguish and pain that we endured going through this episode. Now our son, brother, and fiancée, whom we thought we were going to lose, had been saved and returned to us.

At last we could relax. Nothing could go wrong now. You can imagine the joy and jubilation in the car as we drove away from the surgeon’s rooms. Then I saw a beggar at a traffic light. He was carrying a cardboard sign which read:

“No Money. No Food. Please Help Me. God Bless”.

Impulsively I decided that I wanted to buy his sign and hang it on my wall as a memento of this happy day. I had 200 Rand in my wallet, probably more than he made in a month of begging. I called him over, showed him the money and said that I wanted to buy his sign for R200. He simply said “No!” The lights turned green and people were honking behind me, so I gave the R200 to the beggar and drove on, leaving the beggar with his sign.

After dropping Richard and Rebecca with friends I passed the same intersection on the way to my lodgings. The beggar was still there and I was now more determined than ever to buy his sign. I called him over to the car. “I gave you R200 an hour ago, do you remember?” He said that he remembered, clutching his sign protectively to his chest.

“I want to buy your sign for a special reason. Just tell me how much you want for the sign and I will go to the nearest ATM and get the money.”

He shook his head and again said “No”, clutching his sign possessively to his chest. “It will only take you five minutes to make another one” I said, but that elicited another vehement “No” from him. The lights had changed and once again people were honking at me. “If you will not sell me your sign, at least tell me why you won’t sell it.” He replied “God gave me this sign!” I drove off with the words “God gave me this sign” reverberating through my brain.

I am an accountant and investment analyst by training. I am used to digging out facts, checking them and drawing conclusions from them. I am skilled at calculating odds and probabilities. The odds of Richard surviving such a terrible lion attack were off the charts. The odds of finding the only beggar in the world who would not sell his sign for any price were also astronomical.

I had always felt that I was in control of my life. I make the decisions and do things my way. Richard’s recovery from the lion attack was a situation over which I had no control and when I did try and take control of something and buy the beggar’s sign, I had been rudely rebuffed. The only logical conclusion was that God was giving me a sign that He was in control, not me. It was the most humbling moment of my life. Faith is a gift, but it seems that some people have to be bashed over the head in order to accept that gift.

This unusual story needed to be told in order to fully understand the second strange story that does deal with gold. The link came through the Priest in the London parish where we lived for a few years. He had been asked to request prayers for Richard’s recovery and as a result we got to know him quite well. He is a cricket fanatic. When I heard that he planned to visit Australia to watch the cricket series between Australia and England in late 2002 and early 2003, I invited him to stay with us at our house on the northern beaches for a couple of days after the Sydney cricket test in January 2003.

In due course I picked him up from the city. It is about an hour’s drive to our house, so we had plenty of time to chat. He wanted to know if I had done anything special over the past year. I responded that I had made a dramatic change in our family investments during the year, putting some 40% of our capital into gold, silver and mining shares. He was clearly interested and wanted to know why I had done this. I said that I could see a number of problems developing, especially in America, that would eventually result in a major financial crisis which would threaten to bring down the entire world money and banking system. The authorities would create vast new sums of money in an attempt to prevent this melt-down from happening, resulting ultimately in the destruction of paper currencies. This would require the establishment of a new monetary system and I expected gold to be a major part of the new monetary system.

He then asked a strange question: “How high do you think that the gold price can go?” I tried to dodge the question as I did not want to explain Elliott Waves to him, so I just said that gold would probably rise to extraordinary heights. I explained that the extent of the gold price rise depended on the quantity of new money created to ward off the anticipated crisis. He persisted, wanting to know what “extraordinary heights” meant. He obviously wanted a fixed number.

To mollify him I said that in the 1970’s bull market gold had increased 25-fold from $35 to over $850. If the new gold bull market was of the same order, then starting from a base of $255, the current bull market could reach somewhere over $6,000 per ounce. He then wanted to know what the current gold price was. When I said it was about $300, he seemed satisfied.

The next morning the two of us went for a jog on the beach. He asked if I believed in prophecy. I said that I had not really thought about it. Given that there were prophets in the Old Testament who seemed to have the word of God and in the New Testament there were people who had the gift of prophecy, well yes, I guess that I probably had to believe in prophecy.

He then told me this remarkable story. In his London Parish there was a lady who did have the gift of prophecy. She had received several prophecies that had related to him which proved to be accurate. As a result he was convinced that she had the true gift of prophecy. There was an occasion when this lady received an unusual prophecy, quite different to anything she had previously experienced. She thought that if the Parish Priest telephoned her, she would know that she had to tell him about it. Indeed he did telephone, so she told him that she had received this very strange prophecy. She had been instructed to write it down and mail it to him. He was to keep it unopened until she called to let him know that it was time to open the envelope.

A few days before he was scheduled to fly to Australia she telephoned him to say that it was time to open the envelope. The prophecy consisted of just one line which read: “The price of gold will rise to extraordinary heights!” These were the exact words that I had used the previous day in our conversation in the car. He concluded that this prophecy was meant for me!

I was quite shocked, gob-smacked actually. I would normally have shrugged it off as an interesting story and forgotten about it. After the lion episode and my experience with the beggar, I was more inclined to take it seriously. What did it mean? There was nothing new in it for me, other than being a confirmation from a very strange source that my views were correct.

I felt that there must be a deeper reason for receiving such a strange message. I concluded, somewhat reluctantly, that if I had been given the talent and knowledge to see such a dramatic financial crisis coming down the track, then surely I had a responsibility to warn people about it?

The crisis that was coming had the potential to be the biggest event in the lives of the current generation. It was likely to become the most important factor governing investment decisions when the crisis arrived. So I started trying to alert people to the serious financial and monetary crisis that I could see coming and warn them to buy precious metals as protection.

Talking to friends and fund managers about my views, I ran head first into the Moses Principle. The new generation had not received an education on monetary history, nor what qualities money should have. I was met with glazed eyes and body language that showed no interest in what I was saying. I was talking in many instances to the “new rich” generation. They were the bankers, investment managers, stockbrokers, hedge fund managers and others who were massaging the vast sums of money and credit that had been created since 1971. They were taking their percentage of the funds that flowed through their businesses and were doing very nicely. They didn’t want to listen to a grey-haired old fogey spruiking a coming crisis that was going to wreck the gravy train that they were living off. Clearly this method was a failure.

The solution was to publish articles on internet web sites to get my message across. I had to proceed slowly and cautiously, only giving information that people could accept at that time. It was April 2005 before I felt confident that I could write an article titled “The Seven D’s of the Developing Disaster” about the problems that I could see developing, all starting with the letter D, – debt, deficits (budget and trade), the US dollar itself, demographics (baby boomer unfunded entitlements), derivatives, dwellings, deflation (including deleveraging) and destruction, being the long running wars in Iraq and Afghanistan. This article is located at:

http://www.gold-eagle.com/editorials_05/field042805.html

When the financial crisis eventually arrived in 2007, it was sparked by derivatives (credit default obligations – CDO’s) and events in the real estate market (dwellings). The arrival of the crisis allowed me to write more aggressively. By late 2008 there was a much greater awareness of the problems and I felt that I could leave it to others to deal with the ongoing consequences.

In August 2003, in parallel with the money/economic articles, I started forecasting the gold price using the Elliott Wave system. Here too I had to proceed slowly. I felt that I could not reveal my longer term forecast for the gold price because it was so bullish that I would be branded as a nut case. When I wrote my final Elliott Wave article in November 2008 I did reveal the full picture, showing that there was a possibility that gold could reach the extraordinary heights of $10,000. At that time gold was in the $750 area. That article can be found at:

http://www.gold-eagle.com/editorials_08/field112408.html

IMPACT OF THE MOSES PRINCIPLE.

It is now time to return to the Moses Principle and its impact on the gold price. Perhaps the most important point is that the modern Moses generation has had very little exposure to monetary history. They do not understand what has caused the current financial crisis. If one does not know what caused the current crisis, one cannot know how to go about fixing it. Central Bankers and Finance Ministers are also part of the Moses generational change. By the late 1990’s the new incumbents had experienced a 20 year bear market in gold and were influenced by Keynesian economics.

They didn’t understand why gold was held in their country’s foreign exchange reserves and resorted to the wholesale selling of this unnecessary “barbarous relic”. Famously Gordon Brown sold two-thirds of Britain’s gold stock near the bear market lows in 2001/2002. Australia sold a similar proportion of its gold. The European Central banks were selling gold but had a joint agreement to restrict their combined sales to 400t per annum. Even conservative Switzerland sold some of its gold reserves.

Originally it seemed that Central bankers were selling gold to protect the integrity and longevity of their paper currencies. Perhaps, with the generational change, they did not know any better. Perhaps it was just the “thing to do” at the time. Despite this central bank selling, the gold price went up! Buying by investors/hoarders had exceeded official selling and a new gold bull market was born. Central bank selling of gold gradually declined. Recently central banks under the leadership of Russia and Asian nations became net buyers of gold. The GFC has created a much greater awareness in official circles of the role that gold plays as a store of value asset in national reserves.

The distortions that have grown out of the 40 year period since 1971 have reached proportions that demand change. The problem is that the current generation does not understand that the root cause of the GFC is unsound money created at will by governments, combined with a banking system that has enabled the creation of an unsustainable mountain of debt. The modern generation is groping with the problem and gradually working towards understanding that the underlying cause of the crisis is monetary.

The modern generation will have to face some brutal truths as the world deals with the ongoing global financial crisis. The following are the brutal truths that apply to the USA and the world:

THE BRUTAL TRUTHS

  1. The slate needs to be wiped clean and a new sound monetary system introduced.
  2. That will require the elimination of all debt, deficits, unfunded social entitlements, the US Dollar as Reserve currency, and the big one, the $600 trillion of derivatives.
  3. To eliminate these problems by default and deflation will cause a banking collapse and untold economic pain, leading to riots and political change.
  4. Politicians are appointed for relatively short terms and opt for the easy solutions.
  5. While politicians continue to have the ability to create new money at will, they will do so in order to prevent a melt down on their watch.
  6. Consequently the odds point to governments wiping the slate clean by generating enough new money to eventually destroy their currencies.
  7. The new international monetary system is likely to involve precious metals. It will have to be money that people trust and that governments cannot create at will.

This has happened many times before, dating back nearly 900 years to the first paper money introduced in China. History is full of attempts to use paper or fiat money, all of which ended in the destruction of that money. The last century saw virtually every South American country “wipe the slate clean” and begin again with a new money. Some did it several times. The Romans faced a similar financial crisis and resorted to reducing the silver content of the Denarius, eventually by about 95%, before people refused to accept the Roman coins.

There are two things that are different about the current episode. This is the first time in history that fiat or government issued currency has been in use in every country around the world at the same time. Secondly, we have an electronic money system which is very efficient. It enables new money to be created at a faster rate than ever before.

Every experiment with government issued fiat money has ended with the destruction of that money There is no reason to believe that it will be different this time. The world’s 40 year experiment with floating “I owe you nothing” fiat currencies is coming to an end.

I have come out of retirement for this one off, once only, speech to warn that the good ship “Life As We Know It” is sinking.

You have the choice of getting into a life boat now or going down with the ship. The life boats consist of precious metals and other assets that will survive the coming currency destruction.

It is likely that gold will be the new unit of measurement or standard of value against which the performance of other assets will be judged. The challenge will be to find assets that perform better than gold.

The forecast contained in the “Brutal Facts” segment is not a pleasant one. It is unfortunately the most likely outcome. All that we can do is to “be prepared”. It is vital for one’s personal financial survival to take action now.

In conclusion, I would like to mention that my son Richard is married to Rebecca and they have a 4 and a half year old daughter with another baby on the way. They live in Sydney and Richard works for a local company organizing tailor made safaris to Africa for small groups. If you have any interest in doing such a trip, you can contact him at:

rfield@epicprivatejourneys.com

Alf Field ajfield@attglobal.net

7 November 2011.

ADDENDUM: Update of the Elliott Wave Gold Analysis

I promised that I would reveal some interesting things about the EW moves in gold since the $681 low in October 2008. That low was the start of the Major THREE wave. In Major ONE I mentioned that the corrections were 4%, 8%, 16% and then 32%.

We know that Major THREE will likely be longer and stronger than the prior Major ONE up wave. It is logical to expect that the corrections in major THREE will be a larger percentage than those experienced in Major ONE. This is how the first Intermediate wave of Major THREE developed in terms of London PM Fixings:

Intermediate Wave I in London PM Fixings

  1. Oct 08 to Feb 09 $712.5 to $989.0 + $276.5 +38.8%
  2. Feb 09 to Apl 09 $989.0 to $870.5 -$118.5 -12.0%
  3. Apl 09 to Dec 09 $870.5 to $1212.5 +$342.0 +39.3%
  4. Dec 09 to Feb 10 $1212.5 to $1058.0 -$154.5 -12.7%
  5. Feb 10 to Jun 2011 $1058.0 to $1549.0 +$491.0 +46.4%

These are typical of the beautifully consistent sizes of EW waves in gold. There are two up waves of about 39% and two corrections of about 12%. Several things can be determined from these numbers. In February 2010 it was possible to pencil in a target for wave 5 of $1470, being a 39% rise from the wave 4 low of $1058. The 12% corrections are larger than the 8% for the equivalent waves in Major ONE, which was expected. One can deduce that the correction to follow wave 5 will be one degree larger than 12%, possibly double this figure. The target for wave 5 of $1470 was exceeded mainly because this became an extended wave. It reached a high of $1549 for a gain of 46.4%. The chart below depicts these waves in London PM fixings:

Extended waves are simply waves that subdivide into an additional 5 waves. It happens mainly to 5th waves and generally makes life difficult for EW analysts. Difficult yes, but not impossible.. The analysis of the first extension, the extension of wave 5, is set out below:

clip_image004

Wave 5 of Intermediate Wave I – based on London PM fixings.

(1) 1058 to 1261 +$203 +19.2%

(2) 1261 to 1157 -$104 – 8.2%

(3) 1157 to 1421 +$264 +22.8%

(4) 1421 to 1319 -$102 – 7.2%

(5) 1319 to 1549 +$230 +17.5%

Wave 5 1058 to 1549 +$491 +46.4%

NOTE: From the $1319 start of wave (5) above, the target price was $1319 + 19.2%, the same gain as wave (1), giving a target of $1572. The high price for gold in wave (5) in the spot market was $1576 on a day (2 May 2011) when the UK had a public holiday and there was no London PM fix available. Thus the gain for wave (5) was stunted in terms of PM fixes. This is not satisfactory and it became necessary to revert to analysing the waves in spot gold prices to get accurate readings. This was also required in order to pick up the minor waves in the final two extensions which were explosive in nature.

To illustrate how to analyse gold using EW through this difficult period, it is best to work through the time line as it actually happened. As noted above, the expectation was that following the completion of the extended wave 5, a correction one degree larger than 12% would occur from the peak of wave (5) at $1576.

Gold had a minor correction to $1478 in the spot market and then started a sharp upward move. When gold went to a new high above $1576 the probability of the big 24% (give or take 3%) correction occurring at that time receded. The stronger probability was that a new 5th wave extension was underway. This was the first of the explosive series of extensions in gold. It became an historic sequence of four 5th wave extensions in declining orders of magnitude.

At the end of each extended wave, the spectre of the bigger correction (21% to 27%) came into focus. With each new high, the bigger correction was delayed and a new extended wave was born. At $1814, after three 5th wave extensions, the probability that $1814 was THE high was about 80%. Another extension at an even smaller degree was accorded only a 15% probability. The remaining 5% covered the possibility that the wave count was wrong and that a completely different outcome was evolving.

From $1814 gold had a minor correction to $1723, then blasted through $1814 to new all time high prices. The odds of a fourth 5th wave extension at the smallest degree changed from a meagre 15% to a 90% certainty. The wave count at this smallest degree helped to determine in real time that at a price over $1910 gold was in serious danger of an important top, with the bigger correction certain to follow.

clip_image006

clip_image008

clip_image010Both charts updated to 7 October 2011 and illustrate the wave counts described.

We can now consider the possible magnitude of the current correction from the $1913 top. The correction will be one degree larger than the prior corrections, 12% in PM fixes and 14% in spot gold, an average of 13%. That compares with 8% in Major ONE. Both 8 and 13 are Fibonacci numbers, so it may be that the next correction could be 21%, the next Fibonacci number.

In Major ONE, the corrections tended to double when they moved up a degree in magnitude, so one must consider 26%, double 13%, as a possibility. A 21% correction from the peak of $1913 gives a target of $1511. A 26% correction would target $1416. There is one further possible target and that is $1478, the point at which the explosive extensions commenced. The price of an item will often retrace the full amount of the explosive extension. There was a recent example in silver of such a full retracement of the explosive extension, see the chart below:

clip_image012

This analysis was prepared on 27 September 2011, the day after spot silver reached a low price of $26.59. The start of the extension was at $26.50 on 28 January 2011. A mere 3 months later, at the end of April, silver topped at $49.50, a very obvious explosive advance. Silver then traced out an A-B-C correction where the A and C waves were declines of similar size at $17 each, a typical EW relationship. At that low point of $26.59 on 26 Sept 2011 – the silver price had exactly retraced the full gain achieved in the explosive extension. The conclusion was that there was at least an 80% probability that the silver correction had bottomed at $26.59.

If gold retraces the exact gain achieved during the explosive advance from $1478 to $1913, which occurred in just seven weeks, it will represent a decline of 22.8%. That is nicely within the above anticipated range of 21% to 26% for the current decline in gold. There is a possibility that the spike drop to $1531 on 26 September marked the low point of the correction in gold. The midpoint of the correction from $1576 to $1478 is $1527, close to $1531. If $1531 was the low, it was a decline of 20%. This is slightly below expectations, but it still qualifies as one degree larger than 13%. At the date of writing (7 Nov 2011), gold has recovered to $1767, which is a 61.8% retracement of the loss from $1913 to $1531 (-$382), a typical size for this type of recovery. That leaves open the possibility (40% probability?) that gold will have another dip to test the target areas mentioned. The higher the price goes above $1767, the greater the probability that the low was in at $1531.

Once this correction has been completed, Intermediate Wave III of Major THREE will be underway. This should be the largest and strongest wave in the entire gold bull market. The target for this wave should be around $4,500 with only two 13% corrections on the way.

The word seems to be spreading.

clip_image013

A protester on Wall Street. Be careful what you wish for.