A Different Perspective On A Top For Gold

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 |  Includes: DGL, DGP, DGZ, DZZ, FSG, GLD, GLL, IAU, SPGH, UBG, UGL
by: Avi Gilburt
I find it quite interesting that gold is getting such attention and moving up at a parabolic rate on the 40th anniversary of the end of the gold standard era, which occurred on August 15, 1971 when the United States ceased converting US dollars into gold at a fixed value.
Everyone now seems to be enamored with the yellow metal. It is considered the “shining star” of the investment world. Analyst’s upside targets range from anywhere between $2,500 up to as high a $8,000 an ounce.
Currently, gold is in a parabolic phase, and the chart has a vertical trajectory. Central Banks around the world seem to be buying gold at record pace. In fact, Venezuela just announced that it was even going to nationalize its gold industry. But, before you consider this as a bullish factor for the continued rise in gold, remember that these same Central Banks were unloading their gold positions at the last low in 2001. Remember that Great Britain alone sold half of its gold reserves that it had maintained for centuries at the prior bottom when gold hit its $253 low.
Therefore, can we really rely on the action of Governments to dictate the continuation of a trend, or is it rather an indication of the completion of a trend?
So, the question on everyone’s mind at this time is: Will this parabolic rise will actually continue?
Historical Pricing of Gold
Since the early 1800’s, the price of gold was basically set around the $19 level, and remained there for approximately 100 years. After the United States came off the gold standard in 1933, the price of gold increased from approximately $20 to approximately $40. This was primarily due to the Breton Woods system that was initiated after World War II, which attempted to peg the gold price to a rate of $35 per ounce. In 1971, the United States ceased converting US dollars into gold at a fixed value, which ended the era of the gold standard. This allowed gold to rise from this point on, until we hit an all-time high on Friday of $1,878.
Can Gold Go Higher? – An Elliott Wave Perspective
The simple answer is, yes, it is possible that it can go higher. However, there are clear levels that must be watched so that investors do not get caught in a downdraft when a top is hit.
Many Elliott Wave analysts have incorrectly called tops in Gold multiple times over for the last 10 years. A lot of their analysis is based upon where they view the completion of Wave 1 and Wave 2 of Gold from a long term perspective.
As I see it, Wave 1 for gold could be considered to have begun during the 1800’s when gold was trading around $19 an ounce. It then continued up for over 100 years until it hit a significant high in 1980 at $850 an ounce. It then retraced approximately 70% in a wave 2 to the $253 level, which it hit in 2001. You can see the entire wave 1 and 2 price movement in the log chart below.

Click to enlarge
When targeting a top for a Wave 3, we usually like to see some Fibonacci relationship between Wave 1 and Wave 3. Most commonly, Wave 3 will extend to 1.618 the size of Wave 1. Given that Wave 1 in Gold was $831 (the difference between the starting point of $19 and the top of Wave 1 at $850), a 1.618 extension would provide us with a target top of $1598.
Clearly, this potential top level at the most common Fibonacci extension has been exceeded.
Since the gold price is clearly parabolic at this point, we have to seriously consider Frost & Precther’s guidance that fifth waves in commodities are commonly extended waves. They state that fifth wave advances in commodities are driven by the dramatic emotion of fear, which will often provide us with extended fifth wave blow-off tops. This is, in fact, what we have currently been witnessing in the gold market in this extended fifth wave within the third wave, which seems to now be in its blow-off top stage.
This is the main reason as to why I believe that we are relatively close to a potential top in the gold market.
As for targets, the next potential levels that can provide a top for gold are the Fibonacci 2.00, 2.236 and 2.382 extensions. This would relate to top projections of $1,915, $2,111, and $2,232 levels. Again, since we are most probably in the final stages of this parabolic fifth wave “blow-off-top,” I would seriously consider anything approaching the $1,915 level to be a potential target for a top at this time.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in GLD over the next 72 hours.