Precious Metals Cycles And Trends: A Complete Review

| About: SPDR Gold (GLD)

Summary

A detailed look at where gold and silver are in relation to the long-term trend.

A guide for future price action.

Second article in the series providing a complete guide to trends in all asset classes.

This article will add on to the recently published equity cycles and trends review with a section focusing on commodities. In this update, I will look at the long- to medium-term trends in the precious metals, gold and silver, and will also look at the probable future movements.

I will say again, I use Elliott Wave to identify trends, and fractal theory to provide a guide to what future price action may look like. There are hundreds of methods used in trading, but in my opinion, there is no better way of identifying long-term trends. So without further ado.

Precious Metals

Gold and silver traded into bubble territory in 2011, and this will affect them for a long time to come. As much as the movements of the precious metals are correlated, there are important differences in the cycles which could lead to a disconnect over time.

Gold

Gold's (NYSEARCA:GLD) decline has not been as severe as many boom and bust cycles (e.g. oil), but the lack of a crash only delays the need to correct. There are further declines to come.

The four-year bear market of 2011-2015 completed the first leg down of the correction in wave "A".

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This was a nearly perfect "impulsive" wave. Wave 1 and wave 5 were equal in size at around $390, plus wave 3 was the strongest, longest and was very near 161.8* wave 1. These are perfect ratios contained in a trend channel which was broken strongly when the trend completed. We are now in wave "B".

The big question is, what will wave "B" look like? All we really know is that it can't go higher than the 2011 highs, and it will eventually reverse into another decline for wave C; a classic ABC correction.

This is the long-term framework, but we need more accuracy than that. We can look at the smaller time frames, but they are not always reliable, and I prefer to first look at historical precedence. Has gold ever been in a similar situation before, and what happened?

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Gold has indeed been in bubble territory before with a +790% rally in four years from 1976 to 1980. The reaction to this rally has many similar traits to the more recent reaction in 2011-2015.

The above chart suggests wave "B" could be a long, protracted affair and a re-test of the lows is likely. This fits with post bubble price action; new trends take a long, long time to develop, and moves in both directions will likely be faded.

Further evidence comes from the price action of 1993-2003, a period with some similar fundamental drivers (strengthening dollar, crisis in Asia and a crash in oil).

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The structure of the declines has many similarities. And once the downtrend completes, there is a strong rally/short squeeze, which fades and gives way to a re-test of the lows. This is exactly what happened in 1982-1985 in the first chart.

All this suggests not to get carried away in either direction. Gold is notorious for fooling the majority of retail traders; it stays in a range for most of the time and only breaks when most have given up and lost interest. Wave "C" is not expected for many years.

Silver

Although silver (NYSEARCA:SLV) and gold are obviously correlated, there are both fundamental and cyclical differences.

One key technical difference is the scale of the post bubble decline; 72% compared to gold's 45%. This is more in line with the classic crash as illustrated by crude oil in the 1990s.

The above chart is only a rough guide, but this large flush may lead to a larger retrace than that expected in gold. Silver also has more industrial uses which could aid the recovery. A proportionate move to oil would take silver to around $40 before a further decline.

As with gold, silver has completed a common four-year bear market cycle, ending wave "A" at the 2016 low.

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Although the decline looks quite similar to gold, there are significant and important differences.

Silver's wave "A" is not impulsive; the ratios suggest the decline was in fact 3 waves and not 5. The minimum for a wave "Y" is 90% of "W", and this is exactly where price reversed.

The 3 wave decline actually opens up the possibility of a new high above $50. For now, I think the odds favor a lower high, but the probabilities are constantly changing. The $40 suggested by the oil fractal is the minimum target (70%) for wave "B" if the entire ABC were to form a flat correction. Apologies for the jargon, but there's no other way to say it. In simple terms, there are a few reasons why $40 is a long-term target.

The initial target is $25 as explained in an earlier article. But, as with gold, the "B" wave recovery is expected to take many years before a further decline completes the correction for a wave "C". There are many twists and turns still to come during the recovery.

Conclusions

The precious metals have completed the first leg in a very long-term decline. Both are exhibiting post bubble behavior and will likely remain in this state for a long time.

Both gold and silver are now recovering in a "B" wave rally. No rally is the same, but we can use fractals as a guide to expectations. I will write more on the lower time frames at a later date, but first, we need the long-term context as described above.

Below is the first in the series, "Equity Cycles and Trends: A Complete Review". Nothing has changed yet from the original article, but I will update it whenever trends are likely to change. The idea is to keep adding to the work done, so eventually all the markets are reviewed in one place. The next article will focus on oil and gas.

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Equities

There is a major disconnect between the economies of the U.S. and the rest of the world. This is shown by the charts of stock indices: the S&P 500 is at all time highs while major indices such as the FTSE in the U.K., the German DAX, and the Nikkei in Japan are well off their highs. While the S&P 500 is still trending up, some are already retracing the first part of the downtrend.

The S&P 500

The SPDR S&P 500 Trust ETF (NYSEARCA:SPY) has a beautiful, clean long-term trend from the 2009 lows. The below chart was used in a previous article, which also explains some of the theory behind the labeling used (the waves):

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The bull market is mature as we are about half way through the last wave. Expectation is for wave 5 to equal wave 1 in size and (sometimes) in structure. This gives a target of 2,370 for the S&P 500 when using linear measurements.

The chart above actually uses logarithmic scale as it reveals very well-defined trend channels. A logarithmic measurement projects a rather improbable 3,200. How do we know it is improbable (apart from being fundamentally unlikely)? The clues are in the smaller time frames within wave 5.

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By superimposing wave 1 from the 2009 lows onto the current wave 5, we can see the similarity in structure. It suggests a slow grind into an early 2017 top, accompanied by a strange wave structure.

This abnormal looking count is actually what I would expect to see: the lower time frames are not always clear, especially when a large reversal is in the making. The above map may not play out exactly, but it is the best I have at the moment.

iShares Russell 2000 ETF

The iShares Russell 2000 ETF (NYSEARCA:IWM) has a similar structure to the SPY and to the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA).

All the U.S. major indices are in wave 5, the last in the sequence.

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Wave 5 = 1 for IWM projects $134. The interesting thing is the structure of the wave 5 is very similar (so far) to the previous wave v from 2014 to 2015.

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Also compare the 2014-2015 structure to the first chart from 2009 to current. How does it rally, consolidate and correct? In the same way again! This is fractal theory: price action repeats because history and the actions of participants repeat.

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The Nikkei

As I mentioned in the introduction, there is an interesting divergence between U.S. and the rest of the world. Japanese equities such as the iShares MSCI Japan ETF (NYSEARCA:EWJ) and the Nikkei 225 already topped in 2015, after completing the 5 wave bull cycle from the 2009 lows.

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The first leg of the downtrend completed in June as wave "A" and it should now retrace the decline by 61.8-78.6%.

I wrote an article titled "Japanese Equities Look Ready For A 30% Rally Into 2017" in early July. The title is quite self explanatory, and one of the reasons for the call was the similarity with the Asian crisis in the 1990s.

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The decline in the 1990s led to a large counter-trend rally, but importantly did not make new highs and gave way to an even larger decline. This is what to expect for the Nikkei in 2017.

The DAX

The German DAX is also well off the 2015 highs, but is coiling to break the downtrend. There is a decent chance of a new high at some point as the February lows may have completed a large wave 4.

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The logarithmic chart again has the cleanest channel, but I will use the linear target for 5 = 1 which is 12,700.

A new high would be consistent with the fractal I have been using as a guide for nearly a year now. The higher time frame weekly chart from 2000 to current is repeating a similar structure to the daily from 2009 to 2015:

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It's not perfect - no fractal or repetition is - but as a longer-term guide to what is possible and probable, it has worked well so far.

New highs on the DAX may seem unlikely, but don't forget the DAX rallied 32% in H1 2015 while the S&P 500 managed 7%. Further stimulus in Europe may still be necessary and a collapse in the euro currency would inflate the DAX. I will cover EURUSD and currencies at a later date, but a further move down in the euro is expected.

Conclusions

U.S. indices are leading the way higher. Not all countries are as strong, and some, like Japan, have already started a downtrend. Rallies are likely to continue into Q1 2017, after which a large decline is expected.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.