A Gold Bull

December 23, 2002

Introduction
Now that the gold price has shown its willingness to break loose above the glass ceiling around $325-330 that existed for 6 months, one can realistically begin to speculate what are the likely targets during the bull run.

Readers with good memories might remember some charting analyses of the gold price that appeared at Gold Eagle quite some time ago (still available in the G-E archive). The method that used was Chart Symmetry (CS) - based on two observations about the way prices behave:

* That there are preferred gradients along which prices tend to make more reversals than usual
* That different preferred gradients are related through the Fibonacci ratio


Preferred gradients can be made visible through the proper placement on the chart of trend lines with that gradient. The most simple example of preferred gradients is the trading channel, between two parallel lines.

It was found that preferred gradients generally form the boundaries of the traditional chart patterns, such as triangles, wedges and megaphones; also, the two sides of these patterns as a rule are related; they are members of the same 'family' of gradients, or trend lines, in that the gradient of the one boundary of, say, a triangle, can be derived from the gradient of a trend line that defines the other boundary.

In this essay the principles of Chart Symmetry are applied to the monthly gold close in order to explore possible long term targets for the gold bull. As a rule. in these analyses one line is generated between two prominent points on the chart; this line defines the master gradient for the analysis. All other lines used in the analysis are then derived from that gradient; this is done by means of

* Displacement; keeping the gradient constant, but moving the line to result in a parallel gradient
* Inversion; keeping the gradient constant, but changing the sign, to result in an inverted line
* Fibonacci transformation; changing the gradient, steeper or shallower, by multiplying or dividing the known preferred gradient by the Fibonacci ratio (0.618034. . ). This process can be repeated on the newly derived line, to result in a fan of lines of which the gradients vary from each other by the Fibonacci ratio


While the master line is defined between two points on the chart, all derived lines are generated from just a single point of origin. The software used for the analysis generates these lines using very accurate internal data.


Monthly charts

On this first chart, the master line is defined between the cusp of the large bifurcated top and the December 1987 peak, as indicated by the 'x's. While this may at first seems strange to traditional analysts, experience in the use of Chart Symmetry has shown that the centre point or cusp of a bifurcated top - such as developed in the gold price during the early 1980's - generally lies on a significant trend line.

The relevance of this master line is borne out by the additional analysis.

Line I is the direct inverse of line M, so that I-M is a symmetrical triangle. If the bifurcated break above M is disregarded for the count - standard practice in CS - it is evident that the bull market that had started in February 1993 was the fifth leg of the triangle and should have broken higher above M, into a new bull market with some 80% confidence. That is the fraction of triangles that complete normally, resuming the original trend at the end of leg 5.

In this case, gold broke above $400 early in 1996, suddenly and inexplicably reversed its trend, and eventually broke below the triangle. Such premature breaks (either on leg 4 or in the wrong direction when on leg 5) tend to be quite steep and sustained, exactly as we see here.

[It was this low probability event that set me off on the search to discover what was wrong with the gold market and which led me to Gold-eagle where I started to learn the truth]

The break lower found support at line F, which is a steeper derivative of line M, with its origin early in the 1970's bull market.

Lines B and A are the fourth steeper derivatives of line M; the break above line A in July 2001 was the first indication that a gold bull might develop. Now that bull is well under way and has lines I and M as targets. The values of these two lines for the end of this month (December 2002) are $367 and $430 respectively.

The second chart is generated much the same way as the first, using the same master line, M. The difference is that lines A and b are now the third steeper derivatives of M, not the fourth. We again find that channel A-B is a bear channel for gold, with line A offering outright, very long term resistance at $324 on the monthly close.

At the moment it seems that this resistance will be well broken by the end of December, letting the bull loose on its way to $367 and $430 next.

The question now is what may lie ahead after a break above line M.

The long term outlook

Here we have much the same structure as before, with lines A and B now generated parallel to line F.

Lets assume that the gold price is due to reach line M, in order to complete leg 3 of the large triangle M-F. It might hesitate and correct at M, to begin leg 4 of this triangle. This gives two scenario's.

Scenario 1: The gold price returns to line F in order to complete leg 4 and then reverses higher into leg 5, in due course breaking above M to extend the bull market.

Scenario 2: The gold price reaches line M and then starts a correction, thus beginning leg 4 of the triangle. However, it soon resumes the bull trend and breaks prematurely above the triangle, i.e. without completing leg 4. In that case, the resulting move is likely to be steep and sustained - something like the late 1970's.

If we select Scenario 2 on the fundamentals in the gold market, such a steep break can be expected to have either line B or line A as the target, thereby completing a move across either of channels B-F or A-F. This kind of construction, where lines parallel to the base line of the triangle are generated as targets for the new trend - typically only from the top of the triangle, but here we have two alternatives, because of the bifurcated top - explain the well known rule of thumb that says the extent of a break from a flag, triangle or pennant is equal to the length of the 'flag pole' on which the flag or triangle is suspended.

We have the first move, from line F to line B (or line A) in the late 70's early 80's as the 'flag pole' in this analysis. A new move from line F that rises to the top of the channel (either B or A) should be much the same length as the flag pole, depending on how fast the new move takes place.

It follows therefore that the longer term outlook for gold has a target at $650 and possibly also at $812.

For observers of the yellow metal who believe gold may well trade above $1000/oz, the good news is that channels are not inviolate. A break higher is always possible, if the market is strong enough to overcome resistance at the top of the channel.

Should that happen, and since channels tend to be evenly spaced, a break to above the channel would have a good chance of a further increase equal to the width of the channel. With line F currently at $271/oz, the width of minor channel B-F is equal to ($649 - 271 =) $378; similarly, the width of A-F is equal to $541. These values can be added to the tops of the two channels to find the likely targets, should the gold price really get going!

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