Back in April I wrote an article entitled “The Death of Gold” which suggested a longer term correction was on the cards for gold. I was partly led to that conclusion by the headline article below from The London Times dated 14th March 2008. Three days later gold topped at $1032 and has dropped as much as $773 for a 25% correction. Silver has not surprisingly fared worse with a drop as great as 45% due to its thinner and more volatile markets.

We exited most of our silver positions at $18 at the end of March and have not been back in since apart from the odd drip feeding of physical bullion. The reason was purely down to Elliott Wave analysis and the following interpretation gleaned from the five year silver chart.

In other words, when wave 5 was over expect some big action to the downside because silver is correcting the entire bull market since 2003! We have now got that and got it in spades for silver, but nevertheless the current price levels do not surprise me in the slightest. Forget about conspiracies or massive short manipulation. If you believe these entities have power, then sell your silver at the next rally and park your money in something that is safer. Elliott wave theory for months saw this coming, no need for any other explanation - period!

Where this correction could bottom is a matter of conjecture which I addressed to subscribers in April with five different approaches that centered on $11.90 give or take a couple of dollars. For example, Elliott wave theory offers the guideline that a correction to an impulse wave will tend to terminate around the price territory of the wave 4 that preceded it. Note that silver is currently right in the middle of that area.

Or we could employ Fibonacci ratios to the 2003-2008 wave and come up with $12.50ish for a 50% retracement or $11 for a 61.8% retracement. We had hoped silver would level out at $12.50 which is still a good point for the long term buy and hold investor to drip feed but alas the drop continues towards the 61.8% level.

As for gold, the 38.2% retracement of $255 to $1032 (i.e. $735) may yet hold but do not exclude a 50% retracement to $644 at an extreme.

The point being this, forget about 200-day moving averages and RSI values when this kind of event happens. You need something else to make sense of what is going on. Silver investors out there are chewing their fingers to the bone; they want something solid to put their feet on. The ultimate comfort is the confidence Elliott wave theory gives to see this coming and also point further ahead to events not only beyond this first bull leg but beyond to a glorious finale for silver, gold and any other asset that rallies itself against the loose foundation of fiat money.

Right now, the US Dollar index is pushing former support at 80. Plenty of traders and investors are selling gold and silver in anticipation that the mighty dollar gets back above 80 and back to its old ways. They may be right, but don’t bet on another dollar bull ruling the herd again.

Wave one of the 30-year silver bull is over and the wave two correction is now in force. Expect wave three to set a new all time record for silver prices.

9 September 2008

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