A Possible Bullish E-Wave Interpretation

When looking at the chart of gold in dollars, it is obvious that a number of bearish interpretations and chart targets can be derived from it. We were thinking about how to go about an Elliott Wave count of the chart, and one possibility that suggests itself is that 'wave 1 down' was a rare leading diagonal, and that after a wave 2 correction, we are now somewhere in wave 3 down.

However, because leading diagonals are so rare, we have to consider whether a bullish interpretation of the chart is also possible, especially in view of the panic volume at the lows and the extremes in bearish sentiment that were recorded (more on those further below).

Here is what we have come up with. Please note, we do not claim that this is a 'correct' interpretation – we merely note that it is a possibility that would conform with Elliott Wave rules.



Gold-ewave count

Gold's Elliott wave count, the bullish possibility- click to enlarge.



One caveat is that wave 'C' may not be finished. There could be further subdivisions (and hence additional declines) without necessarily invalidating the concept as such. Apart from sentiment, one further consideration that lends support to the above interpretation is the fact that the entire movement since the 2011 high does look corrective in nature. We can detect a plethora of three-wave moves, but no big 5 wave moves except those in the proposed wave C.


Sentiment and the CoT Report

It seems almost superfluous to mention it, but sentiment on gold has become even more bearish than it already was prior to the recent crash. Luckily this is something that can be quantified, and we show a few of the most recent relevant data points below.



HGNSI-new low

A new low in Hulbert's HGNSI (gold newsletter sentiment indicator – at minus 37.5. This means that on average, gold timers now recommend a 37.5% net short position in gold. Given the fact that a number of newsletter writers are perma-bulls, this is quite an astonishingly high percentage- click to enlarge.



gold, public opinion

Gold, public opinion – this indicator merges several prominent sentiment surveys into a single number. A new multi-year low in the bullish consensus has been recorded- click to enlarge.



Now let us briefly discuss the commitments of traders report. Several observers have argued that the fact that the net position of large speculators has actually remained long and has in fact become slightly more 'net long' than it was prior to the plunge, is bearish. For example, well-known internet gold pundit Clive Maund writes: “…despite the massive drop in price, the COT structure is little changed. This is viewed as strongly bearish”.

This interpretation is erroneous. The group that is most knowledgeable about gold's future direction are in fact the big speculators. It would have been very bearish if they had added to their gross short positions. The fact that they have covered a good portion of their shorts is bullish, not bearish. It means they perceive less downside risk than before, and we would note that Mr. Maund previously regarded their growing gross short position as bullish; it wasn't, and we mentioned at the time in these pages that we felt it was a major fly in the bullish ointment. We noted that obviously, a growing speculative short position could add fuel to any developing rally. However, we then added this caveat, which proved to be prophetic in hindsight:


“However, we hasten to add that one should definitely not assume that just because these short positions have risen, a market rally is necessarily imminent. In fact, it would be a very bad sign if money managers became so bearish as to flip over to a net short position.

It is short term bullish when gross and net long positions are reduced in a correction in an uptrend, but it is far less bullish when the decline in the net long position owes mostly to an increase in shorts.

Let us not forget: the big speculators are the group that tends to be right about gold's major underlying trend. Their growing skepticism is not an unalloyed positive sign as many other writers currently maintain. Quite to the contrary, it is a reason for concern. Bulls would want to see this gross short position reduced as quickly as possible.”


(emphasis added)

In so many words, those who believe that the commercial hedgers are the 'smart money' in gold simply have it wrong. This is not meant to detract from the otherwise often very good quality of Mr. Maund's technical observations. We only have a beef with his interpretation of the COT report as well as his misconception about what the 'bullish percent' chart of the GDM or the HUI actually depicts (this chart does not show us the degree of 'bullish sentiment', but the percentage of gold stocks that are on a Point & Figure buy signal).

There has been another positive development in the CoT report, and that was the ongoing liquidation of long positions by small traders. Historically, this is a group of traders that contributes to a positive outlook if its net long position is as small as possible.




Commitments of traders in gold futures: big speculators have covered some of their shorts, small speculators have liquidated longs. This is bullish, not bearish- click to enlarge.



What bulls would want to see from here on out is a further reduction in big trader shorts, ideally to a level of between 30 to 40,000 contracts gross or less.


Gold and the Rand

The South African Rand has weakened further as gold and platinum were clobbered, with the result that the gold price in Rand terms remains within its  trading range of the past few years. As we write these words, Harmony Gold (HMY) is up by nearly 13% on the day, trading at a still very low $5.20 per share. The huge gap between HMY and the Rand gold price can be seen below:



Rand Gold vs. HMY

Gold in Rand and the share price of HMY (green line) – eventually, this gap should close – click to enlarge.



As a matter of fact, Harmony has managed to keep cost increases in check last quarter due to the weakening Rand. The same can probably be expected from other South Africa based mining operations as well – a gradual improvement in the escalation of costs. We think that the current prices of these shares represent an extraordinary opportunity, but obviously everyone will have to do his own due diligence on that point.

There are numerous risk factors, not the least of which is the marginal nature of South African deep level mining operations. They would not be able to cope with a large decline in the gold price. On the other hand, this means also that they sport extraordinary leverage to a rising gold price – it would not be incorrect to refer to them as cheap call options on gold.




Charts by: Sentimentrader, StockCharts




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6 Responses to “Gold – Another Post-Crash Update”

  • SavvyGuy:

    It is evident that the gold and silver charts have suffered an incredible amount of technical damage in just 2 trading days, April 12 and 15. It will take some time to heal and bottom out before they start looking even remotely bullish. A good signal for upside potential would be when gold clears the $1500-1550 range and back-tests it from above.

    • jimmyjames:

      What is it ‘they’ are after, assuming ‘they’ exist beyond the realm of Godot-Land?



      “They” are after “everything”.. right down to busting entrepreneurial little kids who set up lemonade stands to try and make a little extra spending money-and-
      “they” do exist in this reality or is it better described as a nightmare-

      Police Bust Lemonade Stands Nationwide

      What happened to our freedom-I guess I grew up in the best of times and never thought it could be any different- I can remember a half dozen of us kids walking down the street all carrying .22 Cal rifles on our way to shoot gophers and no one ever paid any attention to us–today a swat team would be deployed-


      But what if the idea is to acquire as much of the world’s gold supply, both above and below ground, with as little confiscation as possible? Why not use whatever techniques are available to induce stockholders of the miners to throw their shares on the ground, or at least sell them for pennies on the dollar?


      I guess that’s more or less what I was referring too above- its easy to see by how this is unfolding–
      The power/money hungry elite have absolutely no scruples and in my view of what I think i’ve learned so far is… all existing money/gold/wealth is their target-but mainly natural resources and the labor-
      Blood has been/is being and will always be spilled over holding the old incestuous families in power-
      The cookie crumbs will be thrown to the victors as the spoils of war and whoever they are- they will be grateful for it-

  • worldend666:

    Clive Maund is bearish now is he? That has to be a bullish indicator. I have never known him to be right.

    • JasonEmery:

      On Wednesday (4/24) it looked like the gold stocks would finally start leading the metal higher. Then you get today’s action, where gold is up 2% and silver 4% and the stocks hardly participate in the rally. And that is with the tail wind of oil up 2% and the broader market modestly higher.

      Hard to make the bullish case for gold stocks. As far as gold, it’s hard to say. I think it is going to need help, like continued oil price advances.

      • jimmyjames:

        Hard to make the bullish case for gold stocks. As far as gold, it’s hard to say. I think it is going to need help, like continued oil price advances.

        I think higher oil prices would be a negative weight on miners-although how could it hurt them anymore than they are-you’re right though- what a pathetic performance in light of the gold price-even if gold was $600 they should be doing better than this-
        I would have thought they would lead gold higher this time…wrong again-
        This might be a big negative for the gold price- but what do I know-
        Anyway… this is the picture perfect wall of worry we’re (so far) climbing with gold-

        Hate conspiracies (sort of) but gold miners at this price must look dirt cheap to nationalistic government’s/bankers- with the ability to create enough money from thin air to buy/steal them all?

        • JasonEmery:

          Jimmy-It should be quite apparent that no one other than the PTB (also known as PPT-plunge protection team) has a clue as to what is really going on with gold. Therefore, any theory that is consistent with the known facts is as good as any other, if not better.

          What is it ‘they’ are after, assuming ‘they’ exist beyond the realm of Godot-Land? Bankrupting the miners seems like a pretty sure way of squeezing supply, and I’m pretty sure that is not the goal. But what if the idea is to acquire as much of the world’s gold supply, both above and below ground, with as little confiscation as possible? Why not use whatever techniques are available to induce stockholders of the miners to throw their shares on the ground, or at least sell them for pennies on the dollar?

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