The price of gold has consistently disappointed enthusiasts since the 2011 high. With each rally, we've seen a spate of articles saying that a low had been put in, but each rally stopped at a lower price than the previous one. We believe gold has not yet put in the real low of the correction since 2011, but there are at least two viable and different paths for it to do so. Both scenarios suggest that price will continue in an overall sideways-down corrective fashion in relation to the 2011 high, and that the correction will last for several more years. However, there certainly will be trades to catch in both directions during that time.
Gold Primary Scenario: A New Low in 2014
In the big picture, after price makes a new low in 2014, it should trace some type of large B-wave corrective pattern in 2015 and possibly 2016, to be followed by a downward C-wave that should reach lower than the currently developing A-wave. The long-term chart below shows that path.
This is our primary scenario for gold, and it treats the decline from 2011 as a large, as-yet incomplete five-wave move. This scenario is attractive partly because it offers the cleanest Elliott Wave count of the decline and also because it reflects a belief that gold prices probably will not fall very far through the floor set by the 2008 price high of 1,103.40. If price is presently near the end of a corrective wave [iv], as shown on the monthly chart below, then the final downward push for this large wave A should take the form of a five-wave impulsive or overlapping diagonal series.
In this scenario, price should test near the 2008 high -- a level that many traders will view as crucial support. Therefore, it might offer the greatest potential to surprise many traders if price were to poke through that floor by at least a little bit.
A more detailed analysis and Elliott Wave count for the primary scenario can be found on a weekly timeframe at Trading On The Mark.
The primary count, described above, suggests price will reach a small washout low that would be a signal of capitulation (i.e., a sign that bullish traders have finally given up trying to pick a low). When that kind of capitulation low occurs, the contrarian's viewpoint is exactly what's needed before we see higher prices. The alternative, described below, has a somewhat different trader psychology associated with it, where bullish traders keep stepping in to accumulate on every swing low and are patient in looking for higher prices.
Gold Alternate Scenario: An Intermediate Low Was Made in 2013
Any new high above the March high will likely negate the primary scenario and promote the alternate scenario to become the main one. The big-picture pattern for the alternate scenario isn't very different from that of the main count. The key difference lies in how the rest of 2014 would play out. This scenario calls for choppy price action that finds it difficult either to punch lower or to break higher in coming months.
The alternate scenario for gold counts price as having fallen away from the 2011 high in a three-wave [a]-[b]-[c] move. In that view, the most recent up-down swings on the monthly chart represented part of a large intermediate B-wave. This scenario implies a very choppy 2014, which would have price move downward to make a [b]-wave low (inside the larger B-wave) before resuming an upward path in wave [c] of B.
A more detailed examination of the alternate scenario can be found at our website.
This article originally appeared on Trading on the Mark.
No positions in stocks mentioned.