Monday, February 15, 2010

Elliott Wave Perspective in the Longer Term

Elliott Wave Theory (EWT) is one of many technical tools available when one is trying to "guesstimate" what the market will do next. Different practitioners see different things in the charts using the same technique, making it as much art as science (like all technical analysis). Robert Prechter is the name everyone associates with EWT and he is bearish on Gold, so most Gold bulls don't like him or EWT. He has been terribly wrong on Gold for a decade and his incorrectness on Gold is set to continue. Gold is going much higher from current levels and has already trounced the U.S. Dollar over the past decade.

Figuring out the bigger multi-decade cycles should be a major goal of retail investors. Buy at the dawn of a new secular bull and hold on until at or near the top of the secular peak 10-20 year later. Knowing that the 2000 top in stocks was a MAJOR SECULAR EVENT would have given you a huge advantage over other market participants. Easier said than done, of course.

Prechter saw and still sees a deflationary implosion that will take the U.S. Dollar to nosebleed levels (i.e. much higher from current levels) and he sees Gold going back down to lower lows below the 2008 fall panic lows. I think the US Dollar and all paper debt tickets will continue to deflate against Gold. Other Elliott Wavers such as Alf Field also agree that Gold is in a MAJOR secular bull market.

Tony Caldaro also believes Gold is in a secular bull market using EWT and has a current tentative price target of $3750 for the secular peak. In a recent post he summarizes where he thinks we are in a "big picture" sense - I think it is worth a read and admire his work. To quote arguments from this post against the Prechterite 1930s-type deflationary collapse scenario:

"There is very little protectionism now, no gold standard to limit an inflationary monetary policy, the world is much further along industrially and technically, plus currencies flow across borders in nano seconds.

In regard to currencies, during each of the last two commodity booms the USD was officially devalued. FDR did this in 1933 when he devalued the USD/Gold relationship from $20.67/oz to $35.00/oz. Then in 1971, Nixon took the USD off the gold standard completely. This suggests an official devaluation of the USD will likely occur before 2014. In addition, no need to tell you what will happen to gold and crude over the next few years. Gold and Crude made peaks in the 1940's and then again in 1980. The [fed] policy of quantitative easing will only add more fuel to the current commodity bull market."

I am increasingly inclined to agree with this viewpoint. I thought we were in for a deflationary collapse, but now I'm not so sure. There will be no restraint on new debt creation in the public sector until the public riots in the streets. I think the rioting will be much more likely if governments don't agree to take on more debt - this is the sad state of our collective economic ignorance. Of course, this by no means indicates the current secular stock bear market is over - far from it. But it means S&P 500 at the 500-600 level for "the" bottom instead of the 100-300 level.

A paper money system can be degraded ad infinitum until a new system is put in place to replace the old due to non-functionality. More debt at this point is highly destructive but that doesn't mean it won't be tried. Greece will be bailed out. Other "PIGS" will be bailed out as needed. US States will be bailed out. Japan will be bailed out. On and on. What is to stop us at this point? Who exactly is there to stop this economic madness? You think the majority of people are going to start listening to Ron Paul?! I am a huge Paul supporter by the way, so don't misunderstand this comment.

Gold will play relief valve in this madness. I have always believed that governments cannot stop or change the primary trend, but they do have the ability to destroy the currency. When priced in Gold, we have already experienced a major stock and housing collapse that more starkly unmasks the the nominal price drops in these asset classes. The Dow to Gold will reach 2 and may even go below 1 this cycle. I don't know how long it will take and I don't know at what price points for Gold or the Dow this will occur.

But I do know that Gold is a better investment than stocks, cash held in any paper currency, government bonds, or real estate. Commodities are a question mark to me given the weak economic environment we are in, but rampant speculation can keep commodities afloat during aggressive currency debasement even in the absence of economic need.

We will continue to live in interesting times, to be sure... provides you with the information to make the right decisions on your AU 5 Day investments

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