Though Elliott Wave shows a clear five-wave rally in gold, strong fundamentals and a weak dollar suggest that an overdue correction may not happen until gold achieves yet another stunning new high.
Back in mid-May this year, we had a big rally in the US dollar, and gold was correcting sharply. There was a bit of dollar-bull hysteria at the time, which I felt was quite unfounded. You see, the collective herd psychology at that time—just ten short weeks ago—was that gold would drop hard at the end of QE2, and the dollar would of course rally as high as 82, and maybe more, against the weighted index.
The dollar has dropped hard since mid-May, as I expected, and gold has continued to rally as well. I had forecast $1627 for gold back when we were under $1,500, and last Friday, we closed at $1627 on the nose!
During the mid-May time, most disagreed with my QE3 prediction, and they probably still do, but I think the ship is soon leaving port. This could blast gold up to a target of $1805 on the high end and certainly into the low $1700-$1730 range.
Gold has had a powerful five-wave rally (using Elliott Wave theory) since the October 2008 lows at $681 per ounce, and certainly one could argue that a correction would make sense fairly soon.
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However, the fundamentals for gold are only getting stronger, as we have inflation climbing at an 8%-9% real rate and interest rates continuing to drop. This is creating a “negative” real-interest-rate environment amidst a continually weaker US dollar. Hence, it is hard to fundamentally argue against gold at this time, creating difficulty in forecasting the intermediate-term highs and lows.
With that being said, and assuming QE3 or some form of it takes place soon, then my $1805 target is quite likely to be hit before we can look for any meaningful correction in the precious metal complex.
With the ISM manufacturing index turning down sharply, as reported Tuesday morning, and other economic indicators and the GDP report rolling over, a QE3 horn is likely to sound soon.
The combination of crowd behavior and fundamental analysis often delivers stunningly accurate advance forecasts for the S&P 500, gold, and silver.
By David Banister of Market Trend Forecast
