Gold

[PCMNewsdesk]

Per our discussion in Monday's STU, [Gold] is tracing out five waves down from the $1255.61 high on October 21. Today's sharp drop to $1137.65 either marks the end of wave v (circle) of 1 or prices will end this wave with one more modest new low. The key point is that the completion of five waves down will lead to the largest countertrend rally since the July 10 high at $1345.30. It will be a rally of at least $40 and could be upwards of $100 or more. The Daily Sentiment Index (trade-futures.com) has been below 10% bulls for four straight days and the 5-day average is now 7.6%, its lowest level since near the end of wave iii (circle) in early October. Wave iv (circle) was a $72 rally to the October 21 high. If prices do have one more decline to complete the impulse pattern, the next target range is $1105-$1121.

[PCMNewsdesk]

We forecast the end of a five-wave decline in [Gold] and said it would "lead to the largest countertrend rally since the July 10 high at $1345.30. It will be a rally of at least $40 and could be upwards of $100 or more." The rally is underway. Gold completed the "five down" at $1131.85 in overnight trading. By the start of New York trading, prices had jumped to $1167.82 and continued higher thereafter. The Daily Sentiment Index (trade-futures.com) dropped to 3% Wednesday night (Nov. 5) and the 5-day average fell to 5%, a record low dating back to April 1987, when the data started. We label today's low as Minor wave 1 of Intermediate wave (5). Wave 2 should carry gold to $1214-$1255, the top end of which is the previous fourth wave high from October 21. The alternate count labels the current push as wave ii (circle) of Minor wave 3 of Intermediate wave (5). Under this scenario, gold's rally will stop at $1175-$1193, which is where it is now, and decline to a new low. The sentiment extreme makes this scenario less probable and the rally looks impulsive (see 240-min. chart), hence the alternate designation. The record sentiment also allows another possibility, which is that today's low marks the end of Intermediate wave (5) of Primary wave A (circle) from the September 2011 peak. Under this view, Primary wave B (circle) would carry gold higher through much of 2015. If the odds rise toward this latter view, we'll discuss it here and in EWFF.

[PCMNewsdesk]

Early this morning, [Gold] pushed to a high at $1179.17 and fell back sharply thereafter. This high occurred within the $1175-$1193 area we cited as one possibility in Friday's STU. Under this view, wave ii (circle) of Minor wave 3 down is ending and prices are set to decline toward $1100 or lower. But we noted Friday night that this scenario was "less probable" and my best assessment of today's market action does not materially change the odds. Today's decline to $1147.17 amounts to a 66% (2/3) retracement of the initial upward push from the $1131.85 low on November 7. This is not an abnormal retracement in a developing rally. Last week saw the 5-day Daily Sentiment Index (trade-futures.com) decline to 5% gold bulls, a record extreme dating to April 1987. The above chart shows another extreme. The most recent Commitment of Traders data shows that Small Traders, which represent the retail investor, have moved to their largest next short position in futures and options in 15 years. At the wave (2) high in October 2012 (see blue arrows), when gold was nearly $1800, retail investors held one of the biggest net-long positions. With gold declining 36% since then, the public has thrown in the towel on a gold rally; no mas, no mas. These sentiment measures do not guarantee a gold push but they are exactly what an analyst would expect near the end of a decline and the start of an advance. If the current rally is Minor wave 2 of Intermediate wave (5), gold should carry to $1214-$1255, the top end of which is the previous fourth wave high from October 21. Still, probabilities are just that and if gold declines below $1145, the rally scenario will be suspended. Instead, gold would likely continue down, toward at least $1100, as Intermediate wave (5) continues to subdivide.

[PCMNewsdesk]

[Gold] has traced out five waves up from the $1131.85 low on November 7 to the $1205.01 high on November 18. This structure should be the first building block in a larger advance that carries gold higher in 2015. The initial near-term target range is $1238-$1264, which includes the previous wave 4 extreme. Today's volatility resulted in gold retracing 38.2% of the recent rally, which may be enough to start the next wave higher. But if gold pulled back a bit more, that is acceptable too. Support is in the $1148-$1168 range. If gold breaks down through this area, prices could still be in Intermediate wave (5) down to new lows.

[PCMNewsdesk]

As we noted Wednesday, [Gold] has traced out five waves up from the $1131.85 low on November 7 to the $1205.01 high on November 18, which is labeled wave i (circle) on the 240-minute chart. Wave ii (circle) retraced a Fibonacci 38.2% of wave i (circle), ending at $1175.67. The push to today's high at $1208.20 is a smaller degree first wave, labeled wave (i). The implication of these wave labels is that gold will continue to work toward higher levels. The initial near-term target range remains at $1238-$1264, which includes the previous wave 4 extreme. A decline through $1148 would postpone the bullish potential just described.

[PCMNewsdesk]

[Gold] hasn't changed much over the past several sessions and neither has our forecast. The initial short-term target range for the rally remains at $1238-$1264, which includes the previous wave 4 extreme. A decline through $1148, which would be more than a 78.6% retracement of the rally from the November 7 low, would temporarily postpone the bullish potential.

[PCMNewsdesk]

News that seems contrary to conventional wisdom is a great backdrop for a second-wave low, which occurred overnight in [Gold]. Sunday, November 30, was the Swiss vote on whether the Swiss National Bank would be required by law to hold more of their reserves in gold (see Nov. 24 STU). Voters rejected the measure, which some thought would lead to a plunge to new lows for gold. Instead, gold briefly spike lower to complete wave 2 and then surged higher during the day session, starting wave 3 up. At the overnight low of $1146.57, which broke the $1148 level for 10 minutes when the results of the vote were announced, gold completed its correction and did not confirm the new low in silver. Wave 3 should now carry gold initially to $1255-$1270, the next short-term target. Greater bullish potential exists as wave (A) of B (circle) unfolds over the coming months.

[PCMNewsdesk]

After Monday's sharp spike higher, [Gold] has been consolidating the past two days, traversing the $1200 level. The next wave up, when it starts, should carry gold to the $1255-$1270 range at the least. This area includes the previous wave 4 high. We are less certain on the path gold takes up to this next target because it's possible for prices to first pull back to the $1167-$1185 area before starting the next wave higher. The pattern would become complicated if gold were to closed under $1150.

[PCMNewsdesk]

[Gold] has pulled back since the $1221.39 high on December 1. Today's $1186.22 low was at the top of the $1167-$1185 support range that was cited in Wednesday's STU. We label the rise from the $1131.85 low on November 7 as a series of first and second waves, which implies a strong third wave up in the near future. But right now it may also be interpreted as a three-wave bounce, "A-B-C," so gold's imperative is to soon start another rally phase that carries above the December 1 high. This advance should carry prices to the $1255-$1270 range, at the least. As stated Wednesday, a close under $1150 would complicate the pattern, which includes the raising the potential that the bounce to December 1 was the aforementioned "A-B-C."

[PCMNewsdesk]

There was not much movement in either [Gold] or [Silver] today, which keeps intact the analysis from last week. In gold, prices should soon start wave iii (circle) of Minor wave 3 up, which will be a solid rally to at least the next near-term target range at $1255-$1270. As long as prices do not close below $1150, the odds will remain strong for this upward push. Silver is similar. Prices should soon rally toward $17.71-$18.06 or higher, as the next wave up unfolds. The key closing level here remains $15.00, which we expect prices to remain well above. However, if our analysis is wrong and silver closes below $15.00, it would greatly weaken the near-term bullish case.