The Dow Report: A Brief Look at Gold
By Tim W Wood CPA, July 16, 2004
In April at the intermediate term cycle high in gold I called that the top for that cycle had occurred and that we should see a correction carry gold down into the intermediate term cycle low. Based on the phasing of the shorter term cycles at the time, the idealized timing for that low was sometime in or around July. The expected price target was $355. This target was based on the average declines seen by other intermediate term cycle declines within other bullish cyclical advances. This historical average is 17.94%. So when we apply this average to that seasonal cycle, the target of $355 was given. In this case, the decline was only 14.25%, which was slightly less than average. We now have seen the low for this intermediate term cycle and it did occur ahead of schedule and with a less than average decline. So far, so good.
Below is a chart of gold going back to October 2001. The indicator in the top window is a ratio used to show relative strength. This graph is simply the XAU divided by the price of gold. I have noticed that at important cyclical turn points there are very often divergences between this indicator and gold. This makes perfect sense because typically we see the gold stocks leading the metal.
Notice that these divergences occurred at the May 2002, the February 2003 and the April 2004 intermediate term tops. These divergences were also seen at the November 2001, the August 2002 and the April 2003 intermediate term cycle lows as well.
As I explained above, gold made the most recent intermediate term cycle low ahead of what the averages suggested. This low occurred on May 10, 2004 at $371.30. The Gold/XAU relative strength indicator bottomed one trading day earlier on May 7, 2004. Technically there was divergence at the May 10, 2004 intermediate term low, but only marginally. As you can see, gold has made a series of higher highs as it has advanced out of this low. However, we are now once again seeing a warning sign with the divergence or non-confirmation between Gold and the Gold/XAU relative strength indicator. These divergences can go on for quite sometime or they can even be corrected.
Now the task is to monitor the health of the new intermediate term cycle advance. My original Gold Report was released in April 2004 and I just completed an update to this Gold Report. In this update I outline the statistical probabilities for the current intermediate term moves in both gold and the dollar. The research in these documents looks at both the bullish and the bearish sides of these markets. In doing so I give the bench marks which MUST be met for the bullish case and then the bearish consequences if these minimum objectives are not achieved.
Tim W. Wood
© 2004 Tim Wood