Elliott wave analysis is the blade-proof glove with which "to catch a falling knife"
In the wee morning hours before dawn on Thursday, June 20, the precious metals' rooster crowed, "Cock-a-doodle-DOH!"
It was the ultimate wake-up call:
First, gold prices plummeted 4% then 5% then 6% below $1300 per ounce to their lowest level in nearly three years. Soon, silver followed in an even steeper drop below $20.
At 6:45 am, one popular news outlet went live on the scene and wrote: "It's a bloodbath at the moment with most technical support levels being broken ... calling a bottom would be like trying to catch a falling knife." (Marketwatch)
As for what triggered said knife to fall, you ask?
Well, according to the usual experts and every mainstream news outlet under the sun, the gold and silver bottom fell out after investors digested stimulus-tapering comments from the June 18-19 Federal Open Market Committee minutes.
Upon closer examination, though, there are several problems with this notion:
- Fears of the Fed starting to twist shut its QE tap are anything but new. Gold and silver investors have had months to digest this potentiality.
- Not to mention the fact that the June 19 minutes made no direct mention of actually stopping its bond-buying program. FED Chairman Ben Bernanke was hypothetical at best, saying, "IF the incoming data are broadly consistent with ... and remain broadly aligned with our current expectations ... it would be appropriate to moderate the monthly pace of purchases later this year."
That's hardly a cease-and-desist order.
- And, last, gold and silver prices did not fall immediately after the FOMC minutes were released. In fact, they rose. Headline: "Gold Prices Show Muted Reaction To Upbeat Fed" (Mining.com)
In plain terms: Gold and silver's June 20 thrashing was not a news-driven move.
That leaves this explanation: The gold/silver sell-off was the most probable scenario as outlined by the Elliott wave playbook. In this case, that playbook is EWI's Short Term Update.
In the June 17 Short Term Update -- before the FOMC meeting even got started, mind you -- our analysis set the bearish stage in gold and silver via these charts and analysis:
"[Gold]'s overall trading remains weak. The bounce we noted last evening is over.... A decline through $1373 should indicate that wave __ of __ down is under way. The downside potential indicates at least a sell-off into the $1250-1300 range."
"[Silver] remains weak and prices appear on the verge of declining to new lows beneath $20.07.... Our near-term stance remains bearish."
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This article was syndicated by Elliott Wave International and was originally published under the headline Gold and Silver: A Great Day to be a Bear. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
