While we believe precious metals are trying to establish an important low nearby, we acknowledge that the chart patterns for gold and silver futures have been difficult to count for more than a year. Seeking clarity, we have turned to an examination of the Philadelphia Gold and Silver Sector Index (symbol XAU), which typically follows the prices of metals in the big picture. The index needs to do a bit more work before it prints a completed downward count, but it does not have much farther to fall in terms of price.
When gold and silver made their highs in 2011, XAU was already hinting at the prospect of a reversal by making slightly lower highs. In fact, the index often diverges slightly from metals prices ahead of turns on a faster time frame, such as on a weekly chart (not shown here). The divergence in 2011 wason a larger scale.
Amid the competing forces of momentum for metals and exhaustion for the index, it is not surprising that the first downward move was sloppy. On the other hand, the index showed a nicely defined structure throughout the remainder of the decline, with wave (iv) behaving just as an Elliott wave textbook wouldpredict.
Counting downward from the end of wave (iv) in late 2014, it appears that the index is tracing out a regular five-wave impulsive (non-overlapping) move into a low. The idea that the index might find support nearby for the end of small wave 'iii' matches well with our expectation that the Dollar Index is making an interim high around now. A renewed decline into early or middle 2016also would fit with our Dollar projection.
Traders working on weekly or daily time frames might look for a small bounce to approach resistance near 55.64 in coming weeks, but we caution that another low should be on the way. After XAU has seated a final low - perhaps near the Fibonacci extension level at 28.54 - we would begin lookingfor a sizeable upward retrace into 2017.
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