The purpose of this essay is to further define what we have already learned about the harmonics in the gold complex to formulate predictive models utilizing Fibonacci principles. Within this endeavour, we are about to revisit some of the observations made in our first essay on the subject, as well as expand our examination and modelling technique into a broader scope, by defining the harmonic signature's of both gold and the Gold Bugs Index (HUI) against the S&P 500 (SPX).

Certainly, investing in the precious metals complex has been an interesting experience for all involved over the past couple of years. For most in our modern day society, the proposition has not entered their minds as of yet, at least not in a serious way, as participation levels as a measure against the total investment universe are at historically low levels, and are likely to remain there for the entire initial stage of the bull market. Therefore, it should be understood that as participation levels in the precious metals markets increase, modelling parameters will change, volatility and scale will expand, and we intend to mark those changes as the bull matures in an understandable fashion. At present, we are progressing through the current progression sequences of both gold and the HUI as expected, based on the parameters our modelling established earlier this year. If you have not read my first essay on the modelling technique we are about to employ in this study, you will find it attached now, for your convenience. http://www.gold-eagle.com/editorials_03/captainhook041603.html

It is necessary at this time, to now examine several of the observations derived in the above work, in order to establish a base from which to expand on for the purposes of this examination. The first thing we will need to focus on is gold itself, and how it is progressing through it's current sequence, which is now very close to completion. Indeed, gold seems to be progressing as expected, evidenced by what I originally had projected, as follows:

"Based on the observation gold seems to work into higher progression sequences in 15-month time cells, I do not expect it will take out the previous highs in the three and a half months left in this cycle. However, once gold commences a new 15-month progression sequence in August of this year, I would expect it to pulse through the previous highs not long after it begins, if our work with gold's relationship to the HUI above has any predictive value."

Sure enough, gold has not pulsed through the highs established in February of this year, and has been coiling the past several months, gaining energy to make the push through it's previous highs. (See Figure 1)

Figure 1

Looking like it wants to form the infamous "Teacup With Handle Formation", we are fast approaching August now, a projected low point for gold based on the harmonic signature established above. Taking it forward from this bottoming window, which we are now within, we expect gold to perform based on our definitional model, as follows:

• Based on the observation Phi, defined as a coefficient factor of 2 (2 /1), has proved an accurate verifier to our basic model's construct, it is now possible to label the coefficient 2 as Phi, as it pertains to the entire gold complex, and as it applies to the defined advance sequences of this gold bull market. Notice that it is also possible to identify the coefficient of .5 (1 / 2) as phi, as the template to characterize the corrective phases of the sequential advance, with the recent correction in gold attaining an almost perfect 50 % retracement off the highs.

In terms of price and time then, we would expect gold to reach an ultimate high value of ~ $500 (all prices in US dollars) in the new progression sequence as we approach the halfway mark in the next 15 month time cell (300 trading day cycle), beginning in August of 2003, putting us in the April / May area of 2004. Further to this observation, we can expect gold's performance for the rest of this year to be as follows:

• We know that once the Gold/HUI Ratio breaks the bear flag, that is currently restraining it's decent, in May of this year, it is likely the HUI will hit it's high value range sometime within the first 4 to 6 months of it's progression into a new advance sequence, but gold will not. Gold peaked in May of '02 at $325, which was14.2% lower than the eventual $379 top eight months later. Using the same variance in the second progression sequence off of our projected topping value of ~$500, we get an initial high value for gold's first impulse higher into the new progression sequence of $429, which should occur in coordination with the HUI's first run at high values for it's progression sequence sometime in the late November '03 to January '04 time frame.

Previous occurrences are certainly instructive when it comes to projecting future probabilities, and the above assertions are no guarantee we will see a repeat performance, as it should also be observed the time it took for the HUI to double in the second progression sequence was two months less than the first. This puts us into an October window if this pattern repeats, as it appears each successive impulse is increasing in intensity, with a possible impulse in the HUI up to the ~285 area within the above timing possibilities. (See Figure 2)

Figure2

One thing is for sure, if the HUI is trading at ~285 in the October / November area, it would be a highly probable topping area, remember however, our work shows it could be exceeded by May of 2004, with ten months left in the current time cell. Notice the corrective sequence off the highs from the ~285 target could be quite severe, up to 50% of the advance from the 114.35 mark (closing basis) denoted above, something to keep in mind.

To finish up with this re-examination / fine-tuning of our initial findings in the aforementioned essay then (please note that I have altered some of the original observations and charts), and armed with the knowledge that gold should be trading in the ~$429 by November of this year, it seems appropriate to show gold against the HUI at this time, to see if the ratio's harmonics verify our model constructs and hypothesis, which was alluded in the above bullet. (See Figure 3)

Figure 3

When we look at Figure 3 above, it should be noted the HUI has ran two successive six-month time cells in the last consolidation, and in order to attain a ratio of 1:1, we would then have to run two time cells in rally mode, beginning in late May. Additionally, one should notice that using a 1.5 value on the Gold/HUI Ratio as the target within a defined time frame that matches our previous chart projections, and based on identified time cells, we arrive at a projection high for the HUI this year of ~ 286 (429 / 1.5) in the November area, as well. So what have we learned by putting this all together?

• First and foremost, the basic underpinnings of our model's construct are unquestionably verified, with the relentless decent of the Gold/HUI Ratio over the past 25 months within exacting values as it pertains to Phi / phi, which also confirm the basic construct of the model.
• Based on the timing cells identified in Figure 3, it is possible, if not likely, that a substantial rally in the HUI will commence in late May, and could possibly last up to a full year, with the initial impulse in the next progression sequence topping at ~ 286 (429 / 1.5), in the November area, with a potential major top (to end Primary Wave A) at ~ 333 (500 / 1.5) occurring sometime around July of 2004.

Special Note: Please keep in mind that if the Gold/HUI Ratio trades lower than ~1.5 factor identified, the HUI could trade commensurately higher with gold at ~ $500. As well, it should be remembered that one should use the timing as a guide, and not an absolute. If the HUI releases up to the extreme price targets ahead of the timing projections, sell.

And there you have it, our previous work checked, fine tuned, and verified. So, what comes next? More Verification. Why? Because the more verifiers one uses to support a model's findings, the greater the integrity of the model and it's conclusions. So here it goes, we are now about to examine the gold complex against stocks, as measured by the broad base found in the S&P 500.

The significance of this exercise lies in the fact the SPX is negatively correlated to the gold complex, so if our model's construct is verified against this measure, it will add a higher degree of integrity to the conclusions, than simple intra-market measures within the same group. It seems appropriate to begin with gold itself, so lets take a look at the Gold / SPX Ratio for starters. (See Figure 4)

Figure 4

As with gold itself, the energy structure of the pattern can best be classified as a 'Teacup With Handle Formation" in my opinion, although many would view it as an "Inverse Head & Shoulders Pattern". Quite frankly, it really doesn't matter, because they both work, as the energy apparent in the pattern is demonstrating that prices are heading higher, in a rather dramatic fashion, I may add. The one distinguishing characteristic this ratio possesses against gold itself is the fact retracements are more shallow. This is primarily due to the fact retracements in the SPX are a lot more shallow than most realize, although you would never know it by watching most financial news programs. The question then arises, " does this nonconformity to our model's construct mean that progression sequences will not be characterized by Phi (2) ?" Not at all.

In fact, I would hazard a guess that once Primary Wave A in the above is complete with Wave E indicated, we will indeed see a 50% correction of the entire move off the lows. Now that's going to be a big swing trade, and a bone jarring correction in the precious metals complex. But it appears, upon close examination of the progression sequences in the Gold / SPX Ratio, that we won't have to worry about that until next year. (See Figure 5)

Figure 5

There will be corrections along the way to the targets indicated above, very convincingly apparent bearish moves indeed, but I believe that our model remains both sound and functional in the above measure, which will surprise some of the most ardent gold bulls once they actually see it happen. One of the most telling observations one should make in the above chart, from a purely perceptual (symmetrical) standpoint, is the similarity between the corrective sequences in the bull move to date, both being four quarters in duration, and denoting a high degree of scepticism.

From a numerical standpoint, it should be very apparent upon close examination of the calculations presented above, that our model's constructs work quite well with regard to measuring the harmonic signature of gold against stocks. The relationship can be summarized, as follows:

•  The continuity of adherence in the Gold / SPX Ratio's progression characteristics to our model's constructs significantly increases the validity of the projected targets and timing of the next progression sequence in gold's bull market, as the measure of stocks against gold acts as an external verifier.

•  More specifically, one should notice that the Gold / SPX Ratio has indeed been progressing off of corrective sequence lows at a Phi of "2", and that both the base model computation and 'Golden Ratio" projection point to the identical target of .89 to end the first significant advance in the bull move.

•  A special note must be made regarding timing, as the timing cells presented above suggest a compressed and explosive move should characterize the next progression sequence, culminating in a projected top in the middle of the second quarter of 2004, in and around the May time frame, identified in our analysis of gold's independent progression signature characteristics, as well.

So what does this all mean in terms of actual numerical targets for gold and the SPX next year? We already know that gold is suppose to be ~$500 in May of '04 based on our analysis of gold against the gold complex, so lets work backwards with this one. How we can accomplish this is by utilizing an independent method of calculating a target for the SPX. It just so happens we have this information available from my last essay, which you will find attached now. http://www.safehaven.com/showarticle.cfm?id=874

• As you can see in the above, I have projected a low print on the SPX, in and around the same time frame identified as a turn area in our work here, of approximately 600. Using this figure as the base in the Gold / SPX Ratio then, and working backwards, we arrive at a targeted gold price of$534(600 X .89), in May of 2004.

It's like peeling an orange, it takes a little time and energy to get the job done, but once you do, you get to the good stuff inside.

Let's move on to the gold stocks (HUI) now, as this paper is getting a little long in the tooth, and I wouldn't blame you for taking a stretch right now. But, for the die-hards who are glued to their screens, you will surely enjoy our concluding excursus into this study. I'm not going to warm you up on this one, as if you are not hot already, I would be a little surprised. An examination of the harmonic signature present in the HUI / SPX Ratio is the final measure of gold against stocks for the purposes of externally verifying the price targets and timing derived utilizing our model in this study. And as you will see, those bullish on gold's future prospects are not to be disappointed. (See Figure 6)

Figure 6

Again, what you have before you is what I hope perceived as a succinct presentation of a plethora of important data points pertaining to our study. On first glance, and in comparison to gold's performance against the SPX, it should be noticed that the pivot in the above ratio was much less dramatic, as gold stocks sprung off of their lows well ahead of the significant move in the metal itself. Within this same observance, it should be noted it appears the HUI will peak against the SPX well ahead of gold as well, maintaining the traditional lag gold has to it's related equities. So, what are the details the above is telegraphing to us then?

• It would appear, based on the definitional framework applied above, that the HUI / SPX Ratio is advancing within the constructs of our base model. However, we do not get conformity between the base model and the Golden Ratio computation. Assuming a corresponding print on the SPX of 850 (the mean price on the high day in the ratio that occurred 01/27/03), we arrive at a projected high value for the present progression sequence in the HUI of ~ 289 (.34 X 850) utilizing the base model Phi, and ~ 357 (.42 X 850) using the Golden Ratio method. Special Note: It makes a lot sense to simply follow the ratio itself for targeting purposes, as the SPX may not be trading at the target identified above when we think. See the next bullet.
• Working within the parameters of approximate four-quarter time cells, we appear to be halfway through the current span; with the next progression sequence topping area identified, utilizing our model constructs, being in and around February of 2004.
• Thus, it appears that liquidity in the financial markets is a factor in determining topping values for the gold stocks, as projected high values for the HUI, do not occur at absolute lows in relation to the SPX. This observation lends much credence to the hypothesis that an ultimate high for the HUI will occur closer to February than July, which was indicated in our examination of the Gold / Gold Bugs Ratio, indicating the SPX will be plumbing it's lows closer to the July '04 area.

In summary, and in an effort to be expedient, I will not re-list the bullets above that formulate the basis of our findings. However, if one were to take a quick read of them from top to bottom, it should become apparent another leg in the gold's bull market is likely dead ahead. I think it is safe to say we have sufficiently verified this ascertation rigorously enough to state the following:

• Beginning no later than August of this year, a significant advance in the gold complex should ensue, which will be led by gold related equities. Based on the modelling technique utilized in this study, and the subsequent harmonic signatures identified, the rallies in the gold complex components should be characterized as follows:
• Gold should achieve an initial high value of ~ $429 by November of 2003, and a subsequent high of ~ $500 no later than May of 2004.
• Gold shares, as represented by the HUI, should both lead gold and attain initial high values as early as late September, but no later than November of 2003, with the possibility of a potential 'fifth of a fifth wave extension' taking the HUI to an ultimate top in the 330 to 360 range, to end Primary Wave A higher, no sooner than February of '04, and no later than July, with the former more probable than the latter.

With the degree of scepticism currently being encountered in the precious metals complex, it is my personal belief that the more aggressive targets above could easily be attained within this next progression. The big question that remains unanswered is, "what is going to the trigger?"

And there you have it.

Good investing all.