Steven Hochberg, Elliott Wave International, on What's Going on With Gold

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Given gold's recent volatility, what is the Wave Principle forecasting now with regard to future market behavior? Are the wave patterns suggesting what the market is likely to do or not do over the coming six months? Steven Hochberg, Chief Market Analyst for Elliott Wave International, gives The Gold Report his insights.

Steven Hochberg is Chief Market Analyst for Elliott Wave International, a financial forecasting firm in Gainesville, Ga., and a close associate of Robert Prechter, who founded the company in 1979. He is also co-editor of the financial newsletter The Elliott Wave Financial Forecast and Short Term Update. Mr. Hochberg began his professional career with Merrill Lynch & Co. and joined Elliott Wave International in 1994.

Here The Gold Report gets his latest insights on the outlook for gold according to the Elliott Wave Theory.

TGR: You have indicated that you expect to see a decline in the price of gold: ”There is greater bearish potential than even a decline to around $450, but we won’t know for certain until we see the technical make-up of the sell-off toward this level.” With gold now closing hovering in the mid-$600s, do you still forecast a decline in the range of $450? If so, do you see gold tracking downward in the near term or later in the year?

SH: Gold completed its upward correction a few weeks after we last spoke, on February 27, at $699, basis the June contract. Prices tested this level in late April and since then have come off about $50. We think this decline is the start of our forecasted move.

TGR: Have you seen any significant changes in investor sentiment toward gold in the past three months? Are there any new trends emerging that give greater support to gold? Conversely, that would undermine gold’s rise?

SH: There was a definite change in investor attitude toward gold at the April retest of the February high. Investor optimism reached 90% according to the Daily Sentiment Index. Historically, such extremes signify that a gold rally is in its late stages. This extreme happened to coincide closely with the high. At the same time, numerous stories started to pop up stating that gold was on its way to $800 or higher. So the backdrop was conducive for a gold high and subsequent reversal, which appears to be under way.

TGR: Given the extreme volatility, what is the Wave Principle forecasting now with regard to future market behavior? Are the wave patterns suggesting what the market is likely to do or not do over the coming six months?

SH: Gold’s trend in the coming months should be down. The decline, which will be punctuated by countertrend rallies when pessimism becomes extreme in the near term, should eventually draw prices to below $500, which the Wave Principle indicates is the minimum downside target. Once prices fulfill this forecast, we will assess the pattern and indicators to determine if there is greater bearish potential, or if a significant and long-lasting bottom is forming that will lead to a major price advance.

TGR: You stated in our previous interview with you: “Economic conditions have nothing to do with when and how gold moves. For example, most people view gold as the ultimate inflation hedge. Yet suppose you knew for certain that inflation would triple the money supply over a period of 20+ years. What would you expect gold prices to do? Most gold investors would expect the price to soar. Well, from 1980-2003, M1 more than tripled, and gold prices lost over 50% of their value.” This opinion seems contrary to what other pundits are saying. Namely, that the more value the dollar loses, the more attractive gold looks and the higher the price goes.

SH: A big mistake pundits make is to assume a fixed inverse correlation between the US dollar index and gold. There is none. There are indeed long periods of time when the dollar goes down and gold goes up (and vice versa) but there are other times when they both rally or decline together. For instance, from April 1995 to February 1996, the US Dollar index rallied over 8%. Over this same period, gold was up nearly 6%. We find that it’s best to analyze each market individually instead of assuming a relationship that may or may not exist, which will get you into analytical trouble more often then not. This holds true with nearly all markets.

TGR: You mentioned in our last interview that the only precondition for application of wave analysis is that the market being analyzed must be freely traded --- do you believe that gold is freely traded? GATA has gathered an inordinate amount of evidence that the gold market has been managed since 1994 by a cartel consisting of bullion banks (Goldman Sachs, JP Morgan Chase, etc.), the International Monetary Fund, the U.S. Exchange Stabilization Fund, the U.S. Federal Reserve, and the Bank for International Settlements.

SH: I am not intimately familiar with all of GATA’s arguments, so it is difficult for me to comment on specifics. I do know that there are some highly intelligent people in the organization and others who agree with GATA’s view. My own personal views do not lend themselves to grand conspiracies, but I try to keep an open mind when presented with evidence. The key for me is to look at a market and see if there is a clear and compelling Elliott wave. If I see one, then odds are extremely low that the market in question is being manipulated to any degree that would change its course. If it were, there would be no wave pattern. As for gold, you can tell from our discussion that I do see a clear Elliott wave pattern. (5/29/07)

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