- I am not a practitioner of Elliot Wave Theory (EWT). After trying it, I have concluded that I am terrible at it. It is more of an art than science. However, I do follow the work of a few who are exceptionally good at it. Alf Field is the #1 (EWT) guy IMO for gold. Below are excerpts from his latest article via Jim Sinclair’s website: www.jsminset.com.
- I have warned repeatedly about the ‘financial weapons of mass destruction’: derivatives. Alf highlights his concerns over it as a possible Black Swan event. Alf Field is correct about the gold price. It is heading alot higher than most people imagine possible. Think US$10,000/oz! (emphasis mine)
Gold Correction Is Over!
by Alf Field, http://www.jsmineset.com/
There is a strong probability that the correction in the price of gold has been completed. This article has four separate sections. They are:
1. The Elliott Wave (EW) justification for thinking that the correction in gold is over.
2. Why corrections happen in gold from a fundamental viewpoint.
3. The extent to which manipulation affects the gold price.
4. A possible “black swan” event that could trigger a gold price surge.
The probability of this analysis being correct is high, perhaps 75%? Smaller probabilities allow for: (i) this to be an A wave of a larger magnitude correction; (ii) the current correction becoming more complex, perhaps reaching the lower price targets (e.g. -26%); and (iii) the possibility of deflation, defaults and depression emerging, also testing lower price targets.
The up move just starting should thus be Intermediate Wave III of Major Wave THREE, the longest and strongest portion of the bull market. The gain in Intermediate Wave I from $680 to $1913 was 181%. The gain in Intermediate Wave III should be larger, at least a 200% gain. A gain of this magnitude starting from $1523 targets a price over $4,500. The largest corrections on the way to this target, of which there should be two, should be in the 12% to 14% range.
A possible “black swan” event that could trigger a sharp gold rally:
To achieve the EW target of $4,500 on the next upward move will require something to trigger substantial new buying of gold. What could that event be? By definition, it will be a surprise to all market participants, a “black swan” event. That doesn’t prevent us from making a guess.
One likely area from which problems could emerge with very large numbers are derivatives. The Bank for International Settlements produces a list of outstanding derivatives twice a year. The latest report can be found at: http://www.bis.org/statistics/otcder/dt1920a.pdf. This reveals that the total notional value increased from $601 trillion (with a “t”) at December 2010 to $707 trillion at June 2011. Nearly all of the increase was accounted for by interest rate contracts which now have a notional value of $553 trillion, some 78% of the total.
As we discovered in 2008, derivatives are benign until losses occur. Once losses emerged from credit default obligations, it was game on for the GFC. Interest rate derivatives protect banks from interest rate rises. Most banks borrow short but have large loan books at fixed rates for long periods. Thus a big rise in interest rates could trigger claims on these derivatives.
For the time being, rates seem to be locked at virtually zero in the USA, but this is not the case in Europe. Europeans are learning the lesson that rates rise when investors become concerned that the borrower can’t repay the amount borrowed, let alone the interest on the capital. When we drill down further into the BIS statistics at http://www.bis.org/statistics/otcder/dt21a21.pdf we discover that $219 trillion of the interest rate derivatives are denominated in Euros, compared with $170 trillion denominated in US Dollars.
If just 10% of the interest rate derivatives in Euro’s produce losses, the world’s banking system would be looking down the barrel of a loss of $22 trillion. That is enough to bankrupt the entire world’s banking system, something that the politicians of the world could not tolerate. What would a bail out of $22 trillion do to financial markets? What would it do to the gold price?
If it is not interest rates, there are $64 trillion of foreign exchange derivatives and a “mere” $32 trillion of credit default swaps outstanding that could produce “black swan” surprises.