false rumor, encouraged and spread by some less than knowledgeable writers, of the oil nations turning away from the dollar was the catalyst for the stampede this past week into Gold. That rumor was later decisively quashed by Reuters. But, facts did not matter, for the institutions were turning to Gold simply because the returns were too good to be ignored anymore. If they were going to continue extracting unjustifiable fees from gullible clients, Gold had to be included in portfolios.
$Gold has clearly moved into Wave V of an Elliot Wave framework. That wave is characterized by money chasing price action. Buying is being done out of a belief that the price will move higher. In short, pure greed, emotion rather than logic, is in control. That is what happened in the Gold market this week. People were buying Gold simply because of a belief that it would go higher. Facts to support those beliefs were generated afterwards.
The growing fervor of that emotionally charged buying can be observed by the mini parabolic curve that has developed. It has been marked in the top graph on the previous page. But, while emotions may have been in control, we admit to enjoying it. Though, we must note, all parabolic curves are converted into disappointment. The bearishness on the U.S. dollar is reaching an extreme. In this coming week’s Gold Thoughts we will review Federal Reserve actions, not their words. Federal Reserve policy, for all the talk and smoke, is effectively tightening at this time. That suggests both dollar strength and a weakening U.S. economy ahead.
We do need to note, though, that the funds being provided to the U.S. financial system by Federal Reserve are flowing directly into financial markets. The preeminent reason that paper equity markets, Gold, Silver, and oil moved higher this week was margin buying by funds and other investors. These markets are at this time in minibubble status, and disappointment will reappear. The U.S. dollar is deeply over sold, and has been so for some time. Such a development should be a prelude to, at a minimum, a technical bounce in the value for the dollar. That view is clearly not aligned with the consensus. The panic buyers of Gold this week may come to be disappointed that immediate gratification does not occur.
Wave five is the final leg in the direction of the dominant trend. The news is almost universally positive and everyone is bullish. Unfortunately, this is when many average investors finally buy in, right before the top. Volume is lower in wave five than in wave three, and many momentum indicators start to show divergences (prices reach a new high, the indicator does not reach a new peak). At the end of a major bull market, bears may very well be ridiculed (recall how forecasts for a top in the stock market during 2000 were received).
