Gold has huge upside potential this year: Report

CA ADITYA SHARMA (CA IN PRACTICE ) (16719 Points)

19 July 2011

SINGAPORE: Spot gold could rise as much as 21 percent in a sharp rally by the end of the year to stand around $1,940 per ounce, technical analysis shows, Reuters commodities analyst Wang Tao forecast on Tuesday.

"The strong bullish momentum built in the past two weeks is likely to snowball into the future," said Wang Tao, naming the herd instinct of investors as the reason why gold prices have surged along with other commodities in a big bull cycle that is expected to last the next several years.

His conclusion is based on Elliott wave theory, a powerful technical analysis tool that studies patterns on price charts, which are believed to reflect social or crowd behavior trends, and Fibonacci ratio analysis, a method market technicians use to predict future movement of a trend based on preceding events.

Wang Tao's interpretation of the chart pattern shows a big bull cycle could have originated from a 1970 low at $34.95, from which a subsequent rise to a high of $835 in 1980 only completed a big wave "A", the first part of an "A-B-C" wave cycle.

The next 20 years of retracement from the 1980 high to a 1999 low of $251.70 is labeled as the wave "B", with the current rally interpreted as a wave "C".

In a long-term outlook in April, Wang said gold might peak around $1,545 per ounce or rise sharply towards $1,941 by the end of this year.

The two prices represent two 161.8 percent Fibonacci projection levels, based respectively on the length of the wave "A" and the rise from the wave "I" to the wave "III" peak of $1,030.80 in 2008, Wang explained.

Signals turned bearish after gold touched a high of $1,575.79 in May, about $31 above the projected $1,545 target, and the following consolidation over one month ended with a sharp fall to $1,478.01 in July.

"But the signals were too short-lived, and were totally reversed by a quick recovery of the drop," Wang added.

That's because once the 161.8 percent Fibonacci level is broken above, gold is theoretically heading towards the 261.8 percent level at $2,345 over the longer term.

There are several explanations about the factors that are driving this crazy bull run, ranging from the weaker dollar to a disappointing interest rate level, but Wang says group psychology stands out over the rest.