* Spot gold could rise as much as 21 pct in a sharp rally by yr-end
* Bullish momentum seen snowballing into the future, analyst says
* Price has exceeded 161.8 pct Fibonacci level, heading for 261.8 pct level
SINGAPORE, July 19 (Reuters) - 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.
Technical outlook chart: http://link.reuters.com/rab72s
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.
For example, the charts of spot gold and the yield of the U.S. 10-year treasury note do not show a strong correlation:
http://link.reuters.com/jeb72s
While a comparison chart illustrates that the weaker U.S. dollar does contribute to stronger gold, that may not be the only force propelling gold to record highs:
http://link.reuters.com/beb72s
From a technical point of view, almost all markets are emotion-driven, Wang said, adding, "The most critical factor behind the bull run could be the herd instinct, or so-called group psychology."
** Wang Tao is a Reuters market analyst for commodities and energy technicals. The views expressed are his own.
No information in this analysis should be considered as being business, financial or legal advice. Each reader should consult his or her own professional or other advisers for business, financial or legal advice regarding the products mentioned in the analyses. ** (Reporting by Clarence Fernandez)