 Back
to the 1970s
Mary Anne & Pamela Aden
The Aden Sisters
January 20, 2005
Courtesy
of www.adenforecast.com
Gold's bull market is alive
and well since reaching a 16 year high in early December at $456.
And the decline we've seen since then is normal.
Gold's 16 year high last month
reinforced that the current bull market has now clearly outperformed
the bull markets in the 1980s and 1990s in both time and price
gains. This confirms the current bull market has now been the
strongest since the 1970s and it could be similar, eventually
reaching $800 or more.
It's not really surprising
when you see the similarities compared to the 1970s. The most
obvious is the high oil price. It rose over 400% in 1971-1974,
which is about the same as the 400% rise oil has had in the last
six years.
The budget deficits and an
extremely loose monetary policy are also similar, as are the
costs to finance an expensive war.
Furthermore, just as the industrialized
world now has stiff competition with China and India causing
disruption in the manufacturing and service industries, the 1970s
had a similar situation with Japan and Korea. In both cases,
it hurt the West.
China and India are also keeping
upward pressure on commodities due to their growing demand. In
the end, it's very possible we'll see rising inflation and slower
growth, which would be very good for gold.
GOLD TIMING: On track
chart 1
Meanwhile, many of you know
how well the 65-week moving average has worked in identifying
the major gold price trend over the years (see Chart 1).
Gold rose above this average in August, 2001, triggering a major
buy signal, and it hasn't looked back. This moving average is
currently at $408 and gold's major trend is up above that level.
Since August, 2001, the times
gold declined to this average was during a D decline, which is
precisely where gold is today, since what we call a D decline
started last month.
Many times these intermediate
moves will tell us if a major change is in the making and so
far they're signaling the bull market is solid. The latest "test"
was when gold hit a high last month. The previous C rise performed
well taking gold to a new bull market high, which is normally
the case during a C rise, and that was important for the strength
of the major uptrend.
For now, a D decline is underway
below $435 and we could see gold stay weak until the end of January
to mid-February time period. This would be normal, but if it
ends up lasting as long as the previous D decline did, we could
see weakness until April. The end of this decline will be the
next ideal time to buy new gold positions.
GOLD SHARES: Disappointing
Gold shares have been disappointing.
It's been frustrating for investors to see gold shares end the
year lower than where they started as they watched gold rise
to 16 year highs.
chart 2A and B
We know that gold shares move
with gold (see Charts 2A and B). The vertical lines
show how gold shares rose during gold's previous C rises going
back to 2001. But another pattern is developing too...
Of the five C rises gold's
had since 2001, the 2nd and 3rd ones in the XAU gold share index
were similar to the 4th and 5th ones. The best gold share moves
took place during the 2nd and 4th C rises when gold shares shot
up to new highs, strongly outperforming gold. In both cases,
the following C rises (#3 and #5) were lackluster rises in gold
shares, despite the strong gold price.
If this pattern continues,
we could see the strongest gold share rise take place later this
year with gold shares hitting new bull market highs.
chart 3
The only thing that bothers
us is the big picture on Chart 3. This shows the gold
shares to gold ratio going back to 1969. You can see the rise
since 2001 has so far been a rebound rise within a major downtrend
that goes back to 1969. The peak in the ratio occurred a year
ago at the major downtrend. And the lack of strength in gold
shares last month was not a good sign because the ratio failed
to break above the major downtrend.
The bottom line... gold shares
are at a critical juncture compared to gold. If the alternating
strong-weak C rises continue, then gold shares will be the better
investment. But if gold shares fail to strongly outperform gold
this year and the ratio falls below its 2004 low, the alternating
trend since 2001 will change and gold will then clearly be the
better investment compared to gold shares.
If gold outperforms gold shares
this year, however, it won't affect the bull market. Note from
1973 to 1980, the ratio fell sharply as gold strongly outperformed
gold shares. In other words, an investor would've wanted to be
heavily invested in gold at that time.
Meanwhile, until the trend
clarifies, it's best to keep half of your portfolio in metals
and half in gold shares. Then as it becomes clearer, we'd adjust
and go heavier into the strongest area. For now, keep your gold
coins, gold contracts, gold mining shares and the new
gold ETF, GLD.
Mary Anne & Pamela Aden
info@adenforecast.com
The Aden Forecast
Mary Anne
& Pamela Aden are internationally known analysts and editors
of The Aden Forecast, a market newsletter providing specific
forecasts on gold, gold shares and the other major markets.
For more information,
go to http://www.adenforecast.com/
321gold Inc Miami
USA
|
