 Terror, Oil and Gold: The link intensifies
Mary Anne & Pamela Aden
The Aden Sisters
June 4, 2004
Courtesy
of www.adenforecast.com
The oil price is hitting record
highs. Gold remains in a bull market, despite its recent decline.
Terror and unrest are on the rise. Is there a connection between
these markets and world events? Absolutely, and it's intensifying.
Although we're not happy about
the reasons why, world events do affect the markets and they
provide insight into what's likely coming in the months ahead.
And the way things are shaping up, it's going to be very bullish
for gold.
BLACK GOLD & INFLATION
Saudi Arabia is the world's
largest oil producer and it's the only country with enough spare
reserves to weather a crisis. This makes Saudi Arabia a target
and it's been simmering under the surface. Terrorist attacks
have increased in recent months and they urged U.S. citizens
to leave following the shooting of five Western workers last
month, and again after 22 foreign oil workers were killed last
weekend.
This is one reason why the
oil price is hitting record highs because of concerns terrorists
could target the oil fields, which is already happening in Iraq.
So what happens in the Middle East affects all of us and the
markets, especially since there's currently less spare oil available
than at almost any time in the past 30 years. And if terror attacks
continue as we're currently seeing, it's going to keep upward
pressure on oil, despite the recent OPEC production boost.
The oil price also has a huge
effect on inflation. This month, for instance, producer prices
surged at an annual rate of 8.4%, which was the largest rise
in a year, following a 6% annualized rise last month. The reason?
Higher energy prices and if the oil price rises further, so will
inflation. This in turn will send gold higher since gold is the
ultimate inflation hedge.
 OIL:
POISED TO RISE FURTHER
Looking at Chart 1A,
you can see the oil price is at an all time high and the trend
has been up since 1999. During that time, the price has nearly
quadrupled.
More impressive, the leading
(long-term) indicator is not overbought (see Chart 1B).
In fact, it has plenty of room to rise further before it is.
So despite the oil price rise we've already seen, this chart
is telling us $50-$60 oil is not out of the question. And if
that happens, it's going to really affect inflation and gold,
especially since other commodities are rising at double-digit
levels too.
Plus, as Marc Faber points
out, by 2010 India and China will have a combined population
of 3 billion people, or 40% of the world's population. And with
these countries still in the early stages of economic development
and growth rates at 8-9%, demand levels for raw materials are
being propelled to heights the world has never seen before. In
China alone, the number of cars is increasing by 50% each year.
So it's easy to imagine what this could do to the oil price,
sending it higher than most people expect.
We believe the inflation seeds
have been sown, which explains why bond yields have been rising
sharply, stocks are topping, gold remains bullish and the U.S.
dollar is bearish.
How high inflation goes remains to be seen, but with Iraq now
costing nearly $7 billion a month and heading for an overall
cost more than double that of the first Gulf war, inflation could
surprise on the upside as the U.S. intensifies its deficit spending
and money supply growth, which are already soaring..
SO WHY HAS GOLD BEEN
WEAK?
 Gold is a cyclical and seasonal market. It
tends to be soft in the Spring and early Summer months until
demand picks up as manufacturers begin buying for the holidays.
Our leading (medium-term) indicator on Chart 2B captures
these moves well.
Gold's intermediate moves are
labeled as A-D on the chart. The As and Cs coincide with gold
rises while the Bs and Ds coincide with the declines. As you
can see, gold has been in an intermediate D decline since January.
The rise in March, in hindsight, was part of a topping process
in the C peak before gold fell (see Chart 2A). The D decline
was then fully expressed as the indicator fell to the low levels
that coincide with prior D decline lows. The fall was steep but
gold held near the 65-week moving average and it's now bouncing
up from this important support. The prior D decline a year ago
was similar.
D declines are usually the
sharpest intermediate declines in gold's cycle as they wring
out the excesses of the previous C rise. In a bull market, the
D decline lows will be higher than the prior B low, which is
exactly what happened.
This D decline lasted on the
longer side of a normal D decline but since the dollar's rebound
rise is now over, these markets are now in synch to resume their
major trends. This means gold's A rise is now getting started
as long as gold stays above $385.
A rises tend to be consolidation
rises. In other words, they generally rise to test the highs
but they don't usually rise to new highs. So if gold closes and
stays above $400, it could rise to $430. And if this is all we
get for now, the bull market will still be very solid. The A
rise could last until July. If gold breaks clearly above $430
during this rise, then it would be super strong because gold
would be entering a stronger phase of the bull market.
More important, it's good to
know the worst is over for this year assuming the bull market
stays intact. And it will as long as gold stays above its 65-week
moving average at $377. This means if we don't see a new high
until the Fall, gold will still be fine and on track.
June
4, 2004
Mary Anne & Pamela Aden
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/
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321gold Inc Miami USA
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