 Inflation
has Returned
Mary Anne & Pamela Aden
The Aden Sisters
July 15, 2004
Courtesy
of www.adenforecast.com
Back to the 1970s? That was
the title of a recent cover story in The Economist. Some of the
similarities between what's happening now and what happened then
are worth discussing because they'll affect us all and our way
of investing.
Even though there are differences
between now and then, the end result was inflation, which we're
currently seeing. And while it may not become as extreme as it
did in the 1970s, inflation is headed higher.
Even though Greenspan is playing
down inflation saying it's unlikely to be a serious concern,
the numbers are telling us otherwise. Here's the latest
Last month import prices soared
at an annual rate of 19.2%. Consumer prices had their biggest
jump in 14 years this year with the latest rise at 7.2% annualized.
This included a 55% surge in energy prices and a nearly 11% gain
in food prices (both annualized). Excluding these, the popular
core rate was obviously less but since we all eat and drive,
the core rate is actually meaningless.
Producer prices reinforced
the other inflation figures. They too have soared the most in
14 years over the past year with the latest up at an annual rate
of nearly 10%. Energy and food prices surged over 19% and 18%
annualized, respectively.
So who says there's no inflation?
There is, and it's soaring.
In the 1970s average world
inflation soared to 13% and it stayed high for eight years, following
a 2-3% rate throughout most of the 1960s. There was international
monetary disorder, commodity prices soared, Vietnam and its economic
effects were being felt, there was an oil crisis and the oil
price soared.
PRESSURE IS ON
Today for the first time since
World War II, the Fed has been actively working to push inflation
higher with its high-powered pumping of its monetary policy,
and other countries have been joining the party. Global monetary
policy is the loosest since the 1970s. As The Economist concludes,
the good news is that deflation was avoided, but the bad news
is that inflation is now coming back stronger than expected.
Inflation has always been caused
by excessive monetary expansion, often associated with wars.
In the U.S., that's certainly been the case with Iraq, which
has become far more expensive than anyone expected.
Whether or not you agree with
the war, Iraq has been inflationary, it's helped fuel an oil
crisis by fanning insecurity and oil has soared to record highs.
Commodities have also risen over 20% during the past year.
So is history destined to repeat?
Increasingly, it looks like it could but with a different twist.
COMPLEX WAR
Even though the transition
in Iraq went smoothly, the militants have been stepping up their
bombing attacks and Saudi Arabia is becoming a real concern.
Al Qaeda is determined to continue
its war there, drive out Westerners, overthrow the monarchy and
disrupt the oil sector. And since Saudi Arabia is the world's
largest oil producer, this alone could seriously hurt the world
economy, producing chaos, soaring oil prices and inflation. Hopefully,
it won't happen but Condoleezza Rice considers al Qaeda a serious
threat in Saudi Arabia and as we've seen in recent years, anything
is possible.
As investors, this means we
have to go with the major trends, which are now more important
than ever since inflation's picking up. You want to be invested
in markets that benefit from inflation like gold and currencies,
and avoid investments that do poorly in this environment like
stocks and bonds.
INTEREST RATES AT
CROSSROADS
For now, we're watching interest
rates closely because they're the key and we'll want to see a
final confirmation on this front. As you can see on the right
of Chart 1, long-term interest rates have been declining
since 1980 and the 80 month moving average identifies this mega
trend as the 30 year yield has stayed below it for nearly 20
years.
Since last year, however, long-term
rates have been rising and the 30 year yield is now at a crossroads
since it's very close to this important moving average at 5.50%.
If the yield rises and stays clearly above this level, the mega
trend would then turn up, signaling upcoming strong inflation
and higher interest rates for years to come.
As you know, gold and bonds
are very sensitive to inflation. When inflation moves up, so
does gold while bond prices decline. The gold/bonds ratio on
the left of Chart 1 is actually an inflation barometer.
The trend has been down since 1980 showing that gold was weaker
than bonds, confirming inflation wasn't a problem.
But now, this 24 year trend
and the moving average is being broken to favor gold over bonds.
This marks an important mega trend change and it's telling us
gold is going to be stronger than bonds in the years ahead. This
in turn reinforces inflation will continue and it's going to
be greater than most expect. If that proves to be  the case, the
30 year yield will eventually follow and reverse its downtrend
too, which would mean the current bear market in bonds will not
be a regular one like the ones of the past 20 years, but a major,
long lasting one. In that case, gold could soar.
GOLD TIMING: "A"
rise underway
For now, gold has started a
renewed intermediate rise we call A, and it could last another
month. Chart 2 shows the gold price with our favorite
leading indicator.
This indicator helps identify intermediate moves in the gold
price. The As and Cs coincide with gold rises and the Bs and
Ds with gold declines.
A rises tend to consolidate
the strength of the prior C rise, which means if gold now stays
above $390 and rises to possibly the April highs near $430, it
will be a normal A rise.
The point is, don't be disappointed
if gold doesn't reach a new high this time around.
Once the A rise is over, a B decline will begin. But here again,
B declines tend to be moderate, just like A rises are moderate.
B declines are still part of the consolidation, which means the
$375 low in May is unlikely to be seen again as long as this
bull market stays intact. In other words, now and at the end
of the upcoming B decline will be the last time to buy gold at
a good price.
Then the excitement begins
because C rises are the best rise in the cycle when gold rises
to new highs. The upcoming C rise could begin in the last quarter
of this year.
Meanwhile, the bull market
will remain intact as long as gold stays above its rising 65-week
moving average now at $381. This applies to the other precious
metals as well.
June 14, 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/
________________
321gold Inc Miami USA
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