 Back
to The Basics
Mary Anne & Pamela Aden
The Aden Sisters
Dec 14, 2004
Courtesy
of www.adenforecast.com
It's been an exciting couple of
months. Gold broke out to a 16 year high rising to near $460
and the U.S. dollar fell a nine year low. This week, however,
gold was down sharply. So what's going on?
In recent months we've been
to several investment conferences. One impression from these
conferences is that many investors aren't fully aware of the
big picture and what's happening in the economy or the markets.
They seem more focused on short-term events, but they also know
something's not right.
While certainly important,
short-term events have essentially reinforced the major trends
which have already been underway for a few years in both gold
and the dollar. But these markets have been rising or declining
for other reasons.
The most important factor driving
these markets has been the new era that started in the late 1990s.
Since then, the stock market bubble burst, deflation forces intensified,
interest rates were cut to 45 year lows, monetary stimulation
exploded, gold embarked on a major bull market rise, and so did
oil and commodities while the U.S. dollar began a major bear
market decline.
Events following 9/11 basically
fueled this new era. In record time, the government budget surplus
quickly turned into the biggest debt and deficits the world has
ever known as the war on terrorism took hold. The massive military
spending for Iraq and Afghanistan combined with tax cuts sent
the deficit soaring to an unprecedented $600 billion this year.
The current account deficit
is also at record highs and these twin deficits combined with
low interest rates have been the main reasons why the dollar's
been dropping. This in turn has kept upward pressure on gold
and commodities, but there's more...
INFLATION HEATING UP
Gold is a leading inflation
indicator and its quiet rise since 2001 has been signaling inflation
is coming. This year we began to see this with the most obvious
sign being the super rise in the oil price. Energy prices, for
instance, soared at an annual rate of 82% in October and nearly
22% in November, pushing producer prices up the most in 14 years
to a whopping 13% annualized rate in the past two months. This
strongly suggests inflation is far more likely to be the economic
concern moving forward rather than deflation.
Plus, unprecedented government
spending, and the debt and deficits nearly guarantees
it. If the war on terror continues, which is nearly certain,
this deficit spending is going to fuel even more inflation, which
is going to be bullish for gold and bearish for the U.S. dollar.
For now, the markets are looking
ahead and the breakouts last month are telling us they expect
no end in sight to the spending, debt and deficit situation.
Wars are expensive and many will argue the spending is justified,
but that isn't the point. The point is, we've been spending on
a scale never seen before in history.
That's the big picture and
it's basically why the markets are behaving the way they are.
Understanding this is important in making good investment decisions.
GOLD: At onset of major
rise
As time passes and seeing how
big picture events are unfolding, we're more inclined to believe
this bull market in gold is going to be a big one, which could
surpass the old highs at $850. If that proves to be true, then
this mega bull market will likely be composed of three psychological
phases.
The first phase is when the
so-called smart, big money buys. In the second phase, mutual
funds and some investors start moving in, attracted by rising
prices. The third phase is when the public jumps in, which pushes
prices up to levels higher than most expected. That's what happened
to gold in 1980, Japan in 1990 and tech stocks in 2000.
Interestingly, our dear friend
Chris Weber was at a barbecue near Monaco several months ago
where several billionaires were present. (Chris is an extremely
successful investor and he writes a great newsletter we highly
recommend; www.weberglobal.net). When the conversation turned
to investments one of the party-goers wondered what to
invest in these days. Almost in unison, the billionaires all
said gold. They obviously bought in the first phase of this bull
market. Another dear friend Richard Russell believes we're now
in the early second phase and this tends to be the longest phase.
WHERE GOLD STANDS NOW
Last month gold broke above
$430, triggered by the drop in the U.S. dollar, which was very
important for several reasons...
First, it meant gold was entering
a stronger phase of the major bull market. It also meant the
rise was on track and it completed its function by hitting a
new bull market high, which reinforced the bull market in gold
is strong.
But no bull market goes straight
up or straight down. There are downward corrections along the
way and gold is now starting a downward correction following
its steep rise since September, which is completely normal.
By now you know that gold's
been moving in an A through D cyclical pattern since the 1970s
(see Chart 1A, which shows gold since 2001). The As and
Cs coincide with intermediate gold rises while the Bs and Ds
coincide with intermediate declines. Gold has been in a C rise,
which are the best rises in the cycle.
The timing of the C rises has
been fairly consistent. Since 1999, for instance, they've lasted
eight to 10 weeks on average. On that basis, the current C rise
was due to end at any time.
Plus, gold's leading indicator
was at the level of previous C peaks (see Chart 1B). This
told us gold may not go much higher for now. This week gold declined
below $445 and if it now stays below that level, the C rise will
clearly be over and a D decline will be underway.
These declines are the steepest
ones in the cycle and if you want to take some profits, this
would be the time to do it. But as we said earlier, we believe
this gold bull market is going to be a big, long lasting one
and it's best to stay invested throughout the major rise. So
if you do sell some, continue to hold your core gold, gold shares
and other metals for the long-term. Gold's major trend will remain
up above $404, its 65-week moving average.
Regardless of the upcoming
D decline, it's interesting to note that gold is stronger than
stocks or bonds on a mega trend basis (see Chart 2). In
other words, gold is still where your focus should be and normal
downward corrections within the major bull market shouldn't sway
you. Instead, look at these downward corrections as another buy
area.
Dec 10, 2004
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
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