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Gold is looking good. Since its
summer low of $1160 in late June, it has surged to $1275. That's a nearly 10%
gain in less than two months, and even though gold has again broken its
all-time record high, it's poised to move still higher.
What's Driving the Gold Price Up?
There are several key factors
coming together at the same time and all of them are bullish for gold. But if
we had to boil it down, the bottom line is uncertainty. This makes investors
nervous, which has always been good for gold. But is this response rational?
We think so. Gold is the ultimate
safe haven and as the economy stumbles, demand for gold has grown. That's
been the case for almost a decade. In the second quarter of 2010, for
instance, the economic indicators were down and gold demand was up 36%.
Investors are concerned. Not only
did the economy falter this month, but the stock market declined as well.
This has fueled uncertainty about the government's policies, the potential
for a "double dip" recession, and the danger of a deflationary
period.
At times like this, safety becomes
the paramount consideration. Risk is avoided, and that's when gold shines.
Gold provides a shelter from the storm, regardless of what lies ahead. The
ongoing rise in the gold price has reinforced this maxim.
As you can see in Chart 1,
gold has not had a steep downward correction in nearly two years. It's been
moving up slowly and steadily. Consistently rising prices eventually attract
attention, and that's now starting to happen.
It doesn't hurt that some of the
most successful and well-known money managers have been buying gold and
gold-related investments. But, despite the fact that growing demand has kept
upward pressure on the gold price, the yellow metal has not yet become
popular with mainstream investors. That's still to come, and it's one reason
why gold's upside potential will continue to remain positive.
Uncertainty Is Growing
While mainstream investor
sentiment shifts to gold, uncertainty looks set to increase in tandem.
Federal Reserve Chairman Bernanke
recently affirmed that the Fed will do whatever it takes to boost the
economy. In recent weeks, the Fed again started buying US government debt in
the hope of stimulating the economy, and it is prepared to do much more.
If that means buying underwater
mortgages, financing the ever-ballooning federal debt, or printing enough new
dollars to fill the Grand Canyon, then so be it. As home sales fall and
jobless claims rise, the pressure has mounted for Washington to act.
More and more investors understand
that the side effects of Fed's actions will be a weaker dollar and high
inflation.
In the end, whether deflation,
recession, or inflation is the result, uncertainty is being kicked up several
notches. This simply adds to gold's appeal.
On the international front, it's
the same story. Demand is growing, especially in Asia and Europe. Investors
are generally nervous and uneasy. They want something safe; and, as we saw
again this month, gold always emerges as the safe harbor in times of
uncertainty.
Obviously, gold will have its ups
and downs along the way. That's normal - but there's every reason to believe
that gold's mega-uptrend is going to stay on track (see Chart 2).
In fact, with each passing month,
the case for gold grows stronger. For now, if gold can continue its
record-breaking rally, it'll attract even more attention and the momentum
will build on itself. This may already be happening, so stay tuned...
Mary Anne and Pamela Aden
Editors,
The Aden Forecast
Aden Forecast.com
Mary
Anne and 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.
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