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Gold's strength
is unusual. Just when we thought that gold was taking a breather from its
stellar rise, it quickly turned up.
Gold has already
surpassed its June record high. Its decline through July was moderate, giving
up less than 8%, and this action is bullish.
Someone is
clearly buying up gold at every opportunity. Is it central banks, hedge
funds, or nervous investors? We think it's all of the above.
A NEW ERA
Many believe that
gold will have a sharp decline before another up leg gets underway. It's a
rare time in history to see gold rise steadily for almost two years, without
more than a 14% correction. This alone is why another leg up is unexpected.
This month,
however, marks a year since gold broke into a stronger phase of its
decade-long bull market when it closed above $1,000. If gold continues to
rise, it will clearly reinforce that a stronger phase in the new era of precious
metals is indeed underway.
GROWTH MARKET
Gold demand
continues to grow. It surged 36% in the second quarter and the amount of gold
held at exchange-traded funds is way up. The SPDR Gold Trust (NYSE: GLD) is
the sixth-largest holder of gold in the world today.
But even with
overall demand growing, gold as a percentage of global financial assets is
still small compared to 1980, when the gold price reached a record high. This
tells us that gold's bull market is still young, in spite of its 9 1/2-year
rise.
HISTORICAL
COMPARISONS
In fact, the gold
price this past decade reminds us of the US stock market in the 1980s. It had
a good run, but the best was still to come.
The 1990s were
filled with optimism and good times. A new revolution in technology was in
full swing, which pushed the stock market to new heights.
In comparison,
the coming decade has the opposite outlook. While technology continues to get
better, the US and other Western economies are racked with debt, global power
is shifting, and we have war.
BONDS - A VIABLE
ALTERNATIVE?
Bond prices have
been soaring as interest rates decline. Recessionary pressures took their
toll, but it looks like the bonds' strength won't overtake gold's.
In 2003, gold
confirmed its strength over bonds for the first time in over 20 years
(see Chart 1) and has been stronger than bonds since then (excepting the
brief gold dip during the heat of the meltdown in 2008).
A CLASS BY ITSELF
Gold is stronger
than stocks, bonds, and the dollar... and it's positioned to move higher in
an intermediate rise, especially considering the seasonal trend.
For those of you
who have been waiting to buy at a better price, we believe it's best to
average in. A correction will come, likely in October, and when it does, take
advantage of it -- but don't wait for it completely. Keep new positions
focused on gold and silver from now onward.
A NOTE ON SILVER
Silver is
starting to take off. It jumped up in recent weeks as it benefits from the
gold and copper rise.
You may remember
that silver outperforms gold when the resource sector and gold are both
strong at the same time. This was the case from 2003-2007 and it's starting
to happen again (see Chart 2).
Note silver's
uptrend and channel since 1990. It actually reached a low in 1990 and it
essentially moved sideways during the 1990s while gold fell. Since 2004,
silver has been strong, and it doesn't show any sign of losing momentum.
Now that silver
has closed clearly above its 2008 high of $20.80, the $25-$28 level is our
next target.
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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