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The precious metals have been soaring. Gold, silver,
platinum, palladium… you name it. If it’s a metal, it’s
been booming. The same is true of other commodities too.
So are commodities the new bubble? Have they
replaced the real estate bubble, which replaced the tech stock bubble, as
investors move from one bubble to another? It sure looks like it. But the big
difference is that this metals and commodities bubble has a lot further to
go. Why?
THE
PERFECT STORM
Basically, the perfect storm has been
gathering and it’s going to fuel a mega rise that will likely last for
years to come. We’ve often discussed the most important reasons why but
since these markets have been picking up steam, we’ll review these
basics again.
Most important is China and other growing nations, which
are keeping demand and prices super strong. But also important are spending,
soaring global money creation, inflation, the falling U.S. dollar and
international tensions. But let’s take China first…
China
power
China’s growth
has been astounding at over 9% each year for more than 25 years. During that
time, China
has lifted 300 million people out of poverty and it’s quadrupled the
average income.
This is the fastest economic growth in
recorded world history. Many felt it couldn’t last, but year after year
it has, and it’s going to continue.
Since wages are higher in urban areas, 500
million rural Chinese are expected to move to the cities over the next couple
of decades in search of the good life that former migrants have already
found. This growing middle class is proudly spending money on homes, cars and
other consumer goods.
Retail sales, for instance, recently soared
20% and China
has become the world’s second largest oil consumer. This huge demand
for all things, from food, to oil, gasoline, metals and other commodities has
been one of the main factors driving these markets higher.
The Chinese government’s top priority
is to close the gap between rich and poor. And they want to make a big splash
on the world stage as a major power during this year’s Olympics. But
something more important is also happening.
As Time
magazine points out, comparing China
to the U.S., China is
cramming two important eras into one. The post World War II prosperity that
fueled the flight to the suburbs is coinciding with the 19th century
Industrial Revolution that lured people from the farms to the cities.
This is powerful stuff. Demand for everything
is huge and there’s no end in sight. This reinforces that the mega
commodity uptrend will continue.
Demand
growing
That’s especially true combined with
another source of growing demand, which is new money looking for good
returns. With stocks and real estate down, the metals and commodities have
become increasingly attractive, and with good reason.
The metals have gained between 12% and 30% so
far this year. Commodities are up between 9% to 26%. These markets have
strongly outperformed all other investments. They are also stronger than any
currency, and with the U.S. dollar super weak at new record lows, it makes
the metals even more attractive.
Supply
limited
Then there’s the supply factor, which
is critical as well. While demand is soaring, supply is limited. It’s
also consistently threatened by international tension or internal mishaps.
Considering it takes many years to develop
new mines, this supply picture is something that’s not going to change
quickly. The recent electricity shortage in South Africa, for instance, drove
many metals prices sharply higher because miners simply couldn’t work
and supply was therefore disrupted.
Also, don’t forget that events in areas
rich in natural resources, like the Middle East, Russia, Nigeria, Venezuela
and many other places, could push the price of metals, oil and other
commodities sharply higher in a heartbeat, depending on what happens in these
countries. Basically, world tensions are truly a big wild card.
Spending
& money: Out on a limb
A real biggie, however, is spending and money
creation. That’s the cause of inflation and there’s no end in
sight here either.
Spending is skyrocketing. The military budget
alone will be the biggest since World War II. The baby boomers are now
starting to retire and since 20 million of these upcoming retirees
don’t have enough money to retire on, it’s going to balloon
spending to far greater levels in the years ahead.
Meanwhile, money is flowing like mad
all over the world. Money supply is up 16% in the U.S.
but it’s even more in other countries… it’s soaring 42% in Russia, 21% in India,
18% in China
and so on.
And with the whole world worried about a U.S.
recession, as well as the domino effects of the subprime mortgage meltdown,
which has already tallied up losses of around $200 billion (so far only half
of what’s expected), the money’s going to keep flowing, all in a
concerted effort to avoid a recession at all costs.
You see, a recession could turn into a
deflation, accompanied by massive bank failures, and that’s something
no one wants. Sure, all this money is fueling inflation and the commodity
boom. And yes, lower interest rates are making the U.S. dollar super
unattractive and driving it to new all time record lows, but low rates will
help the economy.
The bottom line is that this inflation option
is a whole lot better than the deflation option, and that’s what the
Fed and the world’s central banks have chosen to do. They really have
no other choice.
Inflation
growing
Remember, gold has always been an inflation
hedge. With money flowing, oil above $100 and commodity prices soaring,
inflation is surging too. It’s moving up at the fastest pace in 26
years, which is not surprising when you see the CRB commodity index hitting
record highs (see Chart 1).
This is also making the precious metals very appealing and it’s one of
the most important components in this overall big picture (Chart 2). So despite normal ups and
downs, the major trends are clearly up, and there’s no reason to
believe that’s going to change.
HAVE ALL
COME TOGETHER
That’s the perfect storm in a nutshell.
All these factors have come together at the same time, and they’re
extremely bullish for gold, the other metals and commodities. These are the
reasons why the metals and commodities markets are rising and why
they’ll keep rising.
Interestingly, these factors are also
coinciding with the 200 year commodity cycle, in which bull market upmoves
have averaged between 17-22 years. Currently, we’re only seven years
into the current bull market, so this too coincides with the fundamentals,
reinforcing that these rises still have years to run.
That’s why we’ve continued to
stress keeping a large portion of your investments in gold, silver and their
shares. No investments have been better over the past few years and we feel
strongly that these markets will remain winners.
We wouldn’t trade these markets and
this month’s strong upmove illustrates why. Just plan to stay with the
mega upmove for the long haul. Essentially, the storm is getting stronger and
that’s not when you want to be jumping ship.
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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