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Federal Reserve shocked the
markets this week by taking new dramatic actions to end the recession. They
announced they'll be buying more than $1 trillion in U.S. Treasury bonds and
mortgage backed securities guaranteed by Fannie Mae and Freddie Mac. This
means the Fed will be creating even more money to buy this debt, and that
immediately affected all of the markets.
The U.S. dollar plunged, falling
the most against the euro in nearly nine years. This was due to concerns
that these actions will fuel inflation and devalue the dollar. As a
result, gold rose strongly. Stocks surged too, continuing the rise that
started last week, as interest rates fell.
Overall, this looks like the
trigger that'll drive the rebound rises we've been anticipating in these
oversold markets.
HERE’S WHAT WE’RE
WATCHING…
If there was ever a doubt that gold's
bull market is forming an eight year low, it's gone now. The Fed's action
guarantees that gold has much further to rise in the years ahead. So
far, gold's four week intermediate decline we call B has been moderate, but
it’ll remain underway if June gold again declines below $953. Gold
will stay firm above $880. Keep in mind, gold has been much stronger
than most markets over the last several months, which means the other markets
are poised to outperform gold for the time being.
Gold shares jumped up with the
stock market, and if the stock market continues to rise as we suspect, it
will give gold shares an extra boost (see Chart 1). The XAU
index is strong above 120, and a renewed rise is underway above 124.
Silver, like gold, has been
correcting but it's firm above $12. If silver can now rise above
$14.55, it would be super strong. Keep an eye on these numbers.
The U.S. dollar finally
turned down and the currencies popped up (see Chart 2). The U.S.
dollar index dropped nearly 3% on Wednesday and if it now stays below 87
and 85, a renewed dollar decline will be underway. That will be confirmed
once the dollar index declines and stays below 82 and 80. The euro soared,
leading the way up for the other currencies. If it stays above 1.3150, it'll
strongly signal that most of the currencies are headed higher and its next
upside target will then be near 1.44.
The stock market looks
good and it's poised to rise further in a general market rise... that
is, in the U.S. and the world markets. The Dow Jones Industrials is now
showing its first solid sign of strength by staying above 7200. A strong
rebound rise would be underway above 7900, the 15 week moving average (see Chart
3).
Taken together, all of these
factors are very positive for gold. The fundamentals could not be stronger,
but it was bound to happen.
THE CRISIS GOES ON AND ON
Very quickly, the initial Obama
optimism essentially dissipated, primarily due to the worsening economy. Job
losses are intensifying, the stimulus package isn’t what many thought
it would be, the debt load is overwhelming and there doesn’t appear to
be an end in sight.
The seriousness of this
situation also seems to be sinking in more deeply. Increasingly, people are
recognizing that this isn’t your typical recession. It’s global
and massive, way bigger than anything ever seen before and it potentially involves
the collapse of the banking and financial system.
Obama has been at the forefront
repeatedly warning that, “we are facing an economic crisis of historic
proportions… our nation will sink into a crisis that we may be unable
to reverse… we risk falling into a deflationary spiral”, and so
on.
FINANCIAL CRISES OF THE PAST
Most of us in this generation
have never suffered through a financial crisis, but they are nothing new. We
went back to review financial crises of the past and here’s what we
found…
The past 800 years have involved
a series of bubbles and busts, debt defaults, banking collapses, excessive
speculation, panics, currency devaluations, recessions, deflations, inflation
and of course normal times. And ever since the first stocks traded 400 years
ago, the markets have had a long consistent history of booms and crashes.
Internationally, there have actually been 148 crises in the past 140 years. In
more recent times, an interesting analysis looked at the aftermath of 14
severe banking busts, including the Great Depression, and others in various
countries that have followed since then. Most important, the conclusions
reinforce that the effects of this crisis could drag on for quite a long
time.
So drastic measures had to be
taken as every effort is made to soften the blow.
GOLD SOARING ON UNCERTAINTY
These same factors have also
been driving the gold market. It soared, briefly rising back above $1000, and
within a couple of dollars of its all time, record high.
Gold is once again showing that
it is the safe haven and it thrives in times of global turmoil, uncertainty,
nervousness and fear. That’s what we’re seeing now and gold is
certainly behaving in traditional fashion.
But this is just the beginning. Once
inflation eventually kicks in, in reaction to all of this massive government
spending, gold is going to soar, but this is going to take time.
It’s not going to happen
from one day to the next, but that’s the underlying foundation pushing
gold’s bull market higher, and it’s not going away any time soon.
So stay with your gold. It’s your best, and probably only solid bet
looking out to the years ahead.
Mary Anne and Pamela Adend
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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