Gold: Strong Bullish Action By Mary Anne &
Pamela Aden | October 14, 2010
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 are
authors of The Aden Forecast, an investment newsletter now
in its twenty-ninth year. It is one of the longest continually
published investment newsletters and is highly recommended
by gold investment specialists.