Jul 25 2008 3:50PM

Courtesy of www.adenforecast.com

This month has been extraordinary. The markets have been wild, swinging up and down in big moves we haven’t seen in years.

THE COMMODITY SURGE...

Oil, for instance, soared to a new record high, rising 18% from June 3 to July 3 alone, gold had its biggest one day upmove in 23 years, commodities surged, ending June with their best first half in 35 years, and stocks plunged. And then the markets traded places.

Gold and oil fell sharply. But despite the declines, these markets are still very strong and bullish (see Chart 1).

Due to oil’s decline, however, inflation concerns are temporarily easing. Investors are breathing easier. They’re feeling better about the credit crisis because of the housing rescue bill, which will likely become a reality. If so, it will be extremely inflationary, simply because of the magnitude of the amount of money involved.

GOLD LOVES INFLATION

As you know, inflation is great for gold and the other precious metals. In fact, the overall environment couldn’t be better for metals, resources and energy looking out to the years ahead. That’s why we’ve consistently recommended buying and holding for the long-term.

Even though these markets will be volatile, moving up and down, by riding this mega uptrend over the long haul you’ll do very well.

A recent study of thousands of investors confirmed this. Those who traded the least made 7% more per year than those who traded most often. And while weeding out underperformers and lightening up on some positions is normal, the overall fundamentals strongly reinforce our strategy.

With the economy slow, the Fed can’t raise interest rates to curb inflation and help the dollar like it normally would because it could push the economy into recession. So its hands are tied and inflation will continue to flourish for a long time. This is happening worldwide.

Money supply is soaring and inflation is the result of this. Inflation’s at a 10 year high in emerging countries, it’s surging in Europe and prices in Japan are rising at their fastest rate in 27 years. Plus, wholesale prices in the U.S. had their biggest jump in six months last month, soaring at a nearly 17% annualized rate.

OTHER REASONS WHY GOLD IS RISING

Then there’s the ongoing government spending, which isn’t going to change either and that too is one of the primary factors fueling inflation. Massive spending means more money is needed, and more money means more inflation. Again, it’s that simple.

Currently, the U.S. is in debt to the tune of over $500,000 per household, taking future liabilities like Social Security into account. The defense budget is at a post World War II record, and the list goes on.

These are the fundamental, primary reasons propelling prices, inflation and gold higher, and the housing rescue bill will provide an even more solid base for the long-term bull market in gold. But there’s more and these are playing an important role too…

CLIMATE CHANGES GETTING WORSE

Over the years, we’ve also mentioned climate change and its effects were clearly illustrated last month as well.

The worst floods in 15 years destroyed around five million acres of farm land, piling up losses of over $3 billion. This was a huge factor pushing the price of corn up to new record highs. High corn in turn drives up the prices of chicken, milk and eggs, and these higher prices help push inflation higher.

Most important, this was not an isolated incident. There were also massive floods in Southern China, over 1000 wild fires in California, more droughts, typhoons, and the most rain on record in Northern India.

In addition, the Himalayan glaciers, which support over one billion people, are melting and there’s a strong probability that ice at the North Pole will melt this Summer. Antarctic ice cores show carbon dioxide levels at the highest in 800,000 years.

China has now overtaken the U.S. as #1 in carbon dioxide emissions. And while most countries are making some effort to tackle the situation, so far it’s too little. Unfortunately, this strongly suggests that we’re going to see a lot more climate change, along with its effects like higher commodity prices, inflation and gold in the years ahead.

So it’s a vicious circle…spending, money and higher oil drive inflation higher and combined with these other factors, they all keep upward pressure on gold, the other precious metals and commodities. So we can’t stress enough… invest for the long run, at least with the main portion of your portfolio, and you’ll be glad that you did.

For now, gold is correcting downward, which is normal. We call this a B decline and it’ll likely be moderate. Gold will remain strong by staying above $900. The same is true of oil above $115.

by Mary Anne & Pamela Aden

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Mary Anne & Pamela Aden are well known analysts and editors of The Aden Forecast, a market newsletter providing specific forecasts and recommendations on gold, stocks, interest rates and the other major markets. For more information, go to www.adenforecast.com