May 24, 2007

Courtesy of www.adenforecast.com

METALS: NOT TO WORRY

The metals markets are correcting. Some traders are nervous, others are worried and a few feel this is the end of the bull market.

These reactions are fairly common whenever the metals experience a quick down move. But let’s look at the record…

MAJOR TRENDS ARE UP

The major trends currently remain up for the four main precious metals (see Chart 1).

Yes, the rises have temporarily stalled but that’s nothing to be seriously concerned about.

These markets are bullish. They have been for years. We believe that’s going to continue for the same reasons we’ve often discussed like massive liquidity, unprecedented spending, inflation, China’s growth and demand, geopolitical tensions and so on.

But now in a new development, there’s yet another important reason why the metals will continue to rise and the bottom line is interest rates.

INTEREST RATES HEADED LOWER…

A couple of weeks ago, short-term interest rates officially confirmed a major reversal for the first time in three years. This is a huge deal because it means the major trend for interest rates has turned down and rates are headed much lower, probably for a couple of years.

This tells us that the Fed has been more worried about the housing slump and the economy than it’s let on. And despite inflationary pressures, the Fed will do whatever it takes to keep the economy going. But there’s more…

Interest rates are important in determining which way a currency is going and low or declining rates normally coincide with a weak currency. With U.S. interest rates now beginning a major decline, it’s going to keep downward pressure on the U.S. dollar. That’s especially true combined with the huge trade and budget deficits, along with massive government spending. Fiscal irresponsibility + low interest rates= a weak currency. It’s that simple.

… BULLISH FOR GOLD

Since gold moves opposite to the dollar, a weak dollar will in turn keep upward pressure on gold. In fact, it’s an ideal environment.

Note, for instance, that when the T-Bill interest rate rose above its 65-week moving average back in 2004 (see vertical line), higher rates helped to stabilize the dollar, but gold continued to rise in spite of a stable dollar (see Chart 2).

This shows gold’s strength and the dollar’s weakness because the dollar couldn’t even move higher with a T-Bill rise from 1% to 5%.

T-Bills then peaked last February and the dollar has been declining with lower rates since then, while gold has been rising (see arrows). But with T-Bills now confirming a major downturn, lower rates will continue to push the dollar down, which again will be good for gold and the other precious metals.

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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