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BIG PICTURE: MOST IMPORTANT
It’s easy to get sidetracked with so much
going on in the world and markets today. This often makes
it hard to see the forest for the trees. That’s why
we feel strongly about keeping the big picture in perspective.
While we certainly don’t claim to have all the answers,
after 30 years of following the markets every day we’ve
learned the big picture is the most important when it comes
to investing. But this also means patience is needed.
The big moves in any market are the most profitable
but they also take time. If a market is in a multi-year long-term
uptrend, for instance, it’s not going to go straight
up. There will always be downward corrections and volatility
along the way. These are normal, but they don’t change
the major uptrend. And as long as a major uptrend stays intact,
the price is headed higher.
FASCINATING TIMES
So what’s the big picture currently telling us? The
bottom line is, we’re living in fascinating times and
everything changed in 2000. At that time, the biggest stock
market bubble in U.S. history burst and less than three years
later Nasdaq had plunged 78%. Deflation became a real possibility,
so the Fed quickly dropped interest rates to 40 year lows
and flooded money into the system to avoid deflation. The
result was a huge housing boom and the biggest credit explosion
in U.S. history. This is now beginning to fuel inflation,
which is up the most in 14 years.
This backdrop has been good for gold since it’s
the ultimate inflation hedge. Gold is also a leader and its
rise since 2001 has been telling us inflation was coming.
Last December, gold hit a 16 year high and this four year
rise has been the strongest since the 1970s, suggesting gold
is going much higher (see Chart 1).
NEW INVESTMENT ERA
Most important, a new investment era began in 2000. At that
point, a mega shift occurred for the first time in 20 years
from financial assets like stocks to tangible assets like
gold. This is only the third time this has happened since
1919 and these mega shifts usually take a long time. The previous
one lasted 14 years. In other words, gold is now stronger
than stocks and bonds and the percentage gains will likely
continue to be greater in gold in the years ahead.
At the same time, the war on terror began on
9/11/01. This, combined with tax cuts to help boost the economy
during the nervous deflationary times, resulted in massive
spending and the largest budget deficits in U.S. history.
This in turn has led to even more liquidity, further fueling
inflation pressures.
Reinforcing this, commodities also began a new
mega rise a few years ago, which only happens about every
30 years and these also tend to last for years. As you know,
oil is near a record high and commodities reached a 24 year
high, but this new mega uptrend is signaling that commodities
are going much higher in the upcoming years. This too suggests
we’ll likely see higher inflation in the years to come
and both of these factors will keep upward pressure on gold.
Not coincidentally, this commodity boom has
been, and will continue to coincide with China’s growth
and ongoing demand. This is one of the biggest factors driving
these mega trends and there’s no sign this is going
to change.
On the contrary, China is booming, it’s
a huge exporter and it’s becoming a major world player.
As its citizens become more affluent, they’ll need more
oil for their cars, and natural resources and metals for their
infrastructure. China’s oil imports, for instance, have
been moving hand in hand with the oil price and in five years
China will depend on oil for half of its energy needs. This
is going to keep upward pressure on oil, metals and other
commodities in the years ahead, just as we’ve seen in
recent years.
Meanwhile, China has become our second biggest
lender. Remember, we’ve gone so far into debt that we
need over $2 billion a day from foreigners to keep our game
going. Not only are we the world’s largest debtor nation
with unprecedented budget deficits, but our trade deficit
is also the largest in U.S. history. This is very dangerous,
so it can’t come as a surprise that many are questioning
this situation and moving out of U.S. dollars, which has been
driving the dollar lower.
DOLLAR FEELS THE ABUSE
So far, 40 countries have indicated they’re reducing
their U.S. dollar reserves. This too is a dangerous situation,
indicating the U.S. dollar is slowly losing its world reserve
currency status.
There’s little doubt in our minds, the
U.S. dollar is headed lower and since gold and the dollar
move in opposite directions, this will also keep upward pressure
on gold. This doesn’t mean it has to happen quickly.
It could be gradual as we’ve seen happen to other currencies
at other times throughout history. But the point is, it’s
happening.
PROTECT YOURSELF
Basically, we’re living in amazing historical times.
We’re in a new investment era and we need to understand
what’s happening and protect ourselves. The best way
to do that is by holding gold, other precious metals and foreign
currencies, which will continue to rise as the dollar heads
lower.
Sure, there will be ups and downs. In the past
three months, for instance, the markets haven’t done
much but the long-term trends remain intact and that’s
what’s most important.
As our long time subscribers know, we
haven’t always been so keen on gold, but we have been
in recent years due to the mega investment shift that happened
in 2000 and the events since then. Remember, gold is the ultimate
currency and it always has been. Throughout history, paper
currencies have come and gone but gold is real money and it’s
maintained its value over the centuries. It has a 5000 year
track record, which no other investment can claim. If nothing
else, think of gold as an insurance policy. During these volatile
and uncertain times, we don’t believe you’ll regret
it.
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Mary Anne and Pamela Aden are internationally
known investment analysts and editors of The Aden Forecast,
a market newsletter providing specific forecasts on gold,
gold shares and other major markets. Click here to visit their
website at http://www.adenforecast.com
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