Oct 27 2011 1:06PM

Gold is Shining Again

Gold fell sharply last month and it made many investors nervous. That’s because the decline was so fast and steep. But now gold is again on the rise. So what’s happening?

Gold was due for some sort of downward correction following its sharp rise. This sell-off reflected a lot of pent up pressure because the market had held up so well, and for such a long time, surging higher and higher without a normal downward correction.  The slowing global economy added fuel to the fire.

Gold and silver were dumped for cash.  This is similar to what happened in 2008.  Nevertheless, these were still downward corrections within major bull markets.

So far, we’ve seen a 16% decline in gold and 28% in silver. These were the biggest declines since 2008 when gold lost almost 30%, which was the worst correction in the bull market so far.

MAJOR TREND IS YOUR FRIEND

Again, we’d like to emphasize the importance of the major trend. It’s truly our friend, and we’ll stay invested as long as it remains intact.
 
We’ve found over the years, it’s most profitable to buy and hold during a major uptrend. This is hard to do, especially when you first buy because the price will probably go lower before it heads higher.

This is part of it. The sweating out process, but with a plan. We’ve been recommending gold since 2002. It took several years before it was looking better, but we stuck with it, by measuring the major trend and going with it.

BUBBLES… WHERE?

The current bull market in gold will turn 11 years old next February. This incredible run has been historic because gold has gained each year since 2001. It even ended 2008 on an up-note. And this year is unlikely to be an exception as its gain is still in the double digits, so far.

Chart 1 provides a good example of this bull market in gold compared to two famous bull markets of the past… the huge gold run in the 1970s and the tech bubble in the 1990s. Here you can see that this current bull market has been modest in comparison, but gold is on track to jump up in a frenzied rise in the years just ahead.

Meanwhile, gold could still decline further in the upcoming months.  But once the current downward correction is clearly over, you should be well positioned and ready for the train to take-off. Use any weakness to buy the gold and silver you’ve been wanting to buy, but were waiting for a good opportunity.

HOW FAR DOWN?

Considering today’s uncertain times, anything could happen.  For this reason, our bottom line recommendation for new positions is to buy gradually over this month and next in order to average in at a good price.

Many people have been worried about this gold decline, but look at it as a healthy thing.  It’s down 16% so far from its record $1900+ high, which has been a small decline compared to the tremendous rise it’s had since 2008. 

In perspective, gold rose almost 170% since its lows in 2008.  That’s 170% in three years! And gold’s steepest decline since then has been the current one at 16%.

This was a rise we call a C rise when gold rises in the strongest intermediate leg up in a bull market.  In fact, the bull market’s strength is reinforced when C rises hit record highs (see Chart 2A).

The last C rise, from April 2009 to Sept 2011 was phenomenal.  It lasted longer than any other C rise over the last 10 years, and it was much stronger.  Gold gained almost 120% in 2½ years without much of a decline to speak of.  So you can understand why we say the 16% decline has so far been moderate.

We say so far because gold’s indicator still has room to fall further before it’s oversold (see Chart 2B).  For now, gold has been holding steady above $1600, but if gold closes below $1594 (the low in late September) and stays there, then we could see gold fall further to its next support near the $1550 level.

But it doesn’t stop there.  In a worst case decline, we could see gold test its 65-week moving average.  This would be a normal occurrence for a D decline, which is what we’re calling the decline that is currently underway (see Chart 2A). Although unlikely, should this happen, the bull market would still be intact, and you should then buy with both hands.

It’s not a coincidence that the most powerful C rise in the entire bull market happened once the stronger phase of the bull market began in September 2009.   This tells us that, we want to be ready for next leg of an even stronger phase of the bull market. And with gold currently showing renewed strength, this could happen sooner rather than later.

The bull market is far from being over.  This is accumulation time...

by Mary Anne & Pamela Aden,
October 27, 2011
Courtesy of www.adenforecast.com

*****

Mary Anne & Pamela Aden are well known analysts and editors of The Aden Forecast, a market newsletter named 2010 Letter of the Year by MarketWatch, which provides specific forecasts and recommendations on gold, stocks, interest rates and the other major markets. For more information, go to www.adenforecast.com

 





 
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