Gold's bull market is alive and well since reaching
a 16 year high in early December at $456. And the decline
we've seen since then is normal.
Gold's 16 year high last month reinforced that the current
bull market has now clearly outperformed the bull markets
in the 1980s and 1990s in both time and price gains. This
confirms the current bull market has now been the strongest
since the 1970s and it could be similar, eventually reaching
$800 or more.
It's not really surprising when you see the similarities
compared to the 1970s. The most obvious is the high oil price.
It rose over 400% in 1971-1974, which is about the same as
the 400% rise oil has had in the last six years.
The budget deficits and an extremely loose monetary policy
are also similar, as are the costs to finance an expensive
Furthermore, just as the industrialized world now has stiff
competition with China and India causing disruption in the
manufacturing and service industries, the 1970s had a similar
situation with Japan and Korea. In both cases, it hurt the
China and India are also keeping upward pressure on commodities
due to their growing demand. In the end, it's very possible
we'll see rising inflation and slower growth, which would
be very good for gold.
GOLD TIMING: On track
Meanwhile, many of you know how well the 65-week moving average
has worked in identifying the major gold price trend over
the years (see Chart 1). Gold rose above this average in August,
2001, triggering a major buy signal, and it hasn't looked
back. This moving average is currently at $408 and gold's
major trend is up above that level.
Since August, 2001, the times gold declined
to this average was during a D decline, which is precisely
where gold is today, since what we call a D decline started
Many times these intermediate moves will tell us if a major
change is in the making and so far they're signaling the bull
market is solid. The latest "test" was when gold
hit a high last month. The previous C rise performed well
taking gold to a new bull market high, which is normally the
case during a C rise, and that was important for the strength
of the major uptrend.
For now, a D decline is underway below $435 and we could
see gold stay weak until the end of January to mid-February
time period. This would be normal, but if it ends up lasting
as long as the previous D decline did, we could see weakness
until April. The end of this decline will be the next ideal
time to buy new gold positions.
GOLD SHARES: Disappointing
Gold shares have been disappointing. It's been frustrating
for investors to see gold shares end the year lower than where
they started as they watched gold rise to 16 year highs.
We know that gold shares move with gold (see
Charts 2A and B). The vertical lines show how gold shares
rose during gold's previous C rises going back to 2001. But
another pattern is developing too..
Of the five C rises gold's had since 2001, the 2nd and 3rd
ones in the XAU gold share index were similar to the 4th and
5th ones. The best gold share moves took place during the
2nd and 4th C rises when gold shares shot up to new highs,
strongly outperforming gold. In both cases, the following
C rises (#3 and #5) were lackluster rises in gold shares,
despite the strong gold price.
If this pattern continues, we could see the strongest gold
share rise take place later this year with gold shares hitting
new bull market highs.
The only thing that bothers us is the big picture
on Chart 3. This shows the gold shares to gold ratio going
back to 1969. You can see the rise since 2001 has so far been
a rebound rise within a major downtrend that goes back to
1969. The peak in the ratio occurred a year ago at the major
downtrend. And the lack of strength in gold shares last month
was not a good sign because the ratio failed to break above
the major downtrend.
The bottom line... gold shares are at a critical juncture
compared to gold. If the alternating strong-weak C rises continue,
then gold shares will be the better investment. But if gold
shares fail to strongly outperform gold this year and the
ratio falls below its 2004 low, the alternating trend since
2001 will change and gold will then clearly be the better
investment compared to gold shares.
If gold outperforms gold shares this year, however,
it won't affect the bull market. Note from 1973 to 1980, the
ratio fell sharply as gold strongly outperformed gold shares.
In other words, an investor would've wanted to be heavily
invested in gold at that time.
Meanwhile, until the trend clarifies, it's best to keep half
of your portfolio in metals and half in gold shares. Then
as it becomes clearer, we'd adjust and go heavier into the
strongest area. For now, keep your gold coins, gold contracts,
gold mining shares and the new gold ETF, GLD.
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