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 West.
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 last month.
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
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
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