Aden sisters' outlook for gold

By Pamela and Mary Anne Aden

Gold, silver and the metals group are coming down from their January highs, on the eve of gold’s nine year bull market run. Considering the gold price has had nine consitent yearly gains, and it’s still above $1000 is a feat in itself.

Gold’s bull market is solid, a new phase has begun and it’s currently declining in a sharp, yet normal downward correction. Corrections tend to cause fear. And considering the volatility we’ve seen in recent years, the fear level rises fast.

The debt bubble is an ongoing reality; it’s international in scope and it’s the biggest ever. This is hanging over our heads and over the markets, and it isn’t going away, it’s just getting bigger.

Debt monsters of the past have tended to end in deflationary depressions, but it’s important to understand that gold can rise in this kind of environment.

Advertisement

Remember, gold rises during economic uncertainty. In the early 1930s, for example, during the Great Depression, President Roosevelt raised the price of gold almost 70% from $20.65 to situation.  It needs a weaker dollar to compete and stimulus measures must continue, which are both ultimately bullish for gold.

This is one important reason why we do not think gold or commodities are in a bubble. We believe they are rising within a mega trend that could last several more years, perhaps a decade.

Some say that China is in a bubble and if they are, the demand for commodities will fall. China may be overheated but we don’t think it’s in a bubble. Their growth, even if it’s only a part of what they claim, is solid.

Commodities are in demand and this continues growing with each passing month. China is the engine for demand. It’s the biggest consumer of many raw materials, like aluminum, copper and iron ore.

China and other countries are also buying gold. It currently only makes up about 2% of the reserves in emerging markets. With the average being 10%, there is interest and a need to continue adding gold to their reserves.

Gold is money. It’s the currency of last resort when monetary times are difficult. So when gold rises in all currencies, as it’s been doing for several years, you know the rise is enduring and superior. So even though gold has no yield or earnings to measure like the other markets do, it has true value.

The central banks are flooding the markets with their own currencies, and competitive devaluations will continue to grow. Many countries depend on exports for economic survival.  This means the best price in the current deflationary environment wins, which is what a cheaper currency does. This situation originally started with globalization and it’s bullish for gold.

Aside from central banks, last month we mentioned that mutual funds are adding gold to their portfolios as well. This month, the second biggest U.S. public pension, the California State Teachers retirement system, is considering investments in commodities in order to boost returns and provide a hedge against inflation.

Yes, gold is slowly making its way into mainstream investing, in large part thanks to the Exchange Traded Funds, ETFs. They have made it easy to invest in gold and commodities.

The $1000 level is a key support area, which is near the prior C peak in 2008. The 65-week moving average, now at $975 is rising and it’s set to reach the $1000 level in a few months, which will further reinforce the support at $1000. For now, $975 to $1000 is the strong support level for gold. Gold will be under downward pressure below $1110.

Meanwhille it’s important to focus on the big picture during corrections. The major trends are solidly up and we will stay invested for as long as they last. Thewhole sector has great potential to rise to much higher levels in the comingyears.

Keep your positions (shown on the right) but let’s wait a while longerbefore buying new positions.  We’ll take advantage of this period of weaknessto buy new positions. Among our core, long-term positions, we continue to hold SPDR Gold Shares (NYSE: GLD), the iShares Comex Gold (AMEX: IAU) and the iShares Silver Trust (AMEX: SLV).

Learn more about this financial newsletter at The Aden Forecast.