Friday May 18, 2012
by Mary Anne and Pamela Aden, editor The Aden Forecast
Gold’s fundamentals are strong and solid. As for gold shares, they’re bombed out, oversold and cheap. This is not the time to sell. Sit tight and be patient.
We also recommend long-term government bonds. That way we’ll be hedged with a 40% position in bonds (recession, deflation haven) and a 40% position in precious metals (inflation and uncertainty haven). The last 20% will stay in cash U.S. dollars.
Already the major world central banks have joined in to help the ailing world economy, but more is needed. It’s still to be seen when it’ll happen but you can bet it will push up the metals and commodities.
Gold benefits due to the inflationary implications of a stimulus, whereas the whole commodity sector benefits from the potential of higher global demand during better economic times.
Gold has been much stronger than gold shares since 2011 when they parted ways. The ratio comparing the two has now shot up to the 2008 highs.
That is, the gold share fall compared to gold has been as severe as it was during the heat of the 2008 financial crisis.
This means gold shares are at an extreme low and they’re cheap compared to gold. They’re poised to normalize, rise and then they’ll likely outperform gold.
The Summer months tend to be a seasonally low time for gold. We can’t stress enough to take advantage of further weakness to buy.
The good news is that gold and silver both held at their key December lows. It’ll now be important to see if they stay above these levels at $1540 and $27, respectively. If so, it’ll be a good sign that these markets are bottoming and the worst is over.
Use weakness below $1600 on gold and $30 on silver to buy or add to your positions. This is one of those times that can be difficult but we don’t think you’ll regret it.
On the upside, the metals will begin to look better above $1620 and $33. Gold’s fundamentals are solid, demand is strong and it looks like this weakness will be temporary.
Among ETFs, we hold Central Gold Trust (GTU), iShares Comex Gold (IAU) and iShares Silver Trust (SLV).
While premature to say, the shares look like they may have finally bottomed. And if they have, they’re likely leading the way up for the metals.
Some of our favorite individual shares include New Gold (NGD), Silver Wheaton (SLW) and Royal Gold (RGLD).
Meanwhile, as economic tensions mount, bond prices are soaring as interest rates plunge. Bonds are the #1 safe haven and they’ll remain super strong with the 30 year yield below 3.10%.
Continue to buy and hold long-term U.S. government bonds. We also recommend buying Rydex Long Bond (RYGBX), Barclay’s 20+ Bond Fund (TLT) and Barclay’s Long Term Treasury (TLO).
The U.S. dollar is also surging, and benefiting as a safe haven as well. The U.S. dollar index broke above its mega moving average and if it now stays above 80.75, it’ll be a strong sign the dollar’s headed even higher, at least in the months ahead.
The currencies are very weak, and that goes for all of them. Continue to keep your cash only in U.S. dollars.
Learn more about this financial newsletter at The Aden Forecast.