Gold - Good Time to Buy

By Mary Anne & Pamela Aden
July, 2003

GOOD TIME TO BUY

Gold shot up last month reaching its February highs and it’s been declining since then. But that’s okay because if you haven’t bought yet, or you want to add to your positions, the current weakness will likely be the last good buying opportunity for a long time to come.

Gold’s bull market is solid and it’s poised to rise to new bull market highs before the year is over. In fact, for the first time in years both the technicals and the fundamentals are glittering brightly.

FUNDAMENTAL STEPS IN PLACE

·Most important is the U.S. dollar because it’s the main world currency. Its ongoing decline has given gold a big boost over the last two years and we believe this will continue.

The U.S. is swimming in debt. With a half trillion dollar budget deficit, an over half trillion dollar current account deficit, a slowing economy, lower taxes, low interest rates and more spending on the war on terrorism, it nearly guarantees an even weaker dollar.

Never in the history of the world has a currency been able to stay strong with its trade deficit at current levels without a serious decline following. Also, it’s historical that a superpower expands their military might while servicing a huge debt and lowering taxes. The world sees this and some central banks have begun easing out of dollars. They know that guns, butter and debt are a deadly combination for the dollar.

The Fed is also concerned about the weak economy and deflation and it simply can’t raise interest rates. This means the dollar’s going to remain weak. In fact, the government has been talking down the dollar because a falling dollar is inflationary and it helps offset the deflationary pressures, so it’s in their interest to keep the dollar weak. It now looks like the dollar’s going to drop much further than anyone expects, which in turn will provide a very bullish backdrop for gold.

Gold rises during uncertain economic times. We all know that gold rises during inflationary times like in the 1970s. But it also rises during deflationary times because gold is the asset of last resort in a deflationary environment. We don’t think it’s a coincidence that gold bottomed in 1999-2001 just as the bubble burst from the good economic times of the 1990s, and today’s uncertainty is providing an ideal backdrop for further gains.

The growing ease to buy gold around the world is another big plus. For decades, China severely restricted the buying and selling of gold. But it’s been liberalizing since last October. Most important, starting June 1st, individuals can invest in gold by buying ingots or opening gold accounts at the bank. This is powerful, especially because the population is so large.

When India did the same in 1996, it quickly overtook the U.S.’s place as the world’s largest consumer and China may be following.

The World Gold Council is also working to make gold easily available to investors. They helped set up a gold security on the Australian stock exchange, traded under the symbol GOLD. And New York is next. A gold exchange traded fund was filed with the SEC and once it’s approved, it’ll mark the first time gold is traded like a stock on the NYSE. It’ll be called the Equity Gold Trust under the symbol GLD. And making gold a readily available financial product will have a big impact on the price.

Central bank gold sales are over. They sold a lot of their gold at the bottom and they’re unlikely to sell more. Forward selling by gold companies is also unwinding. Central bank sales and forward selling by the mining companies put a big damper on the gold price in the 1990s. But since this era is essentially over, it’s good for gold because the lid is off.

TECHNICAL STEPS IN PLACE TOO

The most important technical step in the big picture happened last December when gold shot above $330. This marked the first time since 1979-80 that gold rose above its prior peak.

Chart 1 shows that the gold price moves in a 1-4 cyclical pattern. The #1’s are the best gold rises, which are followed by the worst declines #2. The #3 rises are short and the #4 declines tend to fall to new lows. Gold’s been rising in a #1 rise since February, 2001 (which was also the 8 year cycle low). Last December it rose clearly above its prior #3 peak for the first time in 22 years, which was a big step in the bull market.

Gold declined below $330 for a few weeks in April, but that was okay because it quickly made up for lost time. Gold’s been clearly above $330 since then, which reinforces last December’s breakout.

Gold’s bull market is in a stronger phase above $330. It’s now poised to rise to our next target, the prior #1 peak near $415, and this could happen before year-end.

·The 65-week moving average is the major trend identifier and it’s worked very well over the years. Gold rose above this average almost two years ago and it hasn’t looked back since. Gold’s major trend will remain up, above this average now at $328.

For now, we could see gold weaken in a normal downward correction until July or August and it could fall to possibly the $330 level. The month ahead is, therefore, an ideal time to buy or add to your positions.

Meanwhile, gold shares have been forming a massive bottom for over five years now. Chart 2 shows the huge head and shoulders bottom the XAU has formed. And since it’s been forming the right shoulder over the past year, it means a breakout is nearing.

The recent rise is reinforcing the shoulder, and once XAU closes above the 2002 high at 88, the head and shoulders bottom will be complete. Based on this technical pattern, the XAU could then soar to near the 160 level, which would mean a rise of 100% from current levels. This chart is reinforcing the action in the gold price and it’s also saying, buy and hold gold shares.

By Mary Anne and Pamela Aden
This commentary has been provided courtesy of adenforecast.com

Mary Anne & Pamela Aden are internationally known analysts and editors of The Aden Forecast, a market newsletter providing specific forecasts on gold, gold shares and the other major markets.
Click here to visit their website at http://www.adenforecast.com