Veteran analyst Pamela Adenís studies of the market suggest that although recovery is by no means imminent, a respite for the battered stock market is due and she sees important signs of calming in the turbulence. In this wide-ranging interview with The Gold Report as one of Wall Streetís worst years comes to a close, Pamelaówho with her sister, Mary Anne, publishes the highly regarded Aden Forecastótalks about prospects for gold, silver, bonds, currencies and more.
The Gold Report: The stock market is down, the dollar index is down, the LIBOR (London Interbank Offered Rate) has also come down, but gold and Euros are on the rise. One of your recent letters indicated that these are all signs that the crisis is calming down. Could you explain that?
Pamela Aden: Weíve been measuring and watching the crisis and the recession in the various markets. The way they move will tell us when things are easing. The LIBOR rate, for example, stayed high when the T-Bill rate collapsed. This alone was clearly crisis driven. But it has been coming down, which is saying that the crisis is easing. This is a good sign.
This is not to say the crisis is over. Itís just easing up a bit. The dollarís strength has been crisis-related; it isnít based on its own merits. So with dollar beginning to decline after these last several months of crisis-related strength, itís another sign of easing in the crisis.
Therefore, with the dollar coming down, the Euro and gold are rising, as theyíre more closely tied to the dollar than other currencies.
TGR: How about the commoditiesógold, silver, oil and other metals?
PA: When the resource sector was really hot in 2003 and 2006, silver soared much more than gold. So thatís another barometer for the recessionóthe silver-gold ratio. When silver starts outperforming gold, it means the resource sector is starting to strengthen. Silver will have a bigger boost than gold when itís rising as both a precious metal and an industrial metal.
Recent new lows in oil and copper suggest that the recession signs are not letting up. Theyíre still there, theyíre real, theyíre scary; but you also see that Mr. Bernanke is doing everything he can to prevent the economy from moving from recession to deflation.
TGR: How many more essential tools to fight does he still have? The interest rates are at zero. Heís already produced trillions of dollars. What more can he do?
PA: Heís going to keep doing that. He canít lower interest rates from zero, but he has other instruments he can and will use. It also will help when the banks start spending the money they now have available to lend. You can lead a horse to water, but you canít make him drink. Thatís kind of what theyíre facing now.
TGR: Will these moves actually encourage the banks to ease up?
PA: With time, yes, they will. People are still shell-shocked. Everyone is pulling back, and in some cases a lot, by being conservative and careful, not wanting to make any mistakes. They canít afford mistakes. Everyoneís spending less, from the consumer to the banks.
But life goes on and people need loans; banks need to lend. Even though it might not be the wild situation thatís been going on, it still has to happen. That is where itíll start easing up little by little with time.
All of the global stock markets are now completely bombed out, the most since 1974. Itís not casual. Itís a big major oversold situation. That alone says that the markets are poised for a bounce-up. The gold and Euro rise may be leading the way in a rebound rise because most markets need a breather. And while this rise could be impressive on an intermediate basis, it doesnít mean that the bear market will end. A bear market is clearly the stronger force now.
Maybe we might get that January surprise rise on a rebound basis and perhaps Obama optimism will be the reason (with everyone having such high hopes for him). Low interest rates are another positive for the market. When T-Bills, for example, first fell to zero on November 20, it coincided with the stock market low. The stock market has been wanting to bottom, and T-Bills have been sitting practically at zero since then. So that is helping the stock market.
TGR: Despite the potential for a January surprise, then, all the signs you see tell us that recession will continue, albeit perhaps with a little blip in a continuing bear market?
PA: I think so, definitely. Itís to be seen if itís going to turn the market around. Sometimes bear market rallies can be fantastic in the sense that they are rising from a bombed out level. But it doesnít mean that the marketís going to turn bullish from here and continue on into an ongoing multi-year rise. It just means a several month bounce is possible.
It seems to me, the way that the markets are looking, that weíll still have bad news coming out for next year, before mid-year. Weíll likely hear more stories similar to that of the auto industry. The money still has to come out of the Fed. After a rebound rise takes the market out of an oversold area, the market could turn lifeless. It wouldnít be surprising to see a lackluster performance after a bounce.
TGR: In this lackluster market environment youíre describing a continuing recession, do you maybe see the gold sector breaking out and actually starting an increase in a bear sector market?
PA: Whatís interesting with goldís rally over the past several weeks is that after the plunge this year, gold will probably break even or have a gain for the 2008 year. If so, it will be the ninth year that goldís had a consistent gain. Even if itís a small gain or a break even year, itís still not a losing year. Thatís good for gold, when looking at it on a year-by-year basis. The Fed and other central banks are printing money like never before to save the financial system. In protecting their countries and their banking system, they will eventually create the biggest inflation boom that will be exceptional for gold investors.
Itís hard to say when weíll see the end of the whole crisis and recession period. It could be a year away, two years possibly. But after that, is when I think gold is going to go way up, and the dollar and probably a lot of the currencies will take a back seat to gold. I think that gold will have its moment at that time.
For now, gold actually has held up the best of any market. Itís held up better than the stock market, and itís held up better than the commodities. Of course, we canít compare gold to the bond market right now because, since the crisis, bonds have been extremely strong. But when looking at gold compared to bonds going way back it shows that the mega-trend turned to favor gold over bonds in 2003 for the first time since the early 1980s. It said gold is a better investment than bonds. Last March, gold rose too high versus bonds and it was due for a downward correction versus bonds, which, of course, itís done in recent months. Bonds have been stronger than gold but itís now getting closer to a point of approaching the mega-trend. So far, the mega-trend favors gold over bonds in spite of the last monthís rise. This is an interesting indicator and itís still telling us the mega-trend still favors gold, not bonds, even though bonds have been very good in recent months and probably will continue to be good.
TGR: With the interest rates on bonds reaching zero, how does that work as an investment strategy?
PA: U.S. government bonds have been soaring. While the dollar has been strong, during the crisis, bonds have clearly been the best investment by far. If you had bought them in August or September, you would have been the winner of the year. Very few people really caught that. I have yet to see anyone say, ďYeah, Iíve been big on bonds.Ē Itís interesting. It caught a lot of people, even the bond people, off guard.
TGR: But with the dollar now beginning to weaken, would you expect bonds to weaken, too?
PA: You would think so, but they donít always go hand-in-hand. In fact, bonds have been an excellent investment. Just look at it on the mega-trend basis since 1981. They are still in a mega uptrend since then. Of course, gold has been better since 2001 and so have other markets. But bonds by themselves (not comparing it to any other market) have been an okay investment. Itís amazing.
TGR: You said that on a mega-trend basis, gold will outperform bonds even though bonds have been a good investment. What other sectors or specific commodities do you see outperforming the market?
PA: First of all, gold is special because itís the ultimate currency and so itís always going to be the currency in time of need when the dollar is not doing well, and I think the dollar is in for some hard times. Not just the crisis. It also has been very subtly, slowly losing its reserve status since the 1970s. It will be interesting to see what happens once this crisis is over.
How much something hurts will determine whether there will be any clear structural changes. In the U.S., will they really restructure the markets that caused all this? Will globalization end and everyone turn inward and try to protect themselves? These are all things to be seen.
In any case, the countries of the world are seeing that itís not worth it for the dollar to have the reserve status. They have to worry about it because they all have a lot of dollars, so they have to ease out carefully. They donít want it to fall either. But I think thatís going to change over the next 10 or 20 years. We are going to see the dollar eventually become part of a global reserve and not the only global reserve.
The global reserve may become a basket of gold and Euros and dollars and maybe yen. And just with that twist, which doesnít seem like a big deal to most people, is a huge deal for gold and for the dollar. It would make the dollar fall a lot more over time and gold rise a lot more because it would cause a lot more demand for gold, probably more than theyíre able to get out of the ground.
TGR: Do you eventually see the elimination of fiat currencies and going back to a gold standard? Or is this just not possible anymore?
PA: If the worst part of the crisis and recession is now, then maybe not. But I think if things get bad enough, if it keeps getting worse, Iíd say yes. You have to see how other countries see the U.S. Right now, they are probably upset because the U.S. has been able to keep their standard of living due to their privileged reserve status. Having the reserve currency allows them to spend all they want, create all the money they want because everyone accepts their currency. No other country can do that.
If the U.S. could no longer do that, it would be a huge change. Thatís to be seen. I donít like to be so dramatic, but those kinds of changes are coming. It takes time to do it, but over time I think that definitely thatís going to be what happens. That situation is favorable for gold and makes it special versus the commodities. Then, when you take the commoditiesóenergy, resource, even soft commodities as a whole systemóyou can expect a commodities boom once the recession phase is over.
President-elect Obama wants to start a whole new infrastructure phase for the U.S., which is needed and will be the first itís had since the '50s. China and India are talking about doing the same. The emerging countries are also building infrastructure, which will continue to grow even if at a slower pace. This means infrastructure-related investments will be the coming boom, which is commodities. Itís to be seen when, but itís coming. I think that 2009 will end up being the year that people want to have a lot of cash to be able to start picking some bottoms in different sectors. That is probably the best strategy anyone could have right now.
TGR: Even though copper and oil are at lows, do you see a possibility they might go even lower?
PA: Thereís nothing stopping them right now other than the fact that theyíve gone down so far so fast that itís unlikely they will keep this wild pace. But thereís really nothing keeping them from going down further. I do think that the downside is limited for now; and if we see a boost in the stock market, weíll see it in the energy stocks, resource stocks, and probably oil alternatives and base metals, tooóthey are all just as bombed out as copper.
TGR: Youíve said that copper is sort of the barometer of the economy.
PA: Yes, it is the barometer. Itís like the front man for the base metal industry, and itís saying right now that the demandís not there, that the recession is still going, everyoneís still cutting back. But markets always tend to go from one extreme to the other. So right now, resource and energy are bombed out markets.
TGR: Thinking about your advice about staying in cash and looking for some of those bottoms, gold is probably the one thatís looking good to you right now, and youíd be looking forward for more opportunistic circumstances for the rest?
PA: Yes. We like gold and the idea of buying it during weakness. You may not want to load up on it a lot because we still could see some more weakness in gold next year. Itís not totally out of the woods, though itís definitely doing fine. We had a great buying opportunity this year and it looks like we may get another chance to buy at a low price sometime next year. Itís hard to say when, but it looks like by midyear or so. I would think if we do get an opportunity, itís going to be the last opportunity to get it at a decent price.
TGR: Are you a proponent of buying gold equities, the mining stocks?
PA: Right now, yes, because they are the most bombed out of everything. Every sector you look at in the stock market, gold company shares took the number one prize in falling the most. And they fell so much more than gold itself. When you look at the gold share index compared to gold, it was a straight line down.
TGR: Many of your open positions appear to be in very large gold producers. What are your thoughts on investing in large gold producers as opposed to exploratory companies and to smaller ones that may just be coming-on-board producers?
PA: We donít go into the smaller ones because that takes a certain expertise. Many people dedicate their full studies to small caps in the mining business. So I respect the people in that industry and see what they like. We just stay with the seniors that we know. You donít have to worry about management or anything about the mine other than how it performs with the gold price. Thatís why I really donít have an answer for you on that. Of course, thereíll be some juniors thatíll be fantastic, but the seniors were very good, too.
When they got so bombed out a few months back, we definitely decided it was such an easy thing to buy companies like Goldcorp (TSX:G) (NYSE:GG) or Agnico-Eagle Mines (TSX:AEM) or El Dorado Gold Corporation (ELD.TO) (AMEX:EGO), any of those. You could have bought almost anything, but these were the prime candidates for a rebound. I thought they'd rebound nicely and the stock market probably would rebound with them, but theyíre rebounding with the gold price. It makes sense, given how bombed out they were. And that doesnít mean that theyíre out of the woods. Once this rebound is over, weíll probably sell some of our gold shares and wait to see whatís in store for next year. Next year is one to watch the market develop and look for bargains.
TGR: Many people would say youíve got bargains right now.
PA: Well, you do, definitely in gold shares and gold weíve had bargains. And definitely we have been recommending buying those in recent months.
TGR: You also have some of the gold spiders and exchange-traded funds related to gold. How do you compare those investments to owning gold bullion?
PA: Physical gold is the best, but itís not always the most convenient for investors. The exchange-traded funds have been a wonderful vehicle because they allowed everyone to buy gold easily through their broker. It added great demand and helped push gold up in the bull market, so itís been very good. On the downside, gold got caught up in the wind of the crisis. When all the hedge funds were deleveragingóand they still areónot only were they forced to sell everything, which is why most assets went down, but in the case of exchange-traded funds in gold, they also were forced to sell gold on the market. That put additional downward pressure on the gold price. So there was a downside to that and an upside. Itís a good mix to have them both. ETFs make it easier to get in and out whereas you tend to keep bullion and not sell it. I definitely like both.
TGR: Earlier on you mentioned the fact that the ratio between the price of silver and gold is a bigger gap than normal and that silver is poised to increase at this point. Do you see that as just an immediate trend in the next couple of months or will it continue to increase as gold does?
PA: Silver always moves with gold. Whether itís going to be stronger or weaker than gold is the question and right now the trend is favoring gold over silver. Certainly in the years from 2003 to 2006, silver was the winner compared to gold. I think silver is still an okay investment. Again, if you have to pick, I like gold better, but I do like silver too and its rise is just starting. In fact, though itís following gold, it could be leading the base metals in an intermediate rise and silver does have more upside potential in the short term. Itís not even close to overbought.
TGR: Youíve talked a bit about megatrends in gold and bond ratios, and tracking megatrends is certainly something that you and Mary Anne do in the Aden Forecast. Can you tell us a bit more about the methodology you use?
PA: First, weíve always felt that you really canít see when to buy or sell something unless you see it on a chart. The fundamentals and the technicals complement each other nicely, so we do both together. Correlations are also important, such as how the market fits into the whole global system, and how markets correlate with each other. When interest rates rise, what do other markets usually do? If gold rises, what else rises or declines with it? When one market influences another and they move opposite or move together, if that changes, you find out whatís changing it and why is it changing? Correlating markets has been a very big part of our overall ongoing views and opinions of the market.
Over the years we also have developed our leading indicators. We go from short to medium and long term and then the mega-trend. There are three trends. The intermediate trend, for example, occurs when something had a nice rise for three to nine months and is definitely due for a restóor the same on the downside. Long term would be anywhere from three to five years; maybe even seven or eight years. Mega-trend would be more like a move thatís been going on for decades. Those are pretty much the three trends we zero in on. Within that framework, we try to pick the strongest market and break down our portfolio based on that.
TGR: How long have you been publishing the Aden Forecast?
PA: Weíve been writing our monthly newsletter since 1982, so itís going on 28 years. We first started getting involved in following the markets before that, though. Weíd actually been studying the markets privately, following the gold price and also other markets every day since 1976. We wrote a gold report back in 1981, and then we launched the newsletter, which weíve been doing nonstop ever since. Along the way we manage money and weíre going to start other services, but weíve always dedicated ourselves basically to writing the newsletter.
Investment analysts Pamela and Mary Anne Aden are the well-known co-editors and publishers of The Aden Forecast, a monthly investment newsletter now in its 27th year, which specializes in the U.S. stock market, U.S. interest rates and bonds, the international stock and bond markets, as well as the foreign exchange and precious metals markets.
The Aden Forecast is known for its original technical research, leading market indicators, market correlations, cycles and historical market research, and one of the best and most consistent long-term track records in the business. In June 2008, The Aden Forecast was rated the fifth best performing investment newsletter over the past 12 months, out of more than 180 newsletters tracked by The Hulbert Financial Digest (HFD), putting it in the top 2.7%.
†In May 2008, The Aden Forecast was rated the 10th-best performer over the past 12 months according to the HFD, up 18.8%. Over the past five years, the letter achieved a 16.74% annualized gain, vs. 11.77% annualized for the total return DJ-Wilshire 5000 (DJW). Over the past 10 years, the Aden Forecast also outperformed the total-return for the DJW.
The Adens, who live in San Jose, Costa Rica, have authored dozens of reports and articles and have spoken at investment seminars across the globe. Their work has been featured in The Wall Street Journal, Money Magazine, Barron's, The London Financial Times, as well as CNBC business news and the international television documentary, Women of the World.
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