All That Glitters
Source: Mary Anne & Pamela Aden (8/16/10)
"The volatility never seems to end."
The markets have essentially been reacting to the news of the day for what seems like ages. When the news is good, they rise. When it's bad, or perceived to be bad, the markets get nervous, they become vulnerable and they decline. And investors simply don't know what to do. They're still edgy and uncertain. And as long as this continues, the entire outcome could go either way.
Stay with Gold
So what's an investor to do? Stay in gold. Despite its recent volatility, it's the one investment that benefits during times of uncertainty. As you've seen, it does well during good times and bad. That's been true throughout history, and it still is.
The numbers back this up. Gold, silver and metals related investments have by far been our top performing sector since we first recommended them over the past decade. This year has not been an exception. Again, they've been the top performing group.
So where does that leave us? We're planning to keep most of our metals related investments for the long haul. Considering what's happening behind the scenes, we currently don't see a better alternative. That's especially the case for gold. Why?
There's an old saying that goes, "watch what they're doing, not what they're saying." So we're not being blind gold bugs because again, the numbers show what they're doing.
A Sad Tale
Even though we've talked about this for years and we don't mean to sound like a broken record, but something very important is happening that you should be aware of. . .
This year, for instance, the U.S. national debt has already reached 87.5% of GDP. It's expected to hit 93% this year and over 100% of GDP within five years, a far steeper increase than almost any other country, says the IMF. And the aging baby boom population, along with their future needs, pretty much guarantees this.
The rule of the thumb is that over 90% of GDP a country stagnates and it doesn't move ahead. But the U.S. is not alone.
Italy and Japan are already over 100% and we know what's happened in Japan over the past couple of decades. Zimbabwe is an extreme case, at 240% and we know that terrible story too. Other countries, while still well below the U.S. number, are moving up too. It's a trend, most prominent in the developed countries.
This tells us that hard times are coming. If so, then what we've seen in recent years has been an intro to the years ahead. Yes, there will be ups and downs. There always are but things will be different. Stagflation, unemployment, inflation, global power shifts, recessions, higher taxes and lots of other repercussions will be the likely effects. As our dear friend Harry Schultz notes. Biflation—a simultaneous inflation and deflation- is yet another possibility.
This doesn't necessarily mean the end of the world is coming as some are suggesting. And here too, Japan and Italy provide examples.
Sure they've had serious problems but they're basically still plugging along, despite their repercussions. But again, things will be different and those who've been hoping for a return to the good ol' boom days will be sorely disappointed.
Considering that the U.S. is issuing new debt this year that's nearly equal to the rest of the world combined, the picture remains pretty dismal. So we need to be prepared for what's to come.
For now, central banks are buying more gold. And even some Wall Street types, who have traditionally shunned gold, are now starting to take note. This will continue as this new era, as we call it, intensifies.
Gold is showing the world how it reacts to difficult times. Better said, it's showing how people and governments react during times of uncertainty.
Russia increased its gold reserves in May in the biggest one-month increase ever, while Saudi Arabia is now saying they have twice as much gold as last reported.
Central banks were net buyers of gold in 2009, which is very powerful because it means they do not want to sell their gold like before.
You may remember the Central Bank Gold Agreement under which central banks were allowed to sell 400 tonnes of gold each year. Sales went on, but by 2008 sales were way down. In 2009 central banks were buying more than they were selling and 2010 will surely be similar, as we've been seeing.
Gold demand is building but gold fever is nowhere near. You will recognize it when it comes because there's no fever like gold fever.
Well, maybe the tech fever in the late 1990s was close. Keep in mind though, the gold market is small compared to stocks and bonds, which means it could easily spike up once the fever hits.
The 1970s saw gold rise tenfold. Today gold has only risen about 400% in nine years. This good solid, steady and consistent growth provides a very bullish backdrop for a further rise in gold.
In fact, it's been almost two years now since we've seen a decent downward correction in gold. The March to November 2008 decline, when gold lost almost 30%, was the last great buying opportunity.
Gold's risen nearly 80% since that November low without more than a 14% decline. This super rise caused the bull market to move into a stronger phase last September when the gold price reached the first record high that was well above the $1000+ record highs of 2008–2009 (see Chart 1).
Gold's Big Picture: Very Bullish
As you can see looking at gold's big picture since 1967, this rise since November 2008 came from a cyclical 8-year low bottom that tends to precede good-sized rises in gold. That's been another big plus in gold's favor, along with so many others.
The point is, despite normal ups and downs, gold remains very bullish. So again, stay with it. . .we strongly believe you'll be glad that you did.
Mary Anne and Pamela Aden are well-known analysts and editors of The Aden Forecast, a market newsletter providing specific forecasts and recommendations on gold, stocks, interest rates and the other major markets. For more information, go to www.adenforecast.com.