Gold: Strong Bullish Action

The following article was written by Mary Anne and Pamela Aden for the October 2010 edition of Peter Schiff’s Gold Letter.

Gold’s strength is unusual. Just when we thought that gold was taking a breather from its stellar rise, it quickly turned up.

Gold has already surpassed its June record high. Its decline through July was moderate, giving up less than 8%, and this action is bullish.

Someone is clearly buying up gold at every opportunity. Is it central banks, hedge funds, or nervous investors?

We think it’s all of the above.

A New Era

Many believe that gold will have a sharp decline before another up leg gets underway. It’s a rare time in history to see gold rise steadily for almost two years, without more than a 14% correction. This alone is why another leg up is unexpected.

This month, however, marks a year since gold closed above $1,000 and broke into a stronger phase of its decade-long bull market. If gold continues to rise, it will clearly reinforce that a stronger phase in the new era of precious metals is indeed underway.

Growth Market

Gold demand continues to grow. It surged 36% in the second quarter and the amount of gold held at exchange-traded funds is way up. The SPDR Gold Trust (NYSE: GLD) is the sixth-largest holder of gold in the world today.

But even with overall demand growing, gold as a percentage of global financial assets is still small compared to 1980, when the gold price reached a record high. This tells us that gold’s bull market is still young, in spite of its 9 1/2-year rise.

Historical Comparisons

In fact, the gold price this past decade reminds us of the US stock market in the 1980s. It had a good run, but the best was still to come.

The 1990s were filled with optimism and good times. A new revolution in technology was in full swing, which pushed the stock market to new heights.

In comparison, the coming decade has the opposite outlook. While technology continues to get better, the US and other Western economies are racked with debt, global power is shifting, and we have war.

Bonds – A Viable Alternative?

Bond prices have been soaring as interest rates decline. Recessionary pressures took their toll, but it looks like the bonds’ strength won’t overtake gold’s.

In 2003, gold confirmed its strength over bonds for the first time in over 20 years (see Chart 1) and has been stronger than bonds since then (excepting the brief gold dip during the heat of the meltdown in 2008).

A Class by Itself

Gold is stronger than stocks, bonds, and the dollar… and it’s positioned to move higher in an intermediate rise, especially considering the seasonal trend.

For those of you who have been waiting to buy at a better price, we believe it’s best to average in. A correction will come, likely in October, and when it does, take advantage of it — but don’t wait for it completely. Keep new positions focused on gold and silver from now onward.

A Note on Silver

Silver is starting to take off. It has jumped up in recent weeks as it benefits from the gold and copper rise.

You may remember that silver outperforms gold when the resource sector and gold are both strong at the same time. This was the case from 2003-2007 and it’s starting to happen again (see Chart 2).

Note silver’s uptrend and channel since 1990. It actually reached a low in 1990 and essentially moved sideways during the 1990s, while gold fell. Since 2004, silver has been strong, and it doesn’t show any sign of losing momentum.

Now that silver has closed clearly above its 2008 high of $20.80, the $25-$28 level is our next target.

Mary Anne and Pamela Aden are authors of The Aden Forecast, an investment newsletter now in its twenty-ninth year. It is one of the longest continually published investment newsletters in the world. They specialize in the precious metals and foreign exchange markets, as well as the US and international equity and credit markets.

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