The gold market and resource sector have consolidated; a "B" decline is underway and gold could still see more downside, cautions Mary Anne and Pamela Aden, resource sector experts and editors of The Aden Forecast.
Gold is weak below $1850, and if it declines clearly below $1770, we could possibly see the 23-month average tested at $1730 (see chart below). The indicator also has room to decline further.
Silver is vulnerable to a further decline by staying below $26.50. If it declines clearly below $25.80, we could see $25 tested. Gold shares are also holding near their lows.
The HUI index will remain weak below 295, and 250 is strong support. Gold will tell us when gold shares are nearing their lows.
Going back to 1968, gold has risen during every bear market decline in stocks since then. This includes the stock market declines in 1968, 1970, 1974, 1982, 2001 and 2008.
So the odds favor on ongoing gold rise whenever the stock market bubble bursts, which could be sooner rather than later. In fact, we’re already seeing signs that the bull market in stocks is likely in its final stages and approaching a major top.
Some of these signs are rampant speculation, buying by novice investors, soaring debt to buy stocks, the timing of this bull market, which is near maturity, stocks are expensive, fund managers buying big while hedge funds are selling, and most important… our reliable leading indicators are overbought and this coincides with market tops.
However, money remains very easy and interest rates are near 0% and that’s good for stocks. So overall, the market may head higher for a while but it’s near the end of the road. That being the case, you may want to sell some stocks now, if you haven’t already.
We know some will disagree, but all things considered we believe the risk is high for at least a steep downward correction to unfold in the weeks or months ahead. And more likely, it’ll probably evolve into a full blown bear market decline.
At this point, we don’t yet know what could trigger a sharp stock market decline, but basically it could be any number of things... inflation, a drop in the dollar, higher interest rates, a financial accident or wild card, slow economic signs, a political event, or simply the froth in the markets is overdone.
Meanwhile, if you want to buy bonds with a high degree of safety and stability, then inflation adjusted bonds — or TIPS as they’re popularly called — would be your best bet.
When inflation rises, which is currently the case, it’s bad for bonds and it keeps downward pressure on bond prices. But the TIPS bonds are adjusted based on the current CPI (Consumer Price Index, which is the popular inflation index). This, therefore, removes the inflation risk, and that’s a big plus.
We think there’s a good chance interest rates could be in the process of embarking on a mega trend reversal later this year. If so, that would mean interest rates could keep rising in the years ahead.
And if they do, bond prices would drop. But as long-term rates head higher, a TIPS bond investor would collect an inflation free higher return.
When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater. You can buy these from the Treasury or through a bank. The bottom line is that this could be an attractive long term option for income starved investors.
