When Should I Buy Gold Again?

04/16/2008 12:00 am EST

Focus: MARKETS

Mary Anne & Pamela Aden

Co-Editors, The Aden Forecast

Pamela and Mary Anne Aden, editors of the Aden Forecast, say gold may continue to correct but it's in a long-term bull market and there may be buying opportunities soon.

The subprime crisis and its rippling effects have kept gold and silver strong since last summer. (In the first quarter alone, gold was up 10%, [while] silver gained even more, near 17%.)  In fact, it's helped keep the gold price strong in all currencies. But the Bear Stearns emergency rescue seemed to be the final blow for now.

Since then, gold has been coming down from its $1004 record high posted on March 18th. The dollar has also formed a small bottom. The intermediate trend appears to be changing, [yet] the major trends are very much intact, which is up for gold and the metals, and down for the dollar.

Gold's [recent] rise is finally over. After rising 55% in nine months, in one of the best intermediate rises in the current seven-year bull market, it signaled that this rise is due for a well-deserved rest. Gold's next step is likely to be a good downward correction that could take several months to develop.

We are asked this question more than any other one: When do I buy? Buying during weakness is ideal, but since it's not always practical, averaging in over a period of months is the next best strategy.

We now highly recommend buying gold and silver over the next few months. In a worst-case decline, gold could fall 22% (like it did in 2006), which would take it to the $780 level. If it declines by 15% (like it did in 2003), the weakness could end near $850. If gold holds above $840, it'll be incredibly strong.

The summer is normally a seasonally low time for gold, and this current decline could end in June through August. This means buying heavier during the summer may end up being the best time to buy. 

Gold is also overbought compared to the Dow Jones Industrial Average, which means they are set to change roles for a while. We could see a gain in the Dow and a loss for gold in the second quarter, and if we do, it shouldn't be a concern.

Some worry that the March peak was the peak for gold. This is very unlikely considering the world situation and the economic imbalances today. Plus, demand for gold is growing strongly. The gold market is currently more powerful compared to the 1970s. There is much more money behind the move. Whether it be China, India, the Middle East, Russia, or elsewhere, the world has mega-wealth and it's acquiring gold.

Gold's 65-week moving average works very well in identifying the major trend. The gold price has been consistently above this level since August 2001. This average provides solid support at $755. For now, gold is vulnerable below $950 and it'll be weak once it stays clearly below $920.

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