Fundamental headwinds due to the government shutdown along with technical weakness, a break of risin...
An Aden Analysis
09/16/2005 12:00 am EST
"Our hearts are broken as we see the scenes of devastation caused by Hurricane Katrina," notes Mary Anne and Pamela Aden. "Meanwhile, the longer-term repercussions are yet to surface." Here, they look at the impact on oil, bonds, gold, and the dollar.
"We wouldn’t be surprised if the Fed stops raising interest rates. If oil now stays at high levels, it’ll increasingly hurt more consumers, who will likely cut back on spending too. And since consumers account for two-thirds of economic growth and nine out of the past ten recessions have coincided with rising oil prices, it could also trigger a recession, which would affect the housing boom.
"And if US rate hikes are on hold, it’s going to make the dollar less attractive than other countries where rates are higher, which will also add to downward pressure on the dollar. Further, if the Fed starts pumping again as it’s done in the past whenever there’s big trouble, then inflation’s eventually going to intensify. Combined with high oil, this too will weigh heavily on the dollar like it did following the stock market crash in 2000
"For now, we believe the US dollar has plenty of room to decline further. If the dollar index closes and stays below 86.10, the three-year-old bear market will remain in force. The Canadian dollar is strong as it approaches its 2004 highs and it’s leading the other currencies in a renewed rise. We continue to recommend buying and keeping a 25% position in Canadian, New Zealand, and Australian dollars. Keep the Aberdeen Asia Pacific Income Fund (FAX ASE) and it’s okay to buy the Franklin Templeton Hard Currency Fund (ICPHX ).
"We also suggest keeping a 25% position in US dollar government bonds and T-Bills for now. A renewed rise in bonds began in August and it looks like it may be the final leg up in the incredibly long bull market. If you haven’t bought long-term US government bonds yet, it’s okay to buy now. Another good way to take advantage of the bond rise is by buying iShares Treasury Index Fund (TLT ASE) as it rises with bonds prices.
"The weaker dollar helped provide a boost for gold, but gold’s actually been on the rise for 4½ years. And even though it’s risen 78% in that time, most people don’t realize that a bull market is underway. That’s good because it means this bull market is still in its earlier stages. And if high oil pushes inflation higher it would give gold an extra boost. The same is true of uncertainty and these have indeed been uncertain times. And with the dollar set to weaken further, especially if the Fed stops raising rates due to the pressures of a slowing economy and the repercussions of Hurricane Katrina, we could see gold a lot higher. If gold reaches a new high above $456 (last December’s high), then the bull market will be super strong and gold could then reach $500.
"Currently, the resource and energy sectors are bullish but overbought. As such, we recommend traders take profits in the energy and resource shares. For long-term investors, we suggest selling half of your positions or taking out your original investments in energy and resource holdings. Gold, however, is poised to move higher, and we would continue to recommend buying new positions in physical gold and silver, iShares Comex Gold (IAU ASE), streeTRACKS Gold Trust (GLD NYSE), as well as positions in the strongest gold shares, which are Royal Gold (RGLD NASDAQ), GoldCorp (GG NYSE), Buenaventura (BVN NYSE), Glamis Gold (GLG NYSE), and Barrick Gold (ABX NYSE)."
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