Trading is not a game of exacts. Perfectionists need not apply. Markets are made up of many irration...
A Golden "Dynamic Duo"
05/12/2006 12:00 am EST
Unlike many who have joined the gold bandwagon after two years of gains, Mary Anne and Pamela Aden have been participating since the bull move began. Here, the “dynamic duo” review the causes for this strength, and their outlook for what lies ahead.
“Its been an amazing month. Even though we’ve been expecting a higher gold price, its still been surprising to see how quickly and sharply gold has moved up. There’s no question the bull market is heating up and gold is beginning to attract attention. Higher prices have caused investment funds to jump into the market and they’ve been the biggest buyers this year. These funds are looking for better returns than they’re getting in stocks and bonds, and with metals the clear winners, they’re going for it.
“The likelihood of future inflation was one reason why the dollar is headed lower. Investors often turn to gold during times of dollar weakness. And with inflation brewing and the US dollar now confirming a renewed bear market decline, this will continue to keep upward pressure on gold. The most important factor driving gold higher this month, however, is what’s happening in Iran--increased tensions over Iran’s insistence in proceeding with its nuclear plans.
“Then there’s the ongoing global demand, which shows no signs of slowing. On the contrary, China’s economic boom continues at its best growth rate in ten years and it’s buying up more commodities to keep building its infrastructure. Don’t forget, China is experiencing the biggest human migration in history as people from the countryside pour into the cities and it needs everything. Demand is also growing in India and the former Soviet countries.
“Interestingly, a recent report by UBS showed the many similarities between India today and China in the 1980s and 1990s. If this continues, and with a population of one billion people, India’s demand for raw materials could triple over the next ten years. And combined with China’s ongoing demand and one billion population, these two countries could be the main drivers of the mega bull market in commodities over the next decade or more.
“Last but certainly not least is money and debt. The world is swimming in money. It’s being produced like mad and that’s the fuel that’s been driving commodities higher. To pay for all its expenses, the US simply prints money. All this money is the cause of inflation and that’s why gold is rising. But the magnitude of what’s happening has never been seen before. Gold would have to reach $2,000 in order to coincide with $850 in 1980. But since the world financial situation is now far more serious than it was in 1980, it would not be unreasonable to assume that gold will ultimately go much higher than $2,000.
“This isn’t anything new. Its happened dozens of times throughout history. Empires start from humble beginnings, they work hard, grow powerful, fight wars, and debase their currencies. This can take hundreds of years and, unfortunately, the US is following this historical pattern. The dollar has lost about 98% of its purchasing power over the last 90 years, it’s dropping against the other major currencies, and it’s starting to lose its global reserve status. History shows that no paper currency in history has survived and the US dollar will not be an exception.
“Gold, on the other hand, has maintained its value for thousands of years. It always has been, and still is, real money. And even though it’s not officially considered money, the market is telling us otherwise. It’s recognizing gold’s historical value, which is why gold is rising and why it’ll continue to rise against all other paper currencies. Gold is really where you want to be in today’s world in order to conserve what you have.
“This is a mega shift based on long-term fundamentals and if you’re not in the market, we urge you to start getting in because the years ahead could be unlike anything investors have seen in decades. For now, we’re looking at $850 gold, the 1980 high, as the next upside target. The way gold’s been moving, this could happen sooner rather than later. But once that level’s broken, the sky’s the limit.
“We’re constantly asked by investors, ‘what’s better to buy, the metals or the shares and what’s the best way to buy.’ We personally like keeping a larger part of our holdings in physical gold, and a smaller part in the shares, due to the risks of individual mining companies. And it’s now easier to buy gold compared to before. StreetTrack Gold Trust (GLD NYSE) has been a huge success because you can easily buy it through your broker.
"Among mutual funds, the strongest performers are DWS Gold & Precious Metals B (SGDBX), DWS Gold & Precious Metals AARP (SGLDX), Tocqueville Gold (TGLDX), and US Global World Precious Minerals (UNWPX). Our favorite gold mining shares have risen impressively and the strongest are Agnico Eagle Mines (AEM NYSE), Goldcorp (GG NYSE), and Glamis Gold (GLG NYSE)."
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