Gold: How High? How Low?

06/16/2006 12:00 am EST

Focus:

Mary Anne & Pamela Aden

Co-Editors, The Aden Forecast

Mary Anne and Pamela Aden are well known as being among the leading authorities on natural resources, with a noted expertise in precious metals. With the market having pulled back, the sister now ask two critical questions: how low and high can gold go?

"Gold and the other metals have fallen sharply, but considering they’d risen so far and fast this year, it wasn’t a surprise. It’s basically a normal bump in the road and despite this decline, gold’s still looking good. Its parabolic rise remains in force and it’s strong. Basically, there are six major factors driving this bull market:

  1. Too much spending
  2. Too much money is being produced
  3. Inflation
  4. The weak US dollar
  5. International tensions
  6. China’s growth and ongoing demand for commodities, which is coinciding with a new upmove in the 200 year commodity cycle.

"The last big bull market in gold was in the 1970s and it lasted 12 years. In recent years, we’ve seen many similarities to the 1970s, suggesting this rise could also be similar. In the 1970s, for instance, there was big spending on guns and butter as the Vietnam War dragged on. Deficits were large, and inflation, oil, and gold were soaring and the dollar was dropping. But there are also differences in today’s world compared to the 1970s that suggest the current gold rise could be even bigger than the bull market of the 1970s.

"Most important, there are nearly 50% more people in today’s global economy who weren’t there in the 1970s. Aside from China, there’s also India and the former Soviet countries. Taken together, this comes to about three billion people. Plus, China and India have historically been interested in gold. India accounts for 23% of consumer gold sales and its gold consumption is expected to rise 33% this year, and China has made it easy for national gold buyers.

"Another difference this time around is that no country wants a strong currency, in order to compete in the global marketplace. The end result is that gold is now rising around the world, hitting records, and attracting attention, reinforcing that investors worldwide are putting more faith in gold. Yet another difference compared to the 1970s is global warming and changing weather patterns, which will continue to be a big force affecting the commodity markets.

"How high is high? We’re looking at $850, the 1980 high, as the next upside target. Once that level is broken, gold will be in new uncharted territory, but we can make some reasonable assumptions. As you know, simply adjusting for inflation, gold would have to reach $2,000 to equal the $850 high in 1980. But since there are major differences now, it’s not unreasonable to assume that gold will eventually go higher than $2,000.

"Another way of looking at it is in percentage terms. In the 1970s, gold rose 2300% in 12 years, from $35 to $850. So far, it’s only risen 189% in the current five year bull market, from $250 to $722. But if this bull market ends up rising 2300% like the one in the 1970s did, then gold would eventually get to $6,000. As wild as this may seem, remember that $6,000 in the future will not be worth the same as $6,000 today.

"Obviously, we don’t know how this will ultimately end up. But we do know that the ingredients are in place for a 1970s type performance, or better, for gold. Don’t forget, gold was a dead market for over 20 years from 1980 to 2001. Psychologically, gold is still coming out of a 20-year bear market.  It takes a long time for a bull market to catch wide attention, which is why it can be put into psychological stages.

"Gold’s first stage was the rise in 2001 to 2003 when few noticed the rise. The second stage is full of worry as doubts are abundant. Producers and investors alike feel the rise may not last, as we’re now seeing. The third stage is the mania time when the public gets involved. The fourth step started last December, and it’s the last step to be completed before record highs are reached. This will happen when gold closes above the 1980 peak near $850. It’ll then be wide open for the public to catch on.

"How far could the current correction go? This is now the million dollar question. Gold is still well above its 65-week moving average now at $500. This is the major support for gold. For now, keep an eye on the numbers. We had forecast that a move below $610 would mean a steeper decline is underway and gold could then decline to the $550 level, or possibly to as low as $500.

"On the upside, if gold closes back above $670 and stays there, then a new rise will be starting, which would be exciting because it tends to be the strongest rise in a bull market. Meanwhile, among our recommended gold stocks are Glamis Gold (GLG NYSE), Newmont Mining (NEM NYSE), and Goldcorp (GG NYSE). Among gold funds, we like US Global World (UNWPX) and Tocqueville Gold (TGLDX)."

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