The Black and the Gold

09/10/2004 12:00 am EST


Mary Anne Aden

Co-Editor, The Aden Forecast

"We all know that gold and oil tend to move together; after all, both are tangible assets," says Mary Anne and Pamela Aden. Here, the co-editors of The Aden Forecast look at the outlook for gold and oil and the best stocks to play these markets.

"The big picture for gold is impressive The summer consolidation looks like it’s coming to an end and once the rise heats up, it’ll be important to see if gold reaches a new bull market high. If this happens, gold will be showing great strength, as it will be entering a stronger step in the ongoing bull market. And when you stand back and look at gold’s big picture, you can see a potentially explosive rise coming in the years ahead. Technically, a massive uptrending channel in gold has formed since 1967. The 1974 and 1987 peaks mark the top of the channel while the 1969 and 2001 lows establish the bottom. The worst part of the bear market was during the tech boom, when gold fell to new bear market lows. The negative sentiment became so ingrained it’s still in the market today, despite the 68% rise since 2001 and the fact that gold broke above its 21-year downtrend, which was very bullish. Sentiment is slowly changing, however, and it’ll continue to change with each new bull market high.

"For now, gold is strong in a renewed rise by staying above $398 and it has major support at $389. But once gold rises and stays above the recent high on August 20 near $414, it could rise to test $430. A break above $430 would indicate the bull market rise is on schedule and gold would then be entering a stronger, very bullish market phase. At worst we could now see gold back and fill a while longer, similar to the mid-2002 time period. And, at best, gold could continue to move up above the April peak. The bottom line is, either way gold is poised to rise in the coming months and $430 will likely be surpassed before year-end. Assuming this huge channel stays intact, once gold breaks above this level, $500 will be the next target.

"And, it’s not only gold. Silver reached a four-month high recently and it’s very firm above $6.20. The major trend is most important, and silver remains in a bullish uptrend as long as it remains above $5.80. For now, silver is holding well above its 65-week moving average, on the higher side of the up-channel, while its leading (medium-term) indicator continues to rise. This suggests silver will stay firm. Silver is stronger than gold as the ratio remains above its moving average in a trend that started last year. This means silver will continue to outperform gold.

"Meanwhile, the bottom line for oil is soaring demand and serious concern about supply. The US and China, for instance, are the world’s biggest oil importers and China’s oil imports have soared 40% so far this year. Plus, the number of cars in China is increasing by more than 50% each year, so demand will likely stay high. These factors strongly suggest that we’re in a new era of rising oil prices. Technically, the oil price has been rising since 1999 and its more than quadruple rise since then makes the 1990 rise look pale in comparison. Oil has become volatile since it approached $50, reaching a short-term top. But with global consumption the largest in nearly 30 years, it’ll likely stay in a major uptrend. For now, the major trend will remain up even if the oil price declines to its moving average at $35.50.

"As long as oil and gold remain in their major uptrends, one will likely feed on the other. Given this outlook, we recommend that investors now buy new positions in gold and silver shares. Among gold stocks, Newmont Mining (NEM NYSE) is the strongest. Silver Standard (SSRI NASDAQ) is the best silver mine. Other stocks in the gold and silver market that we particularly like are PanAmerican Silver (PAAS NASDAQ), Placer Dome (PDG NYSE), ASA (ASA NYSE), BHP Billiton (BHP NYSE), and Central Fund of Canada (CEF AMEX). In addition, energy stocks have now declined into an oversold zone and we think investors should consider buying  small positions in the sector. In particularly, we like the  Energy SPDR (XLE AMEX), New Field (NFX AMEX) and Devon Energy (DVN NYSE)."

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