GOLD AND SILVER BLAST OFF By Mary Anne &
Pamela Aden | November 5, 2010
October saw gold soaring to
record highs while silver shot up even more, reaching a
30-year high. Yes, the stronger phase of the bull market
is flexing its muscles.
Gold's exceptional rise has
now reached our current target level at $1,350. It's been
a super rise, up 55% since April 2009... or, to put it another
way, gold has soared 17% in the last 10 weeks alone!
BUBBLE, BUBBLE, TOIL
& TROUBLE?
Gold is still far from the
mania stage. The average investor is just starting to appreciate
the rise in gold. They know things aren't right and they
are learning that gold is a safe haven. They see the dollar
falling, the economy dragging with debt, and the Fed trying
to keep it together. The public is concerned, but a gold
mania is clearly not here yet.
Remember, it's not just the
US, Europe is also hurting. Whether we like it or not, no
country wants a strong currency right now. With stiff competition
for exports in the global economy, governments believe a
weaker currency gives them an edge on trade.
This is one important reason
why gold is rising in all currencies, as Chart 1 shows.
Gold reached a record high last June in euros and Swiss
francs, and it's holding near its highs versus the Australian
dollar.
Most interesting is the Swiss
franc. It's been one of the strongest currencies, reaching
a record high against the dollar in recent weeks at the
same time gold hit a record high. Yet when comparing gold
to the Swiss franc, you can see it's holding near its record
high. In other words, gold is stronger than the Swiss franc.
PARADIGM SHIFT
It took the financial crisis
and the ongoing aftermath to change the way people view
gold. Confidence is growing and the change in the central
banks' actions and attitude toward gold was key in giving
a green light to investors.
Central banks stopped selling
gold and they've become net buyers this year for the first
time in two decades. They're expected to buy 15 metric tonnes
of gold this year, which is a major turnaround. Gold is
becoming an important reservable asset.
Gold miners have been shutting
down their hedging too. Anglo Gold Ashanti, the third largest
mine, is closing their hedging by 2011. This means gold
miners also believe gold is going higher. Plus, the global
holdings of gold exchange-traded funds (ETFs) are at a record.
HOW LONG CAN IT LAST?
Some people claim that gold
is in a bubble and it's ready to fall. If you think a substantial
rise in government confidence and a bull market in the dollar
is at hand, then you would be correct to think gold is due
to slide. We don't see it.
Historically low interest rates
in the US and Europe are providing another boost for gold
because it doesn't have to compete with the currencies,
since gold does not pay interest. But actually, during the
1970s bull market, interest rates rose with gold. The key
here is inflation as CHART 2 shows.
CHART 2
You can see that when inflation
is higher than the T-Bill rate (above zero, shaded area),
it coincides with a bull market in gold. So, as long as
inflation is higher than short-term interest rates, the
environment will continue to be positive for gold.
SILVER SHINES BRIGHTER
Silver has jumped up to a 30-year
high, gaining 31% in 10 weeks. It beat our previous $23
target. And as much as silver has already risen, it's still
clearly not overbought. It's on a roll and our next target
is the $27-$30 level.
When silver is stronger than
gold it tends to coincide with a rising resource sector.
Silver then gets the benefit of being both a precious metal
and a base metal. This is another way of saying that if
the emerging economies remain strong and demand for resources
stays high, silver should continue to outperform gold.
TOO LATE TO BUY?
For new buyers, our suggestion
is to buy gradually this month and next. Buy gold, silver
and mining shares on weakness. Palladium has been very strong,
rising 38% since July. Platinum is following. Both are in
major uptrends above $420 and $1500, respectively.
Mary Anne and Pamela Aden
are authors of The Aden Forecast, an investment newsletter
now in its twenty-ninth year. It is one of the longest continually
published investment newsletters in the world. They specialize
in the precious metals and foreign exchange markets, as
well as the US and international equity and credit markets.