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November 28, 2008

Some Positive Signs
by Mary Anne and Pamela Aden

It's been one major blow after another on the market and economic front. But the historical election excitement provided a welcome distraction during these uncertain times.

There's no question that events have been moving fast and the markets remain volatile. There's been a lot of blame throwing, concern and worries as stocks and real estate values continue tumbling, shrinking most people's retirement funds, investments and savings at best, and creating severe stress due to foreclosures and jobs losses in other cases.

SOME CALM ENTERS MARKETS

Even though the markets have settled down somewhat in recent weeks, the global financial crisis continues. But the worst may finally be over, at least for the time being. It's still premature, but we're seeing some early positive signs.

As you'd expect, this crisis has triggered a flood of questions, comments and concerns. And while we'd love to personally answer each e-mail we receive, there came a point when we simply couldn't or we wouldn't get our work done.

Considering what's currently happening, however, this time we are including the most frequently asked questions and we hope you'll find these useful...

MOST ASKED QUESTIONS...

• The first thing on many of your minds is, what should our investment plans be under an Obama presidency?

It's very possible that the initial reaction to the new presidency will fuel a rebound rise that could last several months in most of the markets. This would be in response to a change in leadership and direction, optimism and so on.

Unfortunately, however, the election will not change the economic fundamentals. These are already set and regardless of who would've won the election, Obama will have to deal with the realities of a recession, credit crisis, vulnerability in the banking system, the housing crisis, bailouts and ultimately inflation.

Investment strategy should focus on these factors, more so than on the Obama presidency, aside from near-term reactions, which will likely be positive. This means gold for inflation, and cash for deflation until we see how this crisis unfolds.

• Why isn't gold rocketing up when the government is printing $700+ billion?

That's what a lot of you have been wondering, especially considering the massive bailouts, which are now actually more than $1 trillion and counting. But at the same time, recession has taken over and the risk of deflation has increased.

This put downward pressure on all of the markets as most assets were sold to cover losses, which caused the dollar to rise and gold to fall. In fact, in September-October it was hard to find anything that was going up, which is very unusual. We feel this is a temporary situation.

The election alone is beginning to ease some of the uncertainty that's been hanging overhead. And once the markets calm down some, which is already starting to happen, investors will again focus on the fundamentals. These remain very bullish for gold because all the excess money being created and spent to keep the economy from going over the edge is going to be extremely inflationary, further down the road, and that's when gold will really shine.

• Which investments are best in a time of recession or depression?

That's when cash is normally king because, as we've seen lately, most investments decline during recessions. That's primarily due to less demand, nervousness, concern about the future, job prospects and other similar factors. Bonds tend to do well too since they are safe and provide income.

• What do you think of the gloom and doomers? (These are worst case scenarios forecasting the end of the financial world as we know it, suggesting the reader will lose everything.) Do you agree?

While the current situation is certainly serious and a worst case scenario cannot be ruled out, it's not a given. The world's central banks are doing everything possible to keep the global financial system together. They're working together and while it will take time to resolve, we don't think the end of the financial world is upon us. These types of extreme views usually coincide with market bottoms, and there are signs that's what we're seeing now.

• How come you didn't see the huge crash coming in the Dow and commodities?

Even though these markets were either bearish or correcting and we identified this down time, we never imagined the declines would snowball into such dramatic moves. Once the turmoil really hit in September, the situation rapidly deteriorated. Panic set in and that's difficult to see beforehand.

Market research is an art. It provides you with information which gives a good indication of major trends, tendencies, which investments will do well, probable scenarios, how to invest accordingly and so on. But it doesn't anticipate the magnitude and speed of an excessive market drop prior to the fact. Research increases the advantage of being in the right markets at the right times, but it's not foolproof.

• Should I sell some of my stock assets now to raise cash, even if it's at a tremendous loss?

No. Most all of the markets are extremely oversold, they're due for a rebound and, unless the markets turn bullish, that'll provide an opportunity to sell at a better price.

• With gold, currencies and the other markets stabilizing or starting to move up, should I buy new positions now?

Yes. Even if the rebound rises only last for a couple of months, these bargain prices should not be passed up if you want to add to your positions or buy new positions. Of course, if the rebounds keep going, that'll be even better but it's still too soon to know if that will be the case. We will cross that bridge when it comes. This would apply to precious metals, gold shares, currencies and other stocks.

• What are your thoughts on the bullish break out for the U.S. dollar?

The dollar surged due to a number of unusual factors related to the credit crisis. But the fundamentals for the dollar remain very weak. Plus, the dollar is the most overbought it's ever been. The dollar now appears to be forming a top and it's likely headed lower while the other markets rebound. That's the current outlook, but over the long-term there's no question that the dollar will continue its long road down, like it's done over the past 35 years. In other words, the dollar's bullish breakout will end up being a temporary phenomenon.

• Is this the longest and steepest gold D decline on record?

Yes, it's been the longest since 1980, and the percentage drop has been the steepest since this bull market began in 2001.

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So these provide a good cross section of what's currently on your minds. We're witnessing unprecedented, dramatic times and it's been difficult. But things seem to be settling down, at least for the time being, and that's a relief following the turmoil in September and October. We'll know much more in the critical months ahead and while it's still premature, so far things seem to be getting a little better.

Over the past week, for instance, gold shot up nearly $90. It benefited as a safe haven and it's currently strong above $802. The Dow Industrials has risen nearly 1200 points over the past week, the U.S. dollar is showing signs of vulnerability for the first time since September, currencies are starting to perk up and gold shares are moving up too.

Despite the poor economic news, the markets are telling us that they like what Obama is doing so far, they like the bailouts and since the markets lead the economy, these are positive signs. So stay tuned.

Mary Anne and Pamela Aden
Aden Forecast.com

Mary Anne and Pamela Aden are internationally known analysts and editors of The Aden Forecast, a market newsletter providing specific forecasts on gold, gold shares and the other major markets.

Copyright © 2003-2009 Mary Anne & Pamela Aden

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