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March 23, 2009

What a Week!
by Mary Anne and Pamela Aden

The Federal Reserve shocked the markets this week by taking new dramatic actions to end the recession. They announced they'll be buying more than $1 trillion in U.S. Treasury bonds and mortgage backed securities guaranteed by Fannie Mae and Freddie Mac. This means the Fed will be creating even more money to buy this debt, and that immediately affected all of the markets.

The U.S. dollar plunged, falling the most against the euro in nearly nine years. This was due to concerns that these actions will fuel inflation and devalue the dollar. As a result, gold rose strongly. Stocks surged too, continuing the rise that started last week, as interest rates fell.

Overall, this looks like the trigger that'll drive the rebound rises we've been anticipating in these oversold markets.

HERE'S WHAT WE'RE WATCHING...

If there was ever a doubt that gold's bull market is forming an eight year low, it's gone now. The Fed's action guarantees that gold has much further to rise in the years ahead. So far, gold's four week intermediate decline we call B has been moderate, but it'll remain underway if June gold again declines below $953. Gold will stay firm above $880. Keep in mind, gold has been much stronger than most markets over the last several months, which means the other markets are poised to outperform gold for the time being.

Gold shares jumped up with the stock market, and if the stock market continues to rise as we suspect, it will give gold shares an extra boost (see Chart 1). The XAU index is strong above 120, and a renewed rise is underway above 124.

Silver, like gold, has been correcting but it's firm above $12. If silver can now rise above $14.55, it would be super strong. Keep an eye on these numbers.

The U.S. dollar finally turned down and the currencies popped up (see Chart 2). The U.S. dollar index dropped nearly 3% on Wednesday and if it now stays below 87 and 85, a renewed dollar decline will be underway. That will be confirmed once the dollar index declines and stays below 82 and 80. The euro soared, leading the way up for the other currencies. If it stays above 1.3150, it'll strongly signal that most of the currencies are headed higher and its next upside target will then be near 1.44.

The stock market looks good and it's poised to rise further in a general market rise... that is, in the U.S. and the world markets. The Dow Jones Industrials is now showing its first solid sign of strength by staying above 7200. A strong rebound rise would be underway above 7900, the 15 week moving average (see Chart 3).

Taken together, all of these factors are very positive for gold. The fundamentals could not be stronger, but it was bound to happen.

THE CRISIS GOES ON AND ON

Very quickly, the initial Obama optimism essentially dissipated, primarily due to the worsening economy. Job losses are intensifying, the stimulus package isn't what many thought it would be, the debt load is overwhelming and there doesn't appear to be an end in sight.

The seriousness of this situation also seems to be sinking in more deeply. Increasingly, people are recognizing that this isn't your typical recession. It's global and massive, way bigger than anything ever seen before and it potentially involves the collapse of the banking and financial system.

Obama has been at the forefront repeatedly warning that, "we are facing an economic crisis of historic proportions... our nation will sink into a crisis that we may be unable to reverse... we risk falling into a deflationary spiral", and so on.

FINANCIAL CRISES OF THE PAST

Most of us in this generation have never suffered through a financial crisis, but they are nothing new. We went back to review financial crises of the past and here's what we found...

The past 800 years have involved a series of bubbles and busts, debt defaults, banking collapses, excessive speculation, panics, currency devaluations, recessions, deflations, inflation and of course normal times. And ever since the first stocks traded 400 years ago, the markets have had a long consistent history of booms and crashes.

Internationally, there have actually been 148 crises in the past 140 years. In more recent times, an interesting analysis looked at the aftermath of 14 severe banking busts, including the Great Depression, and others in various countries that have followed since then. Most important, the conclusions reinforce that the effects of this crisis could drag on for quite a long time.

So drastic measures had to be taken as every effort is made to soften the blow.

GOLD SOARING ON UNCERTAINTY

These same factors have also been driving the gold market. It soared, briefly rising back above $1000, and within a couple of dollars of its all time, record high.

Gold is once again showing that it is the safe haven and it thrives in times of global turmoil, uncertainty, nervousness and fear. That's what we're seeing now and gold is certainly behaving in traditional fashion.

But this is just the beginning. Once inflation eventually kicks in, in reaction to all of this massive government spending, gold is going to soar, but this is going to take time.

It's not going to happen from one day to the next, but that's the underlying foundation pushing gold's bull market higher, and it's not going away any time soon. So stay with your gold. It's your best, and probably only solid bet looking out to the years ahead.

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.