By: Mary Anne Aden and Pamela Aden, The Aden Forecast
Gold is more than just another market. It’s the world’s most reliable and oldest financial barometer, and its movements tell us how healthy the economy is. Gold is also the ultimate currency, which is why central bankers don’t like a rising gold price. It’s the world’s measuring stick because a rising gold price usually means financial trouble ahead.
It’s not a coincidence, for example, that gold reached a major low in August 1999, months before the stock market’s euphoric bubble burst. Gold also moves opposite to the Dollar and it’s not a coincidence that gold formed a major bottom in 1999-2001 while the Dollar was forming a major top.
Many people believe that gold can only rise during inflation because that’s what it did in the 1960s and 70s. Gold rose with inflation because that was the problem then. But gold actually rises when there’s trouble with the Dollar and not just when there’s inflation. In fact, the Dollar is the most important factor influencing gold because it’s the currency used and recognized around the world.
GOLD OUTPERFORMING ALL CURRENCIES…
The Dollar has been falling all year and gold has been rising in a major bull market. Today’s deflationary environment is causing a fierce competition of goods, and when a currency is strong it makes exports higher priced, which means they’re unattractive compared to goods from countries that have a weaker currency. For the first time in many years, the major countries now want their currency to be weak. It’s become more important to have strong exports than a strong currency.
This alone is a breeding ground for a rising gold price. Over the years we’ve often said that the gold price is truly strong when it rises against all currencies.
We know gold’s been rising in U.S. Dollar terms and the major trend is up. We also know the Euro has been stronger than the Dollar. It’s important then to see how strong gold is in Euro terms. And Chart 1 shows that gold’s been in a steady rise against the Euro since 1999. Gold’s major trend is up versus all the currencies, which is the biggest plus for the bull market.
As we’ve pointed out in past articles, however, no market goes straight up or straight down, and that includes gold. In fact, gold is a cyclical market and it moves in an A through D pattern that tends to last a total of nine months. The As and Cs identify intermediate rises, and the Bs and Ds are intermediate declines.
On July 29, for instance, gold posted a low at $302.50 and it was rising in an A rise until two weeks ago. Gold was unable to break above the strong resistance at the $325 level during the A rise, which means it was weaker than previous A rises.
But that’s not necessarily a bearish sign. It just means that gold wasn’t yet ready to move into a stronger phase of the bull market, which it would have done by breaking above the $325 - $330 level.
For now, a B decline has begun and gold could fall to its July low at $302.50. In a worst case, it could decline to its 65-week moving average, the major trend identifier at $297, but the bull market would remain in force. Gold will now likely continue bottoming and it’ll have another crack at breaking $330 during the next C rise later this year.
Based on the consistent timing of 26 previous cycles, the A rise could’ve lasted until November but it essentially ended within the normal time frame. B declines usually last about 10 weeks on average. Some have been longer and some have been shorter. But the point is, it would not be unusual to see downward pressure on gold between now and about December, and that’ll likely coincide with a further upward rebound in the stock market.
Most important to keep in mind, this is a normal downward correction. And as long as gold stays above $297, the major trend will remain up and once the current downward correction is over, the bull market will again take the gold price higher.
Mary Anne & 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. Click here to visit their website at http://www.adenforecast.com
