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October 09, 2004

The Election & the Metals Markets
by Mary Anne and Pamela Aden

The metals markets are bubbling and many are hitting impressive highs. But there's also a presidential election coming up, which could go either way and many investors are wondering how this will affect the metals markets. Let's now take a look at what a Bush or Kerry win could mean for these markets.

If Bush Wins

Bush will likely continue the war on terror at the present rate since that's his top priority. The war in Iraq will continue and it'll probably intensify. In either case, that's going to mean ongoing spending and huge unprecedented deficits.

These factors will keep upward pressure on oil and inflation. It'll also keep the dollar weak, especially since Bush has not been opposed to a weak dollar because it's helped boost the economy.

This in turn would be very bullish for gold, the other precious metals and gold shares since gold is the ultimate inflation hedge and it also rises as the dollar falls.

The major trends are currently up for gold, the other metals, gold shares, oil and commodities. The major trend is down for the U.S. dollar. Are these markets forecasting a Bush win? Interestingly, if these major trends stay intact, and there's every reason to believe they will, the markets appear to be signaling a Bush win…but not necessarily.

If Kerry Wins

A Kerry win would probably fuel market uncertainty since he's a relative newcomer on the world stage, resulting in volatile market action.

But since Kerry would also stay the course in Iraq, spending and deficits would continue, despite his plans to lower the deficit. So the results would essentially be the same as under a Bush win.

In fact, if you combine the war on terror expenses with more domestic spending for health care and other benefits Kerry's proposing, the deficits could soar even more than they did under Bush.

Some argue that Kerry would lower U.S. expenses by getting other countries to help shoulder the Iraq expenses. And while that's certainly a possibility, if the savings end up being shifted to more domestic spending, the end result would still be huge deficits.

The bottom line is that there isn't much difference between the two candidates as far as how it would affect the metals markets. Of course we obviously don't know what the future holds, but for now it looks like little would really change based on the election.

If that proves to be true, the major market trends are likely to continue regardless of who wins. As investors, this means you want to continue buying and holding gold, silver, and gold and silver shares. These markets should continue to do well, outperforming other markets in the period ahead, and the action is currently very good.

Gold's Steps: On solid track

Gold is now rising in what we call a C rise. You'll remember, C rises are the best intermediate rise in gold's bull market. All the C rises since the bull market began in 2001 ended at a new high and if the bull market stays on course, this C rise should do the same. This means gold will likely rise above the prior peak at $430. And if it does, the bull market will not only be on course but it'll be entering a stronger phase, which is doubly exciting.

Chart 1 shows why since it helps put the overall gold action in perspective. Gold moves in what we call steps, which are not to be confused with the intermediate moves which we'll get to in a minute. These major moves are identified on the chart as 1 through 4 and they determine the strength, or lack of strength in a bull market. The #1 rises are the best bull market rises, whereas the #4 declines are the worst bear market declines.

The steps were down for over 20 years from gold's major peak in 1980 to 2001. But this changed in 2001. Gold didn't fall to a new low when it formed its #4 low as it had before. This was the first change in the over 20 year pattern. Gold then rose above its 65-week moving average where it has stayed since then, which is bullish.

From there, the #1 rise began and gold soared above its prior #3 peak in December 2002, again a first in over 20 years. This was a milestone because gold rose into the second step of the bull market and the 1996 high became the next target level, which gold reached this year.

Since April, gold has stayed near the upper side of the bullish second step, showing strength. And now that gold is in a renewed rise, if it closes and stays above the April high near $430, gold will be moving into the third bullish step. This would be a major feat because gold would then be breaking above the prior # 1 and #3 peaks, hitting a 16 year high.

So you can see why breaking above $430 will be the next milestone for gold. The $500 level would then be the next target, which is near the 1983 and 1987 highs, and the top side of the third step.

Gold: C rise underway!

And it looks like gold above $430 could happen soon. Chart 2B is our favorite gold timing tool because it works well in identifying the intermediate moves in the gold price. The As and Cs coincide with the intermediate gold rises, while the Bs and Ds with gold declines. In a bull market, the Cs are the best rises and the D declines are the steepest downward corrections (see Chart 2A). Both the A rises and B declines tend to be moderate.

Gold's been rising in a C rise since September. Gold is now heating up and if it stays clearly above the August high at $414, it'll have a straight shot at reaching $430 quickly. Meanwhile, the major trend is up as long as gold stays above its 65-week moving average at $392.

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 © 2003-2008 Mary Anne & Pamela Aden

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