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April 29, 2006

Gold: Much More to Go
by Mary Anne and Pamela Aden

Gold is soaring. Today it rose over $18 and reached yet another new 25 year high.

Silver has been in a league of its own. It's been soaring too and it's been even stronger than gold. The other metals and oil are surging as well, and so are gold shares, energy and natural resource shares.

So what's driving these markets? Essentially, it's a combination of financial and geopolitical factors. But many are now warning that these markets are overdone and they'll soon be headed lower. And while downward corrections are certainly normal in any bull market, we wouldn't bet against these bull markets.

Why? Because something much larger is currently happening for the first time in about 25 years. It's the mega upmove in commodities and tangible assets, which is poised to last for many more years (see chart). Aside from geopolitical and financial factors, this mega uptrend alone is going to be very bullish for the metals in the years ahead and we feel it's important to understand this very big picture.

The Mega Commodity Cycle

Marc Faber writes a great, always informative newsletter and he discusses these cycles in depth, which were studied by the Russian economist, Nikolai Kondratieff and are, therefore, referred to as the Kondratieff waves. These waves last between 45 to 60 years from peak to peak and the rising waves are characterized by rising commodity prices, new innovations, social upheaval, global economic power shifts and wars.

Briefly, new innovations, which tend to occur during the preceding cost cutting down wave, result in new countries competing on the world stage. This increases global tension because the new competitors (like China today) erode the old economic powerhouse's share of world markets. It also creates wealth imbalances at home, leading to possible social unrest, and wars abroad. This recurring pattern has happened throughout history. It's been documented going back to 1780 and it's now happening again.

Previous Kondratieff upmoves, for example, coincided with the following innovations: in the first one there was road, canal and bridge construction; in the second it was railroads; third was electricity, radio, telephone and autos; in the fourth it was electronics and aerospace and now in the fifth upswing it's telecommunications and internet.

These rising waves also coincided with the following wars and revolutions, to name but a few: the U.S. war of Independence, French Revolution, Napoleonic wars, Austro-Hungary Revolution, U.S. Civil war, Spanish-American war, Chinese Revolution, World War I, Russian Revolution, World War II and the Vietnam war.

Where are We Now?

These mega Kondratieff upmoves normally last around 22 years or more and since we're only six years into this mega upmove, it still has many years to go. This means commodity prices will likely be rising for the next 15 years or so. This tells us that you'll want to keep a large portion of your assets in tangible assets like gold, other metals and commodities, and not in paper assets like stocks and bonds.

Gold's mega uptrend since 2001 is reinforcing this. The booming rise in oil and the ongoing demand in the face of diminishing supplies in the years ahead is yet another reinforcement of this emerging mega uptrend.

Those who recognize this will profit handsomely. But those who follow the mainstream and keep a large portion of their savings in common stocks, especially those approaching retirement age, will be disappointed. And while we certainly don't have a crystal ball, the markets and history are also telling us we're going to be in for a period of wars and social unrest in the upcoming years.

In other words, what we've seen in recent years is going to continue and it'll probably intensify. This too will provide an underlying boost for gold because it tends to rise along with global tension. And considering that gold hit over $2000 an ounce in 1980 at the last Kondratieff peak, adjusted for inflation, it still has a long way to go in the years ahead before it even approaches that previous high.

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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