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March 09, 2007

Big Picture Focus
by Mary Anne and Pamela Aden

All of the markets have been volatile and the precious metals have not been an exception. These markets, however, remain bullish. Despite the recent downward corrections, the major trends are up.

In fact, this month marks the six year anniversary of gold's bull market. This has led to some concern that these bull markets may be reaching maturity. But the evidence points to the opposite. While nothing is ever guaranteed with the markets, gold and silver really have everything going for them, suggesting these rises have a lot further to go.

...SIX REASONS WHY

There are basically six main reasons why and they remain solidly in force. To briefly recap, these are...

1. & 2. SPENDING AND MONEY

The first two reasons are spending and money. The world is swimming in money and that's the fuel that's been driving money assets and commodity prices up. But the magnitude of what's currently happening has never been seen before in world history.

The U.S., for example, is the world's largest debtor nation and its debts are so huge it's hard to imagine. Putting it into perspective, it would take $1 million each day for 189,000 years to pay off the U.S. debt and liabilities. Yet the government keeps spending money it doesn't have.

Since the government doesn't want to cut spending or raise taxes to reduce its debt, it simply produces money to cover its expenses, which is what governments throughout history have always done, and this amount is also huge.

Just over the past year, the amount of paper dollars that've been created is equal to half the value of all the gold that's ever been produced worldwide over the past 2,000 years, which is about $2 trillion. If that shocks you, consider that the war in Iraq alone will probably end up costing the equivalent of what all the gold produced in the past 2000 years is worth.

And it's not just the U.S., other countries are pumping out money like mad too. In Europe, for instance, money has been growing at the fastest rate in 17 years.

3. INFLATION

All this money is the direct cause of inflation, which is our third reason why gold will keep rising. Gold is the primary inflation hedge and it thrives in an inflationary environment.

Inflation has already been rising over the past three years, using official figures. In recent months, it's been picking up steam and even though it slowed this month, that'll likely end up being a temporary blip. Based on alternate inflation numbers, which exclude "gimmicks added to CPI reporting in recent decades," inflation has been about 10% over the past two years, which is the highest since 1981.

Whatever set of numbers you choose to believe, the late, great Milton Friedman taught that inflation is always a monetary phenomenon. So as spending, debt and money supply grow, so will inflation.

4. WEAK U.S. DOLLAR

All those dollars that're being produced cheapen the U.S. dollar, which is why it's falling. That's our fourth positive for gold since gold and the dollar generally move in opposite directions (see Chart 1).

The dollar's been dropping since the early 1970s against the major world currencies when it stopped having a link to gold, becoming instead a floating paper currency. And investors often turn to gold during times of dollar weakness to protect themselves. With the dollar now in a renewed declined, this will continue to keep upward pressure on gold.

Essentially three factors will keep the dollar weak... the massive record U.S. debt, the record U.S. trade deficit due to the higher oil price and low priced Chinese imports, resulting in the unprecedented situation where one country owes piles of money to the rest of the world, and the fact that dozens of countries are cutting back on their dollar reserves, which have declined 16% in the past four years.

5. CHINA'S GROWTH

The booming growth in China is #5 on our list and this alone will play an important role driving gold and commodities higher in the years ahead.

Over the past 20 years, China has gone from being a rural, agricultural economy to a major world force and one of the largest, fastest growing economies in the world. This is expected to continue for the next 20 years or more.

In all of world history, no country as large as China has grown as fast and strong as China has in such a short time. Tens of millions of Chinese have left their farms and moved to the cities in the biggest human migration ever. And since China is growing so fast, it needs everything as it builds its infrastructure.

China has been buying up something like 50% or more of all the world's cement, steel, tin and other raw materials. They've become the world's second largest oil importer and commodity imports have been soaring. They've made deals with countries all over the world for oil and natural resources. In Africa, for example, China is involved in over 900 investment projects, they've agreed to buy half of Chile's copper production over the next 25 years, and so on.

This demand has been a huge factor driving the commodity markets higher. Demand is also growing in India and the former Soviet countries. In India alone, demand for raw materials could triple over the next 10 years.

Remember, 3 billion people are now involved in the global economy who weren't very involved before. That's a lot of new demand and it'll continue driving commodities higher, providing an ideal backdrop for gold in the coming years because gold and the commodity markets generally move together.

6. GEOPOLITICAL TENSIONS

Last but not least are international tensions or war. Unfortunately, that's good for gold too and it's the sixth reason why gold is headed higher.

In 1980, gold shot up to $850 from $400 when Russia invaded Afghanistan. At that time, it was a big deal but compared to what's happening now, the Russian invasion seems almost tame.

We obviously don't know what's going to happen on the geopolitical front in the years ahead. But looking at the world's current hot spots, tensions will likely continue growing in the Middle East.

Iran, Iraq, Palestine, Afghanistan, Syria... the area is volatile and potentially explosive, and any trigger event could send both gold and the oil price soaring.

IN SUM...

Overall, these are the six primary reasons why gold's bull market is not anywhere near maturity. In silver's case, it also has a supply shortage, which gives it an additional boost. Of course, there are other factors involved but these encompass the big picture and we think you'll agree, they're unlikely to change any time soon. That's why we continue to be so bullish on these markets. It's also why we believe gold, silver and commodities are going much higher in the years to come.

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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