Long-term Bond Yield Mega Trend - A Unique Era
Interest-Rates / US Bonds Jun 15, 2007 - 04:47 PM GMTBy: Aden_Forecast
The gold market has been under pressure lately and some investors are feeling a little nervous. But the major trend is clearly up. That being the case, let's stand back and look at the facts...
Gold has been rising for over six years and it's gained 158% since then. That works out to 26% per annum, which has consistently been better than most other markets. The recent weakness is a bump in the road and it's not unusual. We continue to believe that gold will likely rise for years to come, eventually reaching at least $2000 and it'll probably go even higher.
THE PERFECT STORM
Why? We've discussed the reasons why many times before but this is a good time to review some basics.
Essentially, the perfect storm is gathering. That's the big picture and it's by far the most important. If you understand this and invest based on what's happening, we feel strongly that you'll continue to be well rewarded in the years ahead.
Number one on our list is the global boom and wealth shift. Three billion people are now involved in the global economy who weren't involved before and this is a massive development. Think about it for a moment…
THE WORLD HAS CHANGED
Twenty years ago China was one of the poorest countries in the world, and so was India . Russia and Eastern Europe were Communist and shortages were commonplace. Then it all changed. Communism fell. China became a capitalistic society and the world's leading manufacturer, embarking on a mega boom that's poised to continue for decades.
Remember, in all of world history no country as large as China , with its over one billion population, has grown as fast and strong as China has in such a short time.
It's the fastest growing economy in the world, it has the largest cash reserves and you have to see it to believe it. There is growth everywhere… widespread building, modernization, super highways, bright lights, big cities, thousands of skyscrapers, the world's fastest bullet train, and hard working people who are proud of the path China is on.
Then there's India who is following in China 's footsteps. Along with its 1.1 billion people, it's become the world's main service center. India 's growth has been impressive and the demand for commodities from these countries alone has been incredible.
China , for instance, has been buying up a large share of the world's steel, lead, tin, cement, aluminum and other raw materials to build its infrastructure. Commodity imports are soaring and China is the world's second largest oil importer.
All of this demand has been the key factor driving the commodity markets higher in recent years and there's no end in sight. This is also coinciding with the mega commodity cycle, which has been quite consistent for over 200 years.
This cycle hit bottom in 2000 and based on its historical pattern, commodities will likely keep rising for another 15 years or so. If they do, it'll be positive for gold and the other precious metals since these markets generally move together, along with oil, natural resources and so on.
This demand factor is very important, especially combined with the limited commodity supply. But demand is not only coming from China , India and the former Communist nations, the whole world is doing well. Currently, only two countries are in recession and over 100 countries are growing at 4% or more.
Again, this global growth fuels demand, which is good for commodities and, therefore, it's good for gold.
MONEY-MONEY-MONEY...
Spending, money and inflation are the other three big factors we've often discussed and they are equally important. In fact, that's really what this long-term bull market in gold is all about and it's the essence of the perfect storm.
The U.S. is the world's largest debtor nation. It keeps spending money in amounts so large it's difficult to put it into perspective, but we'll try… For example, at $5 million per day, it would take nearly 40,000 years to pay off the U.S. debt and liabilities. The Iraq war alone is going to cost the same amount as all of the gold that's ever been produced in the world since the time of Christ ... and on and on.
It's all truly mind boggling but it's happening and it's going to intensify. How do we know?
The baby boomers are approaching retirement and their numbers are huge at 26% of the total U.S. population. The bottom line is that 20,000,000 of the retiring boomers do not have enough money to retire on. They'll have to rely on Social Security and Medicare over the next 20 to 30 years. In addition to the majority of retired Americans who already depend on Social Security, this is going to zap an already badly strained system.
Not to be gloom and doomers but these are the facts. Very simply, the boomer effect is going to exacerbate the debt problem.
... DRIVING ALL ASSETS HIGHER
As we've often pointed out, to pay for all its expenses, the government simply creates money and it's been creating piles of money. Interest payments on the debt alone are about $200 billion annually. Other countries have been pumping out lots of money too and this massive, worldwide liquidity has been driving all assets higher.
From stocks to commodities, precious metals, oil, currencies, art and real estate… if it's an asset it's probably been rising. That's the good news but there's a price to pay for all this money creation and it's a high one.
Inflation is the direct result of excessive money creation. So far, most people haven't noticed much. Sure, they'll complain that their money doesn't go as far as it used to, but as spending, debt and money grow, inflation will too.
This will also make the dollar worth less. There are too many dollars floating around, which cheapens the currency and that's one of the main reasons why the dollar's been falling and why it'll continue to fall. And since gold is a hedge against inflation and it moves opposite to the dollar, that's why gold will continue rising.
GOLD REAL MONEY, DOLLAR NOT
It's also important to understand what happened in the 1970s and why this will continue to affect you.
Briefly, from that point on and by presidential decree, the dollar was no longer backed by gold. This removed all discipline and money could then be created at will.
The dollar became a paper currency, it began to float in the free market and it has lost 70% of its value since then against the other major currencies. The dollar will continue losing its value because it's only backed by paper, by a country that has sadly run up the biggest debts in world history. Throughout history, no paper currency has ever survived. It's a slow process but it'll eventually happen to the dollar too.
Gold, on the other hand, has stood the test of time. It has a 5,000 year track record and it's valuable. It always has been, and it always will be.
Gold is real money and it has maintained its purchasing power over the centuries. And as the dollar continues to slide, and spending and money creation continue on their merry way, gold will be the ultimate beneficiary.
THE FINAL CONFIRMATION
Plus, there's even more and this is truly the final confirmation (see Chart 1 , which we believe is the most important chart we're currently following). Here you'll see the really big picture of the 30 year yield, together with its very long-term 80 month moving average, going back to 1930.
Note that the yield has been declining since 1981 and in recent years it's been building a base. The long-term moving average identifies the mega trend and it doesn't change direction often. In fact, it's only changed three times in 77 years, but when it did, it then set in motion a new era and mega trend that lasted for decades.
The last time that happened was 22 years ago. After long-term interest rates peaked near 15% at the end of the inflationary 1970s and gold had soared to $850. the mega trend has been down since then.
Currently, however, another one of these big changes is taking place. This mega moving average is at 5.03% and the 30 year yield has soared above it. It's now at 5.25%. if the yuield stays above 5.03%, the mega trend is up, which is a huge new development. It means long-term interest rates are going much higher and htat big inflation is coming for years to come, which is similar to what happened in the 1970s.
This would also coincide with the mega uptrend in commodities and it would loudly signal that a totally different era is in store, contrary to what's been happening for over 25 years, and it'll be extremely bullish for gold.
So bumps in the road shouldn't sway you. Gold is in a mega trend based on fundamental factors that are not going away any time soon. So again, stay invested and we feel strongly that you'll be glad you did.
By Mary Anne & Pamela Aden
Mary Anne & Pamela Aden are well known analysts and editors of The Aden Forecast, a market newsletter providing specific forecasts and recommendations on gold, stocks, interest rates and the other major markets. For more information, go to www.adenforecast.com
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Comments
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Toby
16 Jun 07, 11:04 |
So to benefit from this change in trend we need to buy gold ? |
