Special Report

Mega Changes: Telling Story

By Mary Anne and Pamela Aden  September 12, 2002 This commentary has been provided courtesy of adenforecast.com Gold is an incredible market. It's so cyclical that it's sometimes uncanny. We're often amazed at the consistency of these cycles and this month was no exception. The decline that began on June 4, for instance, was due to end at any time. And right on schedule, gold hit bottom last month and it's been rising since then. Gold shares usually lead gold and many moved sharply higher this month. Gold shares are pointing the way and they're telling us that gold is headed higher too. Interestingly, the stock market is now reinforcing this as well. MEGA CHANGE UNDERWAY Most important, something very big is happening. Not only are we talking about major trends, which normally last a year or two, but we're also talking about MEGA SUPER trends, which generally last several years. Charts 1 and 2 clearly illustrate this. They're two of our favorite charts because they're telling the story loud and clear. And we urge you to follow along in order to clearly understand the big change that is now taking place. Both of these charts are monthly and they're shown together with a 20 month (1.67 years) and 40 month (3.33 years) moving average. Since these averages are very long-term, they identify and confirm the MEGA SUPER trends. Plus, they're not apt to give false signals since they don't change direction easily. STOCKS & GOLD: Trading places Looking at the S&P500 on Chart 1 first, note that it broke clearly below these two long-term moving averages in early 2001, which was a very bearish signal. In addition, the moving averages turned super bearish late last year when the 20 month crossed below the 40 month moving average for the first time in two decades. This alone suggests that the bear market in stocks is likely going to last for years. But that's not all. The S&P has also formed a huge head and shoulders top, which is the most massive top ever built in the history of the U.S. stock market. This top formation was confirmed last month when the S&P broke below the 950 level (see horizontal line). Based on this technical pattern and the breakdown, the S&P could now eventually drop to the 550 level as a downside target. That would be an incredible 40% decline from current levels So this chart is telling us we're in for a long lasting and grueling bear market in stocks. Interestingly, this is exactly the opposite of what gold is showing on Chart 2.    As you can see, gold broke clearly above its two long-term moving averages in late 2001, just months after the stock market's breakdown. This was a very bullish sign. Plus, four months ago the moving averages turned super bullish when the 20 month crossed above the 40 month moving average for the first time in almost 10 years. Again, this strongly indicates that the bull market in gold is going to last for years and it's still in its early stages Gold may have also formed a head and shoulders bottom, but it's not as clear as the head and shoulders top on the S&P500. If this proves to be the case, which would happen once gold rises and stays above $325, then gold could continue up to near the $400 level. NEW ERA IN THE MAKING The bottom line is that stocks and gold generally move in opposite directions and as long as stocks stay bearish, gold's bull market is going to remain in force. A picture is worth a thousand words and these charts tell the story of what's currently happening more clearly than all the discussions you hear on TV or in business publications. These are the markets talking and they're telling us in no uncertain terms that the tide has clearly changed. Plus, it's a big change that happens once every 10 or 20 years It's also a fundamental change, indicating a new era is clearly underway. It's telling us that investors have lost faith in paper assets. After being burned in the stock market, they're going to want tangible assets like gold in the years ahead. Knowing this keeps us way ahead of the game. So despite the short-term ups and downs in these markets, keep your eye on the major, mega trends. Go with them, and you'll do just fine.       Mary Anne and Pamela Aden are internationally known investment analysts and editors of The Aden Forecast, a market newsletter providing specific forecasts on gold, gold shares and other major markets. Click here to visit their website at http://www.adenforecast.com