Thursday, December 14, 2006

Adens doubt U.S. dollar bullish on bonds

Peter Brimelow

Commentary: But chartist sisters still invest 90% in gold, silver, currencies

NEW YORK (MarketWatch) -- More dollar doubts, again from a top-performing letter.
I know, it's my hobby horse recently. See Dec. 7 column
But the fact is that it's simple moves in key markets such as exchange rates that dominate investment performance.

Pamela and Mary Anne Aden have been publishing their Costa Rica-based Aden Forecast since the last gold bull market in the early 1980s. They are chartists, examining market moves in terms of visual patterns. But they also provide intellectually-appealing rationales. See Sept. 5 column

In their just-published December issue, the Aden sisters run a long-term dollar chart and comment: "This shows the dollar going back to 1972 when it first started trading in the free market. As you can see, it's been in a 35-year downtrend since then and it's also been trading in a huge down-trending channel. Within this channel, large drops have taken the dollar from the upper side of the channel to the lower side over the years. Since the current dollar decline started at the upper end of this channel in 2001, it's reasonable to assume that it'll end near the lower end as it has in the past ... If so, that would give the dollar a downside target near .85 against the Swiss franc before this bear market is over. And if that happens, it would mean a 29% drop in the dollar from today's levels."

To put this in perspective: Over the past 12 months, according to the Hulbert Financial Digest, the Aden Forecast has appreciated 15.23%, roughly in line with the dividend-reinvested Dow Jones Wilshire 5000, which is up 16.54%. Over the past five years, however, the Aden Forecast is up an impressive 14.21% annualized vs. 8.86% for the DJ Wilshire 5000.
Other Aden observations in their current letter:
  • Stocks: "The Dow's long-term indicator remains bullish and it has room to rise further ... (But) for now, this chart is telling us that it's not time to be buying common stocks. If the bull market remains intact, we can always get in later, but the way things are unfolding with the dollar, oil and the economy, there's a good chance we won't. The speculation index reinforces this too ... This shows that speculation in the stock market is still at extremely high levels. It's certainly not as high as it was in 2000 when tech stocks were all the rage, but it's high nonetheless ..."
  • Oil: "The oil price ... looks like it has finally bottomed and a renewed rise now appears to be getting underway. That'll be confirmed if oil now stays above $61.75 and then rises above $65."
  • Gold: "If this pattern stays on track, then gold could surpass the $722 level. If it does, gold would be extremely bullish and it could then continue up to its 1980 peak near $850."
  • Bonds (I have to think about this): "The bond market is looking good. Bonds hit a nine-month high this month as long-term yields tumbled to their lowest levels in nearly a year. The bull market in bonds is now picking up steam, but it's still early and prices are poised to rise much further. That being the case, we continue to recommend buying and holding U.S. government long-term bonds."
But, the Adens caution: "Since the U.S. dollar is now showing renewed weakness, we wouldn't keep more than 10% of your total portfolio in bonds at this time. The metals and foreign currencies are stronger than bonds, which is why we advise keeping a larger portion in those sectors, despite the strength in the bond market."

Current Aden asset allocation: 10% U.S. bonds; 30% cash (Euro, British pounds, Australian or New Zealand dollars); 60% gold and silver physical, as well as gold, silver, energy and natural resource shares.

By Peter Brimelow

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