Is $5800 Gold possible?

By Peter Brimelow, MarketWatch

NEW YORK (MarketWatch) — A skillful veteran letter is sanguine about stocks — but positively gleeful about gold and other hard assets.

Mary Anne and Pamela Aden’s Costa Rica-based Aden Forecast first came to fame in the last great gold bull market three decades ago. In the current post-2000 gold bull market, the letter has shown remarkable tactical versatility and a definite willingness to compromise its powerful long-run analysis if short term-trends dictate. ( See Aug. 10 column.)

It’s worked. Over the year to date through September, the Aden Forecast is up 20.2% by Hulbert Financial Digest count, versus 21.3% for the dividend-reinvested Wilshire 5000 Total Stock Market Index. That is, it’s pretty well caught the rally.

And over the longer run, the Aden Forecast’s superiority is striking. Over the past 12 months i.e. counting the Crash of 2008, it’s up 13% versus negative 6.4%% for the total return Wilshire 5000. Over the past three years, the letter is up an annualized 5.6%, versus negative 4.8% annualized for the total return Wilshire 5000.

In fact, it’s been a good decade for the Adens: Over the last ten years, the letter is up annualized 5%, versus just 0.9% annualized for the total return Wilshire.

Long-term, the Adens expect an inflationary collapse. But that doesn’t stop them staying with stocks, although they do anticipate short-term weakness. They write:

“The stock market got through September without any trouble and it’s still strong, again hitting a one-year bull market high this month. The same is true of the stronger world stock markets. As we’ve been pointing out, however, they’re all temporarily overbought and downward corrections are now getting started. This is not unusual following the significant rises they’ve had and this will probably continue in the weeks ahead. But following these corrections, the U.S. and global stock markets remain poised to rise much further. Keep the common stocks you have.”

The Adens’ cynical conclusion:

“The stock market loves the liquidity the Fed is providing. Whether you agree with what’s happening or not, Wall Street views the Fed’s actions as positive. It’s not looking at the super long-term consequences.”

If inflation is returning, nominal interest rates will rise. The Adens think we’re near the low (in fact, they recommend mortgage refinancing). But it’s not here yet. They write:

“The 30 year Treasury is near 4%. When will it be time to short the long bond or buy an inverse Treasury ETF? What will the trigger be?

“Here’s what we’re watching…a rise above 3.35% on the 10-year yield would be the first sign, ideally followed by a rise above 4.30% on the 30-year. The final signal that a mega upmove in interest rates is unfolding, which would totally confirm the big inflation scenario, would be a sustained rise above 4.65% on the 30-year yield.

“Currently, we’re checking the best ways to take advantage of this should it play out. It’s not time to buy yet, but the probable candidates when the time comes, are ones like ProFunds:Rs Rt Opp;Inv /quotes/comstock/10r!rrpix (RRPIX 13.92, +0.41, +3.03%) and ProShares UltraShort 20+ Year Treasury ETF /quotes/comstock/13*!tbt/quotes/nls/tbt (TBT 46.00, +1.97, +4.47%) .

About gold, the Adens note that “gold’s peak in 1980 at $850 is the equivalent of about $2400 in current dollars. Gold has not even approached that level yet and the situation is far more serious now than it was then.”

They conclude:

“The focus now is on the next phase of the current rise. If we continue to use proportions, the bull market’s second rise from 1976 to 1980 gained 750%. Using the same growth and applying it to the current bull market, we could see gold eventually reach $4100 during the next run-up. And if you take the entire bull market gain in the 1970s at 2300% and extrapolate, then $5800 would be the equivalent upside target.”