Where I See Great Value in This Market

Here’s the story…

Gold prices usually travel in the opposite direction of the U.S. dollar trend. If the greenback is rising in value against a basket of other major world currencies, the price of gold has historically declined. The opposite is also true: If the U.S. dollar heads down in value, price for gold bullion rises.

Since the beginning of 2011, the U.S. Dollar Index (type “$USD” into any stock charting service) has been in free fall. It started the year at 81 and fell to below 73 by the beginning of this month. With the dollar so oversold, one would expect a “bounce,” and that’s exactly what happened.

The remainder of May has seen the U.S. dollar rallying. Under such circumstance, gold prices would normally be falling. They are not. In fact, the price of gold bullion is just $20.00 per ounce away from its recent record high in the $1,540 per ounce range.

My interpretation of the gold action: the “dead-cat bounce” of the U.S. dollar will be short lived—this is what the action in the gold pits is telling us.

While gold prices continue to inch higher, the gold-stock sector has remained flat. And this is where I see great value right now. Once this bounce in the oversold U.S. dollar is complete, gold bullion will make its move to $1,600 per ounce. And this time, the gold stocks will not be left behind.

Michael’s Personal Notes:

In the first quarter of this year, the Chinese overtook Indians as the biggest buyers of physical gold (bars and coins) for investment purposes.

According to the World Gold Council, China accounts for 25% of all gold investment demand at about 91 metric tons in the first quarter of 2011.

While I believe Chinese investors are jumping on the gold-investment bandwagon as protection against rapid inflation in China, jewelry demand is also rising. The numbers are mindboggling…

China is still the world’s largest gold producer, having produced 350 tons of gold in the first quarter of 2010. When you add gold purchased for investment purposes to gold bought as jewelry and used in industry, total gold demand in China in the first quarter was 700 tons.

Demand for gold is outstripping supply by almost two to one in China. Is it any wonder gold prices continue to rise?

Where the Market Stands; Where it’s Headed:

Only two more trading days for the month and we will have completed 27 months since the bear-market rally in stocks began in March of 2009. It’s been one heck of a ride, and the bear-market rally is “long in the tooth,” as technical stock analysts say.

The bear-market rally continues, but upside is limited to about 10%. Individual investors will need to assess whether the risk is worth the possible reward.

What He Said:

“Investors have been put into an unfair corner. Those that invested in stocks because they got caught in the tech boom (1999) have seen their investments gone. Now, those that have leveraged heavily to play the real estate game, because it is the place to be (2005), could see the same fate as the stock market investors. Thanks again, Mr. Greenspan.” Michael Lombardi, in PROFIT CONFIDENTIAL, May 27, 2005. Michael started warning about the crisis coming in the U.S. real-estate market right at the peak of the boom, now widely believed to be 2005.

Gold Stock Investment

Dividend Yields Going up—They’re the Equity Investor’s Best Friend

Perusing the stock market for opportunities, I’m discovering some very good values in the marketplace. Economic conditions aren’t the rosiest, as you know, but there are a lot of quality businesses out there that just went on sale. Also useful, dividend yields have gone up with the market’s recent correction. I believe in the attractiveness of dividends, even when dealing with smaller, higher-growth companies. There’s nothing like a stream of quarterly income to make you feel better about your stock market holdings. What’s old is new again and dividends are back in style.

While I continue to be a gold stock bull, I wouldn’t be surprised if the spot price and gold shares experienced a well-deserved correction from their recent run. We’ve had several shocks to investor confidence and the damage is now completely understood by the marketplace.

The spot price of oil, which seems highly correlated to the trading action in stocks, is now at a level that I view as highly stimulative. It does take quite a bit of time for the retail price of gasoline to follow lower oil prices, but this is what the economy needs—cheap gas and cheap rates for mortgages. That’s the best way to stimulate the American economy, period.

The sovereign debt crisis isn’t over and neither are the risks to the domestic economy. I see the broader market trading in a range until third-quarter earnings season, which should once again be robust. The combination of cheap money, strong cost controls, and a weaker dollar is no doubt padding the earnings picture for a lot of corporations. This year, we’re likely to see impressive earnings growth performance. The market is now starting to look beyond the third and fourth quarters and is unsure whether it should bet on the future. The lack of visibility is keeping the stock market in the doldrums.

It’s going to take a lot of positive news to get the stock market to advance in any meaningful manner this year. This is why dividend payments are so important. All the major stock market indices have broken their moving averages and this is technically significant. The Dow Jones Transportation Average has lost about 20% from its yearly high set in early July. This is a big hurdle to overcome—just to get back to the way things were.

We’re in a period of extended revaluation of assets and reevaluation of expectations. The age of austerity is here for the next several years.

Gold Stock Market

Simple Advice: If You Can’t Buy Actual Gold, Invest in Gold Stocks

Since early 2009, gold is up 45%, currently hovering around $1,300 an ounce. Caught in the brushfire, towns in which gold mining companies, large or small, have made their home are displaying the classical symptoms of a boom: rising home prices; unrelenting construction; insatiable demand for skilled workers; and just an overwhelming sense of optimism that things are finally changing for the better.

One such region nests in Ontario, Canada; the province’s northern gold belt, along which many long abandoned mines are going through a renaissance of epic proportions just because investors have finally come to their senses and realized that gold is the only true safe haven against global economic instabilities and the ever-weakening U.S. dollar.

According to Brock Greenwell, a statistical analyst with Ontario’s Ministry of Northern Development, Mines and Forestry, “I’ve been here a long time and 2010 is looking like a record year for gold exploration. It’s unprecedented.”

According to the latest mining statistics out of Ontario, there are 12 gold mines operating in the region, with four more ready to commence production in 2012. Considering that operating costs by mining companies for 2010 are likely to hit $620 million, compared to $389 million spent last year, it is more than likely that more new mines will come online in the near future. As Greenwell put it, “It’s an absolute boom. There are 40-plus companies here at any given time.”

So, who is there “at any given time?” Canada’s Red Lake gold belt, located about 500 kilometers northwest from Thunder Bay, is considered one of the world’s richest high-grade gold regions. For example, Goldcorp (NYSE/GG) has its blockbuster Red Lake mine there, which, along with adjacent complexes and exploration projects, employs close to 1,200 people. There is also Rubicon Minerals (AMEX/RBY), known for making significant capital investments in its Phoenix Gold Project — 60.0 million dollars at the last count — located in the Red Lake gold zone where the company owns about 65,000 acres of prime exploration property.

At the same time, small towns in and around the golden belt are barely keeping up with the demand, from housing to infrastructure to labor force. They are so unprepared for the boom that they don’t even have an adequate tax structure to fund everything that the Red Lake gold mining industry requires. Yet, regardless of the municipal growth woes, gold exploration and development is not abating. In addition to the already operating mines, new drilling technologies, capable of going deeper than ever before, are now unearthing new ore bodies on old and often abandoned gold properties.

Clearly, if there was a star on the dark sky after the crash of 2008, it was gold. In the short and medium terms, you would be hard-pressed to find an analyst who is not bullish on gold. But not many will commit to an opinion on gold in the long term.

Here is what I think. I don’t even have to wish for financial trouble to arise somewhere else in the world. The mess we have got ourselves into in the U.S. will take years to untangle. The financial and credit crisis has deep roots, the pulling of which could take a decade, if not longer. Adding fuel to the gold’s flaming fury is the fact that the U.S. must keep printing the money to keep its head above water. So, if anyone would ask me if I’m bullish on gold in the long term, I have two words: “You bet!”
Gold Stocks

Gold Remains the Story, as the Dollar Keeps on Sinking

In recent trading sessions, gold has kept up its steady upward pace, while silver rose to a 30-year high and palladium hit a nine-year high on Monday this week. The driving forces behind precious metals’ performances are simple to explain—the dollar is sinking and the demand for alternative investments (to money, mind you) is surging. As evidenced by the U.S. Dollar Index, which is a six-currency yardstick of the dollar’s strength in international markets, the Index has dipped further on a widely expected decision by the Federal Reserve to unleash “QE2,” another neat abbreviation for the second round of quantitative easing.

The main goal behind QE2 is maintaining interest rates that are low in order to incite organic growth. But how we are supposed to have organic growth at the expense of the world’s reserve currency remains a mystery. In recent trading sessions, gold responded to this conundrum by having both its futures and spot prices trading strongly above the old resistance level of $1,300 per ounce.

As the dollar weakness continues, so does the dip-buying. The latter is triggering surges in demand for precious metals, as investors, both large and small, continue to focus on protecting whatever wealth they have left after the crash of 2008 and the recession of 2009. So far this year, precious metals have posted significant gains due to most central banks around the world insisting on low costs of borrowing, so that consumer spending should receive the boost it has needed.

To illustrate, for the nine months of 2010, gold has gained 24%, while silver has advanced 48% and palladium even more, surging 60%, compared to their 2009 year-end levels. In addition, precious metals have outperformed global equities, treasuries and most base metals. As a by-product, exchange-traded funds where precious metals have been the underlying assets have also seen significant surges in investment.

Perhaps these statistics collected by Bloomberg will help in putting things into perspective. For 2009, the global aluminum industry had generated revenues of $50.2 billion, which represented a compounded annual growth rate (CAGR) of only 2.1% over the period from 2005 to 2009. In addition, the global base metals market’s aggregate revenues for 2009 were $172.5 billion, generating a CAGR of 5.1% for the same period from 2005 to 2009. Furthermore, the global material sector had total revenues of $6.87 trillion in 2009, which represents the same growth rate of 7.1% compounded over the same period. And, the global coal and consumable fuels market recorded total revenues of $367 billion in 2009, which represents a CAGR of 10.3% for the period from 2005 to 2009.

As for gold, the global gold market recorded total revenues of $73.5 billion during 2009, which represents a CAGR of 20.1% for the period from 2005 to 2009. And, although gold may be trailing behind silver and palladium so far in 2010, note that the global precious metals and minerals market, which excludes gold, has generated total revenues of $32.3 billion in 2009, representing a CAGR of a modest 4.4% over the period from 2005 to 2009.

Whichever way you look at it, the statistics don’t lie. Investors see gold as a safe haven, as a viable alternative to money and as a way of dealing with global volatilities that have certainly changed the game for many since the crash of 2008. True, gold will have short-term ups and downs; but, in the long term, the threat of inflation and more volatility is almost palpable and likely to keep the secular bull market in gold going for the foreseeable future.
Gold Remains the Story

For All the Gold Bugs and Gold Investors Out There

Three important points on gold this morning:

This is not the time to trade gold.

As we move from the second phase to the third phase of the gold bull market, the metal is having $20.00 to $30.00 per ounce daily moves. These types of gyrations make trading the metal almost impossible. As I have been saying since 2002, take a position in the metal, buy more on big price dips, and just sit tight.

The non-believers are slowly jumping on the bandwagon.

Ask investors just a year or two ago about gold and they had no idea it was in a bull market. Today, we have more financial analysts getting on the gold bandwagon than at any time since the gold bull market started…and that’s getting me nervous about a price correction.

Last week, a report from RBC Capital Markets said that it expects gold to reach $3,800 U.S. per ounce in three years. I’d prefer to see this kind of exposure well into phase three of a bull market, not at the end of phase two.

(For new readers: In a bull market, phase one is when the very smart money gets into an investment because they see an investment undervalued [think gold 2002-2006]. Phase two is when other prudent investors get in [think gold 2007-?]. Phase three is when the rest of the investing public and the speculators get into a bull marker looking for quick profits. We have yet to enter phase three in this gold bull market.)

Follow the bellwether stock.

The granddaddy of gold stocks, Newmont Mining (NYSE/NEM), reported yesterday that it made 537 million dollars in the third quarter (up 38% from the same quarter last year) on sales of $2.6 billion. Newmont says that its overall cost to mine gold is about $500.00 an ounce. The higher gold prices go, the more money this baby makes.

The price of Newmont stock on the NYSE continues to move to record highs.

Michael’s Personal Notes:

Growing up in my parent’s house as a child, if there was one thing my mother taught us, it was that if you don’t understand something, don’t fake it.

And, in all honesty, I can’t figure out what is going on in Washington.

I heard President Obama’s White House news conference yesterday. As CNN Breaking News put it in a news release, “Midterm elections confirm Americans are deeply frustrated with pace of economic recovery, President Obama says, ‘No kidding.’”

So Obama is saying he wants to do more for small business. He’s finally getting it that small business in America make up most of the employment in this country and they are ones that need to be helped.

Here’s what I don’t get: it took the Democrats losing control of Congress to get the message that voters don’t like excess government spending and non-focus on small business?

A Bloomberg Global Poll back in September found that 77% of investors say Obama is too anti-business. If business fears the current Administration, how will they ever loosen their purse strings and spend the trillions in cash they’ve accumulated?

Where the Market Stands, Where It’s Headed:

The Dow Jones Industrial Average opens this morning up 7.6% for 2010.

The bellwether Dow Jones Industrials is only 42.88 points away from breaking to a new 52-week high. I mentioned this because of the technical importance behind it. If the Dow Jones breaks to a new 52-week high (as I predicted it would a few issues ago), the “head and shoulders” pattern that was established this past May will come into question.

While the majority of stock market advisors (especially the old-timers) have been negative on stocks for the majority of 2010, I have remained bullish. I’m sticking with what I believe: corporate profits are better than expected, monetary policy cannot possibly be more accommodative than at present, there are not many investment alternatives to stocks.

I’m looking for the bear market rally that started in March of 2009 to keep moving higher.

What He Said:

“Home sales down 8.4%, could be the bottom,” read the headline in last Friday’s USA Today. What do they know that I don’t? They know what realtors and their associations tell them and that’s about it. Unfortunately, the real estate news is predominately written by reporters—not real estate investors with years of experience to share. The hard facts about the real estate market in the U.S. are truly scary. How can the U.S. economy escape the hard landing in U.S. home prices? As we’ll soon find out, it simply can’t!” Michael Lombardi in PROFIT CONFIDENTIAL, January 31, 2007. While the popular media were predicting a bottoming of the real estate market in 2007, Michael was preparing his readers for the worst of times ahead.

For All the Gold Bugs and Gold Investors Out There

Large-caps, Gold & Biotech; Where All the Action Is

There are very few stocks that are actually doing great in this market. If the main stock market averages go up, it’s mostly because of large-cap, dividend-paying stocks that are more heavily weighted. There is an opportunity in this kind of market, however, for momentum trading, particularly if you have a stock that’s already gone up and is trading right around its high. Because so few stocks are what you’d consider to be outperforming, larger traders are rallying around these kinds of positions due to the fact that there are so few in the marketplace at this time.

For the most part though, trading action in equities can be considered quite muted in the absence of a defined trend. The story continues to be about large-caps and will likely remain this way for the rest of the year.

Stock picking in this kind of environment is tough for new positions, especially before a new earnings season begins. That’s why there’s no rush for investors to consider new positions as far as I’m concerned. Event-driven trading will soon be upon us and speculators should look for corporate visibility that beats previous estimates. It’s unclear how much appetite the broader market has for upward price moves in stocks, but I think it’s reasonable to conclude that a lot of investors have been sitting on the sidelines during the lull between earnings seasons.

The gold and biotechnology sectors are some of the best areas in this market for risk-capital speculators. I don’t see the spot price of gold following the trend in the oil market, and biotechnology always trades on its own news (discoveries, drug approvals, etc.) regardless of sentiment. But, as we all know, there’s no wind at our backs. It’s not that kind of market at this time and there’s no catalyst for investors to rally around. That’s why earnings season can’t come soon enough.

The stock market’s already betting that the technology sector will underperform in the second quarter. A lot of investors also aren’t expecting much from large financial institutions, which still have a lot of bad debt to deal with on their books. Again, the most important index to keep an eye on is the Dow Transports. This is the single best benchmark for the stock market’s overall health. If the railroads begin to fall apart, then so will the rest of the stock market and the economy.

With the economy slowing down, anything is possible over the coming quarters. This means that we could experience another technical recession. One thing I don’t expect is runaway growth, because the fundamentals just don’t support it quite yet. The economy hasn’t corrected itself from the housing meltdown and, in my view, it can only really accelerate in a sustainable way once the excess inventory in the system is taken up and real estate prices move higher. This is why large-cap, dividend-paying stocks will be some of the best performers in the stock market. There isn’t enough economic growth for big capital gains just yet.
Large-caps, Gold & Biotech;

Gold & Silver Setting up for an Attractive New Entry Point

An opportunity is now being created in precious metals if the current correction continues. Most precious metals have been falling in price, as financial markets continue to reassess the expectations for economic growth. With lower expectations for global economic growth, the demand outlook for raw materials and spot prices are also going down.

The price of gold has, in my mind, been worthy of a correction for quite some time now. In fact, I think it would be a very healthy development for the long-term trend. It wouldn’t surprise me if the spot price of gold were to retreat and consolidate around the $1,600 level. It’s trading around $1,700 now and $1,600 should provide a good base.

Perhaps an even better commodity to concentrate on would be silver. This precious metal is more useful in terms of its industrial uses and many argue that it hasn’t kept up with the spot price of gold and could therefore be a better trade. The spot price of silver just broke the $37.00-per-ounce level and there’s no reason why it won’t retreat further to the $30.00-per-ounce level if the current trend in capital markets continues.

This is a very difficult stock market and individual investors are loath to participate. While expectations for the future continue to be reduced, the fundamentals for gold and silver remain mostly intact and are therefore worthy of new positions when spot prices find a new base.

It’s a wait-and-see stock market and a wait-and-see spot price market for precious metals. I think the focus for speculative investors should be on gold and silver and that risk-capital investors will have an attractive new entry point very soon.

As for the rest of the stock market, share prices remain very vulnerable before third-quarter earnings season begins. Over the last little while, equity investors have had to endure tremendous shocks to the system: sovereign debt problems in Europe; the downgrade of U.S. sovereign debt; natural disasters in Japan; no improvement in housing prices; and no improvement in employment…the list goes on. I think it’s fair to say that the equity market has held up quite well all things considered.

What we know is that mature economies are now in a period of very little to zero growth over the next 12 months. We also know that developing economies are slowing down and the probability of another recession is going up. The trading action in financial and commodity markets reflects falling expectations for economic growth and an expansion in the time horizon for recovery. Predicting outcomes in this environment is a crapshoot—nobody knows how or when the economy will get better.

With belt-tightening going on at the individual consumer level and at the government level in virtually all mature economies, we should be in a slow growth environment for quite a long time.
Gold Stock Updates, Tips & Guidance

Gold Burning up the Chart: My Gold Advice

What a few months it has been for gold. With war worries in Libya to debt concerns in Europe and the United States, along with rising demand out of China and India, it appears to be the perfect storm for driving gold prices higher. In fact, the break at $1,500 was much sooner than I had expected and, based on the chart, prices could go even higher, albeit the buying may be somewhat ahead of itself and hence vulnerable to some profit-taking.
The June gold broke to a record high of $1,535.10 on April 28 and is looking to go higher. The chart showed a bullish inverse head and shoulders formation in March. Prior to this, there was a bullish V formation in January and early February. The June gold made a strong breakout at the $1,440 resistance that was in place since November 2010 in early April.
Along with the upward push, the trading volume in the June gold been surging during the breakout and this is bullish. The contract is above its 50-day moving average (MA) of $1,441. The bias remains bullish. The moving average convergence-divergence (MACD) has been flashing a buy signal since early April; but be careful, as we could be in store for a reversal.
Investing in gold is a safe haven play when the market risk rises.
Gold has rallied in each of the last 10 years and shows a beautiful bullish price chart. My gold advice would be to accumulate gold on weakness.
The situation in Libya could worsen and there are also tensions in Iran and other Middle East countries. This means added global risk. Oil is trading at over $112.00 per barrel on the threat of more disruption in oil from Libya and other oil-producing countries.
In my view, the key determinant of how gold will fare will depend on the direction of stocks along with the geopolitical tensions.
If the Middle East situation worsens, it would drive up oil prices, which would impact economic growth at a time when the economies continue to be at risk.
Also, don’t forget about the mounting debt and deficit in the United States. The country has over $14.0 trillion in debt and is paying billions in interest daily. Many states are struggling to make ends meet and are looking at severe cuts in the state budgets.
Silver has also followed gold higher, with the May silver futures contract above $48.00 an ounce. It appears set to take a run at $50.00. The near-term picture with silver is also extremely bullish on strengthening Relative Strength, but at the same time overbought. Silver is a play on the economic recovery, as it’s found in electronics.
I also like copper as a play on the recovering global economies, especially in industrial applications and housing.

My advice on playing the commodities is to buy gold stocks, silver stocks, and oil stocks on weakness.