Central Bank and Inflation—the Top New Fundamentals for Gold Stocks

By Mitchell Clark, B.Com

So the stock market is gyrating and this is the new norm. All equities can’t escape the prevailing trading action in the stock market, but the one sector that continues to have above-average potential is precious metals; gold stocks in particular. Not all gold stocks are doing well in this market, but there’s a lot that are, and they are smaller players that have their own growth stories. If I were a stock market
speculator focused on only one industry group, it would be on gold investments. The outlook is that good within the industry.
The best news for the spot price of gold and individual gold stocks isn’t the European debt crisis; it’s the fact that central banks are buying gold bars again. For years, the central banks of mature economies have been selling off their gold holdings for the simple reason that the assets didn’t generate any rate of return while sitting in the vaults. Now that there’s so much uncertainty in the marketplace and U.S. dollar leadership has lessened, many countries are quietly creating new stockpiles.
We’ve talked about a number of growing gold producers in this column (see Everything Gold Is Turning Into Some Serious Green). I watch dozens of gold stocks at once, and I’d stick with those trading near their 52-week highs. I’d rather try to buy gold stocks high, with the hope of selling at a higher price later, than try to buy low. If a gold stock isn’t doing well now, then it’s less likely to do so later. This isn’t the case for the rest of the stock market, but the gold sector in particular.
The stock market has already rewarded many gold investments, but the spot price of the commodity has so much upside potential going forward that the business model for established producers is very good. There is a lot of risk in the global economy and core inflation rates in mature economies are going up. If the stock market does nothing over the next six months, it’s my prediction that gold stocks will be some of the best performers, following the spot price as it slowly ticks higher.
For speculators in the sector, you want to choose from gold stocks that offer an attractive package—an established miner with growing production, ongoing exploration, declining cash costs, etc. With so much uncertainty in the world and the stock market, exposure to some gold investments is a must in this market. There isn’t any rush to consider much else.


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New Fundamentals for Gold Stocks

It’s Still a Bear Market, But Not in Gold Stocks

By Mitchell Clark, B.Com

The top stocks in this market are large-cap, higher-dividend-paying companies with strong international operations. For speculators, gold stocks remain some of the best stocks in this stock market. The big companies have the cash and the economies of scale (to withstand the shocks to fundamentals and the stock market) and gold stocks have some of the best potential for capital gains, because these are the companies that are generating the most growth. The days of Internet stock market high flyers and software monopolies are over. You can trade the stock market, the futures market or you can invest in the real economy. And I’m not talking mom and pop shops on Main Street—I’m talking about the only real thing that counts in today’s global economy, and that’s natural resources.

The commodity price cycle and gold stocks have been experiencing the same price correction as the stock market. But, any reasonable economic analysis suggests that, with so much debt in the world and governments trying to grow their economies with reduced interest rates and printing money, the next major reckoning is about to be unleashed. We’re already seeing core inflation rates going up around the world and, as economies recover; there will be growing scarcity in a basket of raw materials. This is why gold stocks are poised for another major upward price trend—the fundamentals for the spot price of gold are actually getting better (see Precious Metals Sector Deal-making Padding Investor Wallets).

You might not think about it, but the stock market is still in a long-term bear market. I don’t care what the definition of a bear market is; the stock market is still below its value in early 2000—that to me is a bear market. But what have come alive during the last 11 years are commodities and specifically the prices of gold and gold stocks. With all the risks around the world, including the European debt crisis, I don’t see the price of gold as being expensive at all. In fact, it isn’t as adjusted for inflation.

This is why I’m so bullish on precious metals, gold stocks in particular, and agriculture. All the debt and increasing money supplies will come back to haunt the global economy in the form of inflation. What economic growth we can generate now might just evaporate under the auspices of central banks trying to contain the very inflation that they created. That’s why gold stocks are sitting pretty. They already have the cash, the fundamentals and the growing demand for their commodity. It’s a new upward price cycle that’s about to begin.

Gold stocks are like any other stock market sector—they trade as a group. Most investors tend to associate their gold investments apart from their main stock market portfolio. I can’t predict where the spot price of gold is going to go, but all the global policy action that’s been going on since the subprime mortgage meltdown leads me believe that gold stocks will be the stock market’s major outperforming sector over the next several years.

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Penny Stocks, Stock Market Advice, Economic Analysis, Investing In Real Estate and Gold

Economy: Michael’s Top Seven Reasons to Worry

In my daily writings, my goal is not to continuously be the bearer of bad news. When it comes to the economy, my goal is to educate my readers as to the severe structural economic problems the U.S. faces in the hope that more awareness of the issues will help my readers prepare their portfolios for the inevitable hardships that lie ahead.

Most Americans go along their merry way, oblivious to the mounting economic challenges facing America. I assume that, since you and hundreds of thousands of others read this column daily, you do not want to be in the “merry oblivious group.” You want to know what’s really going on with different aspects of the economy and how they will ultimately play out for or against you.

The following are seven major problems facing the U.S.:

1. Foreign Ownership of America

Ten years ago, foreigners owned 20% of U.S. Treasuries. Today, they own between 40% and 50%. If we go back through history, when we see past countries exposed to such dependence on foreign investment, the debtor nation (in this case the U.S.) has eventually faced sovereign debt problems and high inflation.

2. Price Action of Gold

The price of gold has risen 413% in less than 10 years and, during that 10-year period, it has failed to face a major correction in its price advance. The spectacular but steady rise in the price of gold bullion is a leading indicator of either a collapse in the value of the U.S. dollar or rapid inflation or both.

3. The Fed

As blunt as I can be, and in a nutshell, here’s my opinion: The Federal Reserve’s printing press has been supporting the economy since March of 2009. At the end of this month, the Fed says it will stop its QE2 program—basically a fancy name for printing money, taking that money and buying U.S. Treasuries. I have read various reports issued by analysts and economists. Depending on which report I choose to believe, the Fed has been buying about 50% of the Treasuries issued by the government under QE2. Who will buy these Treasuries if the Fed stops buying them? Scary thought.

4. Debt

The U.S.’s budget deficit this year will be in the $1.5-trillion to $1.6-trillion range. Our debt ceiling (the amount the U.S. can legally borrow) is here and it’s $14.3 trillion. Only nine years ago, the national debt was $6.0 trillion. In less than a decade, our national debt has gone up 140%. But the official national debt numbers we hear do not include entitlements to U.S. citizens and unfunded liabilities. Include these and our total debt is in the $70.0-trillion to $100-trillion range, again depending on which analyst report you believe. The official national debt is expected to increase another $6.0 trillion by the end of this decade.

5. Government Gone Too Big

Under the Obama Administration, the government has only gotten bigger. Between 40% and 45% of households in the U.S. receive some form of government support. Over 30 million Americans use food stamps. And, of course, the government is the biggest employer in the country. Social Security and Medicare—those expenses are huge for the government. But conveniently, they are not included in the government’s total debt, as they are both unfunded expenses. The government took over Freddie Mac and Fannie Mae during the credit crisis. Since these two entities owned or guaranteed half the residential mortgages in the U.S., does this mean the U.S. government now owns or guarantees half of all residential mortgages in the U.S.?

6. U.S. Dollar

Since June of 2010, less than 12 months ago, the U.S. dollar has declined 16% against a basket of six major world currencies. The devaluation has been steady and slow. Frankly, considering all the debt the U.S. has piled on, I’m surprised that the U.S. dollar hasn’t simply collapsed. Maybe it’s being supported. I don’t know; I’m just a writer. But I have studied history. And I can tell you that no superpower has thrived as its currency has devalued. In the case of the U.S., the situation is dire—the U.S. dollar is the reserve currency for 70% of world central banks. If they all dump the dollar, the repercussions to the U.S. economy will be insurmountable.

7. House Prices

The average price of a home in the U.S. has declined 33% in 20 major cities from their 2006 price peak, according to the S&P/Case-Shiller Index. It will be years before the housing market recovers…a major impediment to the U.S. economic recovery.

Yesterday, at a conference in New York hosted by Standard & Poor’s, Robert Shiller, co-founder of the S&P/Case-Shiller House Price Index, was quoted as saying that he would not be surprised to see U.S. house prices decline another 10% to 25% over the next five years. Shiller noted that, in Japan, housing prices fell for 15 years after Japan’s property bubble burst in 1990.

For eight consecutive weeks now, the bellwether U.S. 30-year fixed mortgage has dropped, and consumers are still not interested in buying houses.

A 30-year fixed U.S. mortgage today costs 4.49%. Last year at this time, it was 4.72%. The record low was 4.17% in November of 2010 (Source: Freddie Mac).

If the 30-year mortgage rate in the U.S. fell to three percent, would buyers surface? I doubt it. Consumers have no faith in the housing market and the inventory overhang is unprecedented. Just when you think the housing market can’t get any worse, it will get worse.

Based on the above, I’m sure you can see why I’m so concerned about America’s future and my kids’ future. American is no longer the industrialized leader it was following World War II. We face severe economic problems in the years ahead; hence you see why I’m long-term bearish on the stock market.

Next week, I’ll tighten the time frame and give you my more immediate reasons as to why I believe the U.S. economy will soon fall back into recession. Today’s U.S. economy…it’s looking very similar to me to the Japan economy of the 1990s.

Where the Market Stands; Where it’s Headed:

Stocks broke through their longest losing streak since 2009 yesterday. Although I was disappointed the market didn’t end on its high for the day, the market is putting in a base here.

I’d be worried if the Dow Jones Industrial Average fell decisively below the 12,000 level (12,124 was the opening this morning), but until then, the “tired” and “long-in-the-tooth” bear market rally presides.

What He Said:

“Despite all my ‘yelling’ and ‘screaming’ about gold, I believe that only a few of my readers and a small fraction of the general public have taken a position in gold. Why? Because gold’s not trendy…buying condominiums for investment is! If you are an investor, you need to seriously look at investing in gold stocks because gold bullion prices will likely continue to rise.” Michael Lombardi in PROFIT CONFIDENTIAL, September, 21, 2005. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments.


Top Seven Reasons to Worry in Gold Stock

The Gold Mining Business Model’s the Best There Is for Any Industry

The economic news out there still isn’t great, but the stock market doesn’t seem to care. Equity investors seem only worried about first-quarter earnings and the outlook for the numbers remains very bright.

Also looking good in this market are precious metal stocks, as spot prices remain very strong. This is a sector that needs rising spot prices for stocks to keep advancing, but the money continues to tumble in if you’re a gold producer. In fact, the business model is so good that most growing producers don’t know what to do with all their excess cash (what a great problem to have!).

As an example of the kind of profitability you can find in the precious metal sector, Avion Gold Corporation (TSX/AVR) is but one junior mining company that’s cashing in due to strong gold prices.

Avion Gold is a junior Canadian gold miner with exploration and production facilities in West Africa. The company holds 80% of the Tabakoto and Segala gold projects in Mali. Avion Gold announced strong earnings of 18.63 million dollars ($0.05 per basic and diluted share) for the three months ended December 31, 2010. This compares to net income of 3.97 million dollars, or $0.02 per diluted share, generated in the same quarter last year.

According to the company, it sold 27,908 ounces of gold at an average realized price of $1,370 per ounce, which represents a 10% increase over the average realized selling price of $1,234 per ounce in the previous quarter. Gold revenues were 38.2 million dollars, compared to 14.2 million dollars in the comparable quarter of 2009.

Where I’m from, a business that sells 38 million dollars’ worth of goods and generates over 18 million dollars in profits on those goods is really doing something right. Avion Gold produced 26,090 ounces of gold in the fourth quarter of 2010 at a total cash cost of $520.00 per ounce. For all of 2010, the company generated record earnings of 31.5 million dollars, or $0.09 per share, compared to 2.6 million dollars, or $0.01 per share, in the prior year. Total revenues were 115.3 million dollars compared to 33.6 million dollars in 2009 and total production grew to 87,631 ounces of gold. This year, Avion Gold expects to produce about 100,000 ounces of gold and the company is still predicting production of 200,000 ounces a year in 2012.

This gold stock is just one in a large universe of junior mining companies that are making money hand over fist with gold prices over $1,000 an ounce. It’s a great business model and it’s likely to stay that way for a considerable period of time.

Investing in gold has always been a risky business, because you can’t control how much gold is in the ground and what’s going to happen to the price of the commodity on the open market. All you can do as an investor is play the market as it is. In my mind, however, it’s no different than investing in a technology company. The risks are the same and so is the unknown.


Which is the best business in Stock Market?

The Stock Market: What’s Really Happening with It

My take on what happens in the financial markets and what you hear from reporters and see in the media are two very different things. I guess you know that or otherwise you would not be reading my column.

The facts are the facts. Since the crisis in Japan hit a week ago, the Dow Jones Industrial Average has fallen 3.2%. But if we look closer, we see that North American stock markets started declining back on February 18, 2011—that’s when the Dow Jones hit a new record high for the bear market rally.

My opinion is that profit-taking (who can blame investors, stocks were up almost 100% since March 2009) was already underway. The earthquake in Japan accelerated the decline in stock prices not because of the damage to the Japanese economy, but for very different reasons:

The stock market has adjusted itself lower in the expectation that Japanese investors will pull funds out of North American stock markets and bond markets, as money is repatriated back to Japan to help pay for rebuilding the country’s devastated regions.

When the Kobe earthquake of 1995 hit, Japanese investors sold $30.0 billion in U.S. securities in the aftermath of that natural disaster. Depending on which news report you believe, the damage in Japan from last Friday’s earthquake is pegged at over $200 billion.

Japan is the second largest holder of U.S. Treasuries, second only to China. Japan holds about $886 billion in U.S. Treasuries (Source: “Rising yen adds to Japan’s woes,” Globe & Mail Mar.17, 2011). If Japan stops buying our debt because their needs have changed, and they start selling U.S. securities to bring money home for rebuilding the country, the ramifications in the U.S. will be higher interest rates.

Add to this the Federal Reserve’s comments earlier this week that they will not expand their $600-billion QE2 bond purchases, and one needs to seriously ask: if Japan will reduce its buying of U.S. Treasuries and the Fed will not continue buying them, who will buy the U.S. Treasuries we so desperately need to sell in order to finance our debt?

In light of the above events, it’s a wonder that the stock market has held up so well over the past week.

Michael’s Personal Notes:

I tried to buy more gold-related investments yesterday like I did on Tuesday, but gold prices started to rise Wednesday and they are continuing to rise this morning. Hence, I’ll sit tight for now. Hopefully we will see some more weakness in the precious metal prices, which I would view as a buying opportunity.

For those readers who follow technical analysis, my charts show good support for gold at $1,340 an ounce, about $60.00 below where it is trading today. I would be a buyer of more gold-related investments on any pullback towards $1,340 an ounce; unfortunately, this may not happen. Over the past 12 months, gold bullion is up $273.00 an ounce.

No bull market goes up in a straight line; no bear market goes down in a straight line. The bull market in gold is no exception. Since 2002-2003, I’ve followed a policy of buying gold-related investments on gold price pullbacks.

Where the Market Stands; Where it’s Headed:

Okay, Michael; what’s it going to take for you say that the bear market rally in stocks is over?

Technically speaking, the low point for the Dow Jones Industrial Average was 6,440 on March 9, 2009, when the bear market started. The high point was 12,391 on February 18, 2011. The mid-point between the high and low is 9,415. The bear market rally in stocks would have to break below 9,415 to be officially over. This morning, the Dow Jones Industrial Average trades at 11,613.

Whether you call it an overreaction to the Japan crisis or simple profit-taking, the stock market is obviously taking a breather. But until the market proves me otherwise, I see the bear market rally in stocks that started in March 2009 as still in force.

Bear market rallies usually end in the midst of investor euphoria. We haven’t seen that yet.

What He Said:

“Why Google stock will go higher: Most investors in Google, surprisingly, are retail investors. And that’s why the stock can go higher—because only 20% of the stock is owned by institutions. If the institutions jump in and buy Google, the stock will certainly move higher.” Michael Lombardi, PROFIT CONFIDENTIAL, June 2, 2005. Michael recommended Google stock as a buy on June 2, 2005, when the stock was trading at $288.00. On November 5, 2007, when Google reached $700.00 U.S. per share, Michael advised his readers to sell their Google stock and to put the proceeds into gold-related investments. Coincidently, gold bullion was also trading at about $700.00 per ounce in November 2007. Michael’s message was to trade each $700.00 share of Google into $700.00 of gold, because he saw gold as a much better investment.
What’s Really Happening with Gold Stock Market

Stock Market Correction Phase Over? Spot Price of Gold Looks to Be Bottoming

The third quarter has finally closed…and thank goodness. If you weren’t short the stock market, you were feeling its pain. The broader market basically fell off a cliff in the last week of July and first week of August. The S&P 500 Index has been trading in a tight range ever since around the 1,175 level and the near-term trend seems to be more of the same. If there is to be any breakout to the upside, we’ll need some hardy news; likely regarding the sovereign debt issue in Europe or new policy action from the Federal Reserve. While the earnings picture looks good, it’s hard to imagine spectacular results from this economy.

Also notable late in the third quarter was the price correction in commodities. It only seems reasonable that reduced expectations for global economic growth should be felt commensurately in the prices for raw materials. The spot price of gold is mimicking the recent trading action of the stock market and it’s unclear when it might resume its upward trend.

However, I do think that the medium- to long-run upward price trend in gold is intact and this is due to a combination of fundamental factors that remain in force. And we can’t forget that, while the Main Street economy isn’t producing much growth, inflation is still out there stalking consumers’ ability to employ purchasing power.

I think the current environment is an opportune one to consider gold investments and other precious metals like silver. We’re now in the price correction that precious metals deserved. The top stocks for speculative investors remain gold miners and it’s the one industry that is generating double-digit growth in revenues and earnings.

Long-term, income-seeking investors can be buyers in this market; but, of course, expected returns have been reduced. I think a blue-chip investor would be lucky to receive a 10% return on investment in the age of austerity. It’s the new reality of the economy and it’s going to last for quite a long time.

If you want to see something interesting, pull up a five-year stock chart on SPDR Gold Shares (NYSEArca/GLD). This is the gold exchange-traded fund (ETF) that’s very popular with both individual and institutional investors. Looking at the chart, you’ll notice a very consistent and defined upward trend in the value of the ETF. You’ll also notice the recent spike to a record price high of $185.00 and the subsequent price correction to its current level of around $157.00 per share. In my mind, this price correction has now fully returned the SPDR Gold Shares ETF to its primary trend and is signaling a technical bottoming out for gold. Accordingly, now seems like an appropriate time to consider new positions in these kinds of assets.


Spot Price of Gold Looks to Be Bottoming

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

Economy: Could This Fictitious Story Become Reality?

Just imagine…

It’s 2012 and the world realizes the euro can’t make it as a currency. Greece, Portugal, Spain and Italy have all been repeatedly bailed out. Germany and France have had enough. They tell these weaker countries to get out of the euro or Germany or France will go it alone.

Meanwhile, in Canada, the air has finally been released from its overheated housing market and the economy is on shaky ground for the first time in almost 20 years. In the U.S., years of printing money are causing rapid inflation. Interest rates are rising, as investors want higher and higher returns from U.S. Treasuries. Debt has become a big problem for states and municipalities. The sovereign debt issues of Europe have crossed the Atlantic.

By late 2012/early 2013, countries around the world are in a race to devalue their currency. So they come up with any idea.

The central bankers of the G7, or maybe even the G20, meet to discuss an across-the-board devaluation of world currencies. But if massive currency devaluation is going to happen, what will be the reserve currency?

It can’t be gold, because there is not enough gold in the world to satisfy the reserve, even if the price is $3,000 by 2013. America joins China in making a new reserve currency composed of U.S. dollars and Chinese renminbi, 20% backed by gold.

Could this happen? Let’s put it this way: while I don’t have a crystal ball, I’ve seen stranger things happen. What I do know is that, sooner or later, something has to give with the euro and the greenback. That’s what the 10-year bull market in gold bullion has been telling those who listen.

Michael’s Personal Notes:

There is so much to say this morning, so much to write about. Fortunately, most of the action is happening outside the United States.

Moody’s Investors Service cut Portugal’s long-term government debt credit rating to junk status yesterday afternoon. Greece, Portugal, Spain, Italy…they are all in trouble. While just Greece and Portugal have “officially” had their credit ratings slashed, I predict Spain and Italy are next.

The entire euro region, except for Germany, is in trouble. And I don’t want my readers to underestimate how fast those troubles could spread to North America.

From the other side of the globe, this morning, we get the news that China has raised its benchmark interest rate for the third time this year, as inflation is accelerating at its

fastest pace in China since the summer of 2008. (So much for the naysayers who said China was a bubble about to collapse.)

In China, a one-year deposit with the People’s Bank of China pays 3.5%. In the U.S., a one-year T-bill pays about one-twentieth of that, 0.17%. You really need to ask why foreigners would buy U.S. Treasuries. The answer: I believe they are buying less and less of them.

Whenever we hear news of another euro country facing sovereign debt issues, we see investors in those countries run to U.S. bonds as a safe haven. Between those buyers and the Fed, the demand for U.S. Treasuries continues…that’s until the world wakes up to America’s own sovereign debt problems.

Where the Market Stands; Where it’s Headed:

On May 20, 2011, my lead article in PROFIT CONFIDENTIAL was “Dow Jones 13,000; Why It Will Become Reality.” I’m sticking by that prediction for these simple reasons:

Monetary policy remains very accommodative. I believe the government and the Fed remain ready to do whatever it takes to stimulate further should the economy lapse back into recession. Yes, the economy is in trouble, but corporate America continues to churn out profits. The number of stock advisors bullish on the market is relatively low—there isn’t a lot of optimism in the marketplace, which is good for stocks.

After a correction that took the Dow Jones from 12,876 on May 2 to 11,875 on June 15, I believe the bear market rally is set to give us a final blow on the upside.

Please, don’t get me wrong. My opinion is that we are fully entrenched in a bear market that has yet to enter the dreaded Phase III. But I see this bear market luring more investors back into stocks before taking their money away again.

The Dow Jones Industrial Average opens this morning at 12,569, up 8.6% for 2011 and only 430 points away from the 13,000 target I discussed above.

What He Said:

“Partying Like a Drunken Sailor: The party continues. Stocks are making new highs and people are spending like there is no tomorrow. Why? I really don’t know. Big (cap) stocks, they just continue going up. Wall Street bonuses are at record levels. Popular consumer goods are flying off the shelves. Designer clothes, fast and expensive cars, restaurants with one-hour waits…people are spending in America today at an unbelievable clip. 1932, 1933… who remembers those years? The depression of the 1930s was the biggest bust of modern history. 2005, 2006, 2007…welcome to the biggest boom of the same period. When will it all end? Soon, my dear reader. Soon.” Michael Lombardi in PROFIT CONFIDENTIAL, February 7, 2007. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.

Gold Stock Bullion Market

The Only Asset Worth Betting on—You Guessed It! This Story’s Just Getting Started

If this is the decade of the commodity, then the single most attractive area for equity speculators remains the gold-mining business. The entire industry is swimming in cash, while spot prices and physical demand for precious metals remain strong. Gold, silver and copper have been holding up exceedingly well, as the rest of the stock market corrects. And it isn’t just the store of value argument or the so-called haven status of gold; the fact of the matter is that the global supply of the commodity is relatively unchanged, while demand (particularly from India and China) is going up.

If I had to choose one stock market sector to focus on as an analyst and investor, it would be precious metals—gold in particular. It’s one of the few global industries with improving fundamentals and, because there is always demand for physical precious metals (even if economies are in recession), there are always companies out there worth speculating on.

Right now, the rest of the stock market is in significant turmoil and there’s a lot of fear driving the share price action. But gold shares have been outperforming the market not only because the spot price is hitting new records, but also because gold-mining companies are now consistently reporting record financial results.

It can be difficult stock picking in the mining universe. There’s nowhere near the number of fly-by-night gold miners as there used to be. Standards for drilling results and feasibility studies are now quite stringent and I would argue that a Street analyst is likely to be more accurate in predicting the cash flow from a modern mining operation than just about any other kind of business.

There are basically two kinds of mining opportunities for equity speculators. There’s picking an established producer with a forecast of cash costs and expected production. Then there’s the pure-play venture capital opportunity, which is a company with a property and some cash in the bank to go drilling for metal. Either way, you have to do your homework or you’re just throwing darts at a board.

In the current environment, I would weight a speculative, pure risk-capital equity portfolio somewhere close to 50% in gold-related investments. From my perspective, it’s the only industry that’s generating meaningful growth and it’s the only way for speculators to beat the current volatility in the broader stock market. Investing in gold is something that not all people are comfortable with. The business is tied to a commodity and, by their very nature, commodity prices are risky, unpredictable instruments. But with the general economy stalled and the stock market in the doldrums, gold mining is one of the few booming industries with strong expectations.
Gold Stock Market

Guess Which Industry Is Reporting Outstanding Financial Results?

Gold miners are reporting their second-quarter earnings right now and, for the most part, they are awesome. If it’s one thing that gold-producing businesses have learned over the last few years, it’s that there’s no need to hedge the price at which they sell their gold. The outlook for the spot price of gold has been so uniformly strong that virtually no mining company engages in a major hedging program to protect their profits. There hasn’t been any need, especially with the spot price hitting new records all the time.

One benchmark company that’s a good indicator as to the health of the gold mining industry is Yamana Gold Inc. (NYSE/AUY). The company is currently worth about $10.0 billion in stock market capitalization and I refer to as one of the top mid-cap gold miners within the industry. The stock is highly liquid and is well followed by the Street.

Yamana is a Canadian gold mining company with significant gold production and development properties in Brazil, Argentina, Chile, Mexico, and Central America. The company is producing gold and other precious metals at intermediate-company production levels, in addition to a significant amount of copper. Recently, the company reported record financial results for its second quarter. New records were achieved in revenues, cash flow, and earnings.

According to the company, its revenues grew to $573.3 million in the second quarter on the sale of 220,376 ounces of gold (excluding its Alumbrera operations), 2.1 million ounces of silver, and 41.6 million pounds of copper. This compares with revenues of $351.4 million generated in the same quarter last year on the sale of 186,921 ounces of gold (excluding Alumbrera), 2.6 million ounces of silver and 31.6 million pounds of copper (excluding Alumbrera). Any way you cut it, this is excellent growth.

Yamana generated record net earnings of $194.7 million during the latest quarter, representing an increase of 178% compared to earnings of $70.1 million generated in the second quarter of 2010. Earnings per share increased 189% to $0.26 on a basic and diluted basis. Cash flow generated from operations (before changes in working capital) grew to $331.0 million, or $0.44 per share, compared to $194.3 million, or $0.26 per share, for the second quarter of 2010.

Company management cited that its financial success was due to strong cost controls, an increase in gold, silver and copper volumes, and higher prices for all commodities. Yamana finished the second quarter with $520.9 million in cash, representing an increase of $190.4 million since December 31, 2010.

Even the technology sector can’t seem to touch the growth rates currently being achieved in the gold-mining business. It’s the one industry now that seems flush with cash and great prospects for the future. Right now, the big investment banks are saying that investors should be buying gold. In fact, equity investors should have been buying gold years ago. With the age of austerity upon us, a weaker dollar and inflationary pressures revealing themselves, gold should be one of the top outperformers over the next few years.
Gold Stock Market

Debt Crisis in Europe Highlights Continued Strong Fundamentals for Gold

It’s pretty difficult to get enthusiastic about the stock market with sentiment so focused on the sovereign debt situation inGreece. Even in the face of solid earnings expectations for the third quarter, investors are looking into the future and seeing slow economic growth, translating into slower earnings. It’s the perfect storm for equities and it makes choices for equity investors very limited.

The one sector that continues to stand out in my mind as offering the best risk-versus-reward scenario is precious metals, especially gold and silver. Both these commodities are experiencing a well-deserved correction and the fundamentals for higher spot prices remain intact. With investment risk very high in the equity market and so much uncertainty surrounding European banks and the euro currency, gold is going to be a key asset over the next several years.

And, even without all the turmoil surrounding sovereign debt in Europe, the fundamentals for gold are strong in the face of a huge increase in the U.S. money supply, inflationary pressures, and central bank demand for gold bars.

And don’t tell me that inflation isn’t an issue. The last time I checked, prices for things weren’t going down. Inflation jumped to three percent in the month of September in the 17 countries that use the euro currency, which was the highest inflation rate since October of 2008. And this is happening in a slow growth environment. I understand reduced expectations for global economic growth, but with the world awash in debt and countries stimulating their economies with increased money supplies, inflation is a very real threat and potential wealth destroyer over the next several years.

In any case, gold investments are one of the few asset classes that should outperform over the medium term and gold stocks should be on every investor’s radar screen.

The stock market is going through a tumultuous time right now, and has been doing so since the end of July. The S&P 500 Index just recently broke through its 25-day moving average and does not look healthy from a technical perspective. I wouldn’t be surprised at all if the Index hits 1,050 or even 1,000.

The saving grace over the near term should be third-quarter earnings, but any good news from corporations will be usurped by the debt crisis in Europe. Accordingly, equity investors will be well served by keeping a close eye on the spot price of gold and the opportunity for a new entry point. If everything comes apart in Europe, cash, gold and the U.S. dollar will be the marketplace’s only friends.
Strong Fundamentals for Gold Stock

Precious Metals Winners—Three Excellent Wealth-creating Stocks

One of the best things you can do as a serious equity investor is to review big stock market winners, even if you didn’t own them. It’s the same thing that professional athletes do. A golfer will review past golf tournaments. A race car driver will watch old races. The goal of the process is to improve your own game by seeing what has worked the best in the past. In the case of stocks, reviewing past winners helps an investor to hone his or her stock picking skills by helping him/her become familiar with what a big winner looks like and discover how it all came to be. It takes time and it takes effort, but then again, money doesn’t grow on trees.

Here’s a standout stock market performer: Silver Wheaton Corp. (NYSE/SLW). This is a silver company that’s benefitted from the huge price move in the underlying commodity. The stock is up well over tenfold since the market’s low set in March 2009 and the company continues to report record financial results.

Or, consider Allied Nevada Gold Corp. (AMEX/ANV). This stock has appreciated from just under $15.00 a share in early 2010 to its current level of just over $40.00 a share. The company’s earnings growth has been consistent. If you pull up a stock chart, you’ll also notice a strong consistency to its share price appreciation.

Then there’s Extorre Gold Mines Limited (TSX/XG). This stock has almost tripled since the beginning of this year. This junior gold miner has been increasing its estimated gold find at its main property in Argentina. The stock’s been on a tear while the broader market has slowly come apart.

These three stocks represent only a handful of excellent wealth creators in the stock market in recent history. You’ll notice that all three operate in the precious metals business, and this is no coincidence. Gold investments remain the most attractive for equity speculators and this trend is here to stay for the near future.

Most precious metal producers are happy with a spot price of gold of just over $1,000. This level is kind of like a threshold in terms of making good money extracting gold from the ground. But, imagine how the business model improves with the spot price of gold trading over $1,800 an ounce. That extra $800.00 is pure gravy. All of a sudden, your bottom line just got better by 80%.

Gold stocks are hot right now on a relative basis. They would be a lot hotter if the broader market weren’t stuck in the doldrums. Over the next 18 months, I think it’s fair to assume there will be a major consolidation within the gold mining industry, as producers bulk up on production in a world with very few new discoveries. There will be good money to be made speculating in gold shares. There’s going to be mergers and acquisitions and there’s going to be all kinds of companies reporting record financial results going forward.

It really is a great time to be in this industry. No other industry is drowning in cash like gold mining.
Gold stock market

The Debt Crisis Continues—It’s Like a Credit Card Shopping Spree After Losing Your Job

The spot price of gold is now well above $1,800 an ounce and gold stocks are reaping the benefits. Right now, the stock market is experiencing a crisis of confidence—not in the ability of corporations to generate earnings, but in the macro sense of country economies, debt and deficits. The global debt crisis is just that—a crisis—and it’s been building up for years.

When you have solid economic growth, an economy can support more debt, because it’s easier to service the interest payments. This is why investors weren’t selling on news of higher deficits and national debts. Traditionally, a central bank would partake in a combination of money-supply growth and cite economic growth as a way to keep dealing with rising debts. Now that the economic growth equation is out of the picture (as virtually all Western countries are experiencing little to no GDP expansion), the problem is growing by the day. It’s the same thing as being able to service a credit card with a large outstanding balance. As soon as the ability to service this debt comes into question, the problem starts to get worse exponentially.

So we have the European sovereign debt issue that the marketplace is worried about. Domestic economic news is negatively affecting sentiment and there is a lingering wariness about the possibility that we aren’t going to get out of the current malaise for quite some time. All this has sapped most of the positive investor sentiment in the marketplace.

My view is that this lackluster scenario (and expectations) will be with us for several months more and, in doing so, will create very good value in the stock market. But, very good values in stocks are meaningless if there’s no prospect for those values to get recognized. Stocks can’t advance in a meaningful way in my view without some sort of capitulation on the part of investors. Only then can the stage be set for a new advance.

Of course, the gold sector is flourishing with all this turmoil. I would say that gold stocks would be even higher today if we were in a bull market, but the top stocks for speculators in this kind of market are almost exclusively with gold. There just isn’t the growth out there in the rest of the economy.

Everything has broken down in this market since the sovereign downgrade of U.S.debt. The railroads corrected significantly and so have technology shares. It’s an across-the-board correction the trading action of which is very similar to what happened the same time last year. The stock market was able to recover from last year’s correction based on the expectation for decent corporate earnings. I think we have about one quarter left of a positive outlook on earnings. Without GDP growth, positive trading action in the fourth quarter is vulnerable.
Gold Stock

The Smartest Dictator of Them All Seizes All the Gold

You’ve got to love this guy, Hugo Chavez.

The President of Venezuela had already nationalized the banks and the oil industry. Now he’s going after the gold.

Chavez took to state television yesterday to tell his people that the gold industry is “run by the mafia,” so “We’re going to nationalize gold. We can’t keep allowing them to take it away.”

The Venezuelan leader said he would nationalize gold through a decree that he will issue in the next few days. Chavez said, “We’re going to convert it (gold)…into international reserves because gold continues to increase in value.”

Venezuela has large gold deposits. Gold mining in the country accounts for the production of about four tonnes of gold per year. Last year, Chavez told gold-mining companies that they could export 50% of the gold they produce, with the other 50% going to Venezuela’s central bank. Now he’s taking it all.

My simple interpretation of Chavez’s actions is as simple as Chavez himself: he has witnessed the value of the U.S. dollar plummeting against other world currencies since early 2009. He has also been witness to an outstanding rise in the national debt of the U.S., the downgrading of the U.S. credit rating, and the spectacular rise in the price of gold. He thinks he sees the writing on the wall. He may be right this time.

Michael’s Personal Notes:

Boy, was he ever wrong!

I’m talking about George Soros. His Soros Fund Management LLC sold 99% of its gold holdings in the first quarter of this year, as Soros was calling gold at that time “the ultimate asset bubble.” He was very wrong. Gold bullion has risen more than $400.00 an ounce, or 30%, since March 31, 2011.

I can understand Soros’ concern. Speculators are getting into the action big time. Options on the Comex to buy gold in the future at higher prices are the most popular and widely held. Since speculators often catch the tail end of a move, so much interest in gold call options is unsettling.

But let’s face the facts, after such a great year for gold bullion prices so far, I don’t think any of my readers would be disappointed to see a major correction start. I hope they would use that opportunity to average down their gold investments, as I would.

On the positive side, in respect to real demand, fear about Europe’s banking system with sovereign debt issues persisting is resulting in real demand for gold. Rand Refinery Ltd., which runs the world’s biggest gold refining operation pumping out the world-famous Krugerrands, can’t make the coins fast enough to supply demand.

Yes, speculators are in the options pits big-time betting that gold will go higher, which is worrisome. And demand for gold coins is also rapid.

Like all healthy bull markets, a good correction once in a while is needed to take the speculators out of the market. But don’t let a pull-back or correction in this long-running gold bull market deter you from looking at the glass as being half full, not half empty.

Where the Market Stands; Where it’s Headed:

We started the month with some big 400- to 500-point drops on the Dow Jones Industrial Average and with Standard and Poor’s downgrading of the U.S.’s credit rating. Investors got nervous and dumped their equity funds. And, just halfway through the month, stocks have almost recovered to almost breakeven for 2011. Another lesson in the risks of following the herd.

I continue to believe that we are in a bear market rally in stocks that started in March of 2009. That bear market rally is long in the tooth, but still has life left in it to drive stock prices higher in the immediate term.

What He Said:

“The conversation at parties is no longer about the stock market; it’s about real estate. ‘Our home has gone up this much’ or ‘Our country home has doubled in price.’ Looking around today, it would be very difficult to find people who believe that one day it could be out of vogue to own real estate because properties would be such a bad investment. Those investors who believe a dark day will never come for the property market are just fooling themselves.” Michael Lombardi in PROFIT CONFIDENTIAL, June 6, 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.
All The Gold Stock

Today’s Stock Market: Making Money by Copying Last Year’s Action

There’s no doubt that it’s been a choppy August and September for the stock market. But I want my readers to look at these facts:

The Dow Jones Industrial Average opened 2011 at 11,557 and opens this last trading day of September at 11,153, down 3.6% for 2011 so far.

At the beginning of 2010, the Dow Jones Industrial Average opened the year’s trading at 10,500. By September 30, 2010, the Dow Jones Industrials was trading at 10,000 after a rocky August and September—a decline of 4.8%.

In September of 2010, bearish sentiment amongst investors and stock advisors was at its lowest level of the year.

Today, bearish sentiment amongst investors and stock advisors is at its lowest level of 2011.

There’s a striking resemblance between 2010 and 2011 stock market action and I see this pattern continuing. Between September and December of 2010, the stock market rallied, ultimately leading to a 10% gain for stocks in 2010. On the backdrop of extreme bearishness, just like September of 2010, I believe stocks will rally from today’s level to end the year higher.

Yes, stocks could move 10% higher from where they are today to the end of 2011. Investors will have to gauge if the upside potential is worth the risk. Where do I see the greatest bargain? With gold bullion having corrected 15% from its recent price high, with the stocks of junior and senior gold mining down even more than 15%, I see the best bargains, the greatest upside potential, in the gold mining sector.

Michael’s Personal Notes:

Tomorrow, the longest-serving policymaker at the Federal Reserve, Kansas City Federal Reserve Bank President, Thomas Hoenig, retires.

In his last speech in office, Hoenig said that the Fed’s actions of trying to stimulate the economy by artificially keeping interest rates low will ultimately “buy problems.”

The Federal Reserve has kept short-term interest rates near zero for years now. The Fed has also bought more than $2.0 trillion in securities. Hoenig compared these actions to short-term bandages for the government’s failure to cut its debt to cut spending.

I’ve shared this opinion with my readers since the economic bust started: making the government bigger, having the government spend more at the cost of increasing the national debt, is not the answer. I’m happy an official such as Hoenig has the courage to speak his mind about what his contemporaries are doing…and why it isn’t working.

When President Obama leaves office, he will have increased our national debt by about $5.0 trillion—the greatest four-year increase in the national debt ever.

Where the Market Stands; Where it’s Headed:

A bear market rally in stocks started in March of 2009. This bear market rally that prevails today has the potential to take stock prices higher before the rally finally expires.

What He Said:

“Over the past few weeks, I’ve written about subprime lenders and how their demise will hurt the U.S. housing market, the economy and the stock market. There’s no escaping the carnage headed our way because the housing market and subprime business are falling apart. The worst of our problems, because of the easy money made available to borrowers, which fueled the housing boom that peaked in 2005, have yet to arrive.” Michael Lombardi in PROFIT CONFIDENTIAL, March 22, 2007. At the same time Michael wrote this, former Fed Chief Alan Greenspan was quoted as saying, “the worse is over for the U.S. housing market and there will be no economic spillover effects from the poor housing market.”
Today’s Gold Stock Market:

Good News: The Commodity Price Cycle and S&P 500 Both on Track

I view the stock market’s recent trading action as impressive. The S&P 500 Index has clawed its way back up to the 1,200 level, which is technically significant. Just last year, the index (and others) broke down after a strong run and then recovered meaningfully. While the past can’t predict the future, there is a strong similarity in the share price action.

I think that the broader stock market is reasonably priced and that corporate earnings will be strong enough to be the catalyst for a solid upward move in stocks. How long a little rally might last is unpredictable in this kind of environment. Investment risk for equities is high and the sovereign debt issue hasn’t gone away. I’m certain this issue in Europe will once again be a focal point for investors in the not-too-distant future.

Also impressive is the spot price of oil, which is climbing its way back to the $90.00-a-barrel mark. Silver and copper are ticking higher again and this is a positive signal about confidence in the global economy. And we can’t ignore the spot price of gold, which is persistent in its strength. While there are still a lot of stocks that are down, the commodity price cycle seems to be alive and well.

Without any new shocks to the system, I expect share prices to trade slightly higher from current levels in anticipation of third-quarter earnings season. Like we’ve seen all year, there haven’t been many companies revising their previous guidance lower. The general view that I got out of the second-quarter earnings season is that most corporations are expecting solid earnings in the bottom half of the year. With share price valuations reasonable, this is why I expect a stock market rally based on good earnings news. And, while it’s too early yet, I think the expectation for solid earnings will help the S&P 500 Index climb back above its 200-day moving average.

Here at Lombardi Financial, we continue to talk a lot about our positive expectations for precious metals and gold stocks in particular. This sector remains one of the most attractive for equity market speculators. There have been several mid-tier acquisition announcements in the gold mining industry recently and this consolidation trend is just getting started. Takeovers and mergers are going to flourish in this industry over the coming quarters, because share prices are high and so are bank accounts. It’s a great time to be a speculator in this specific market sector, because the fundamentals are so strong. You have a strong underlying spot price for gold, with the market’s expectation for $2,000 an ounce this year. Gold mining companies are flush with cash from their previous record financial results. And now companies want to bulk up on production, because it’s cheaper to buy another established producer than to go exploring on new properties.

What are the best stocks in this market? For speculators, they are gold stocks. For long-term investors, they are higher-dividend-paying securities.

Good News:

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