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

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.
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