Answered: Can I Still Make Money Buying Gold Now?

Most investors likely fall into one of these three categories:

They likely haven’t bought gold investments yet and they are thinking it may be too late to get in. Or they have bought gold investments and they are wondering if they should by more at these prices. Or, like me, they take as many opportunities as possible to buy more gold investments each time the price of gold bullion pulls back.

What most investors fail to realize is that the last real correction in the 10-year gold bull market occurred back in 2009. This year, gold bullion reached a high price of $1,895 an ounce on September 5, 2011. By September 26, 2011, the metal had fallen back to $1,598 an ounce (London fixed closing day prices). Smart investors would have seized the opportunity to buy more gold investments when the metal fell below $1,600 an ounce (see Gold Bullion’s Price Action: Time to Separate the Men from the Boys).

From its 2011 price high of $1,895 an ounce, gold corrected down 16%. A healthy correction in a long-term bull market…but, yes, I would have liked to see more of a wash-out. I would have liked to see the weaker hands and speculators flee gold investments. But, on the other side of the equation, I feel that the “light” correction is an indication that the bull market in gold bullion is strong.

Yes, I would get into the gold bullion market at this time. But there is a caveat. I wouldn’t be surprised to see gold move to the low $1,500 level. If it happens, I would just seize that opportunity to buy more gold investments. But, at the same time, if gold never makes it back to the low $1,500 an ounce, you will have secured your entry into this gold market now.

Each time gold bullion hit a new price high, be it $500.00, $700.00, $1,000, $1,200, or $1,500 an ounce, I said to buy more gold investments. I’ve been right all the way up.

All this money printing by world central banks since the credit crisis hit in 2008 has greatly expanded the fiat money supply. The more fiat money in circulation, the greater the threat of inflation. In Britain, inflation hit a three-year high in September—inflation there is running at 5.2% annualized! Inflation is also a problem in the U.S., although it’s not really getting any media coverage.

Gold investments…still the best hedge against excessive fiat money printing, too much debt at various government levels, and future inflation.

Michael’s Personal Notes:

Want to now what really went wrong in Europe? My fellow analyst Robert Appel presents his “Top 10 Reasons Why the Eurozone Was Doomed to Fail and What Happens Now.” Well worth the read…

1. Prior to the formative eurozone vote, had you asked the residents of the various countries if they lived in a democracy, they would have unanimously said yes.
2. The actual eurozone, however, was created by politicians who did not consult their constituents. Think about that…
3. After the eurozone vote, had you asked the residents of the various countries if they lived in a democracy, they would have still unanimously said yes.
4.Was the eurozone needed? In hindsight, the only obvious beneficiaries were the (private) banks and the politicians who saw their “power” increased a thousand-fold. Notice we did not talk about money; we talked about power. Yes, there is a difference, and we used that specific word deliberately.
5. Was the eurozone a good idea? Well, if you think about it, major cultural and anthropological differences meant that the zone was doomed to fail from the beginning. And indeed still is. Is money earned the exact same way in Greece as in Germany? That is really the only question you need to ask. The answer is obvious.
6. How will the current mess take to resolve? Short answer: No one knows. Longer answer: The eurozone may dissolve. We doubt it. Or, Germany may step up the plate and use its hard-working citizens to bail everyone else out. Or, they may make a “2-tier” zone where certain countries are a little less equal than others. (Yes, we do get the irony of this solution—creating tiers is really a giant step backwards, since the continent was already tiered, was it not?)
7. What are the chances of dissolving it? Answer: While this makes some small sense on paper, clearly the politicians will do whatever it takes to kick the can down the road, so to speak, just as was done with the subprime mess. They perceive correctly that dissolving the zone might cost them their jobs. And, as we know, politicians today will sacrifice anyone and anything to save their own jobs.
8. Are we getting all the facts? Actually no. The fact is that the Spanish and Italian problems—which are not yet full disclosed—could dwarf the Greek issues (issues which, please note, have been delayed, and obfuscated, but not resolved). Major world banks, as you read this, are reducing exposure to French loans and experts have opined that the bizarre deal recently cut with Ireland is not sustainable.
9. Who benefits from the mess? The U.S., which ironically saw its bond sales rise (even at effectively negative rates) and its buck soar. Two counter-intuitive events, of course, which make little sense yet which happened anyway. Also the “anti-one-worlders” benefit, since the Europe mess is going to make it that much harder to bring Mexico, Canada and the U.S. into one zone next.
10. When will have an answer? No later than next summer, we suspect, because frantic work among the politicians over the last few days has (we think) managed to push the problem forward to that period. In the meantime, we expect stock markets to try to rally between now and then.

Where the Market Stands; Where it’s Headed:

What a coincidence…

The stock market, as measured by the Dow Jones Industrial Average, closed yesterday at the exact number it started at in 2011: 11,577. We’ve gone from a market that sells off on bad news (as we witnessed most of this summer) to a stock market that rallies on bad news—the true sign of a market that wants to move higher. The year 2011 is looking more and more like a repeat of 2010 for the stock market (see Today’s Stock Market: Making Money by Copying Last Year’s Action).

Since March of 2009, we have been in a bear market rally. This rally will serve to lure investors back into stocks before Phase III of the bear market sets in. As I have been writing since March 2009, I expect stock prices to continue trending higher (see The Strongest Indication Yet That Stocks Are Short-term Oversold). However, the easy stock market profits of 2009 and 2010 will not be repeated. Bear market rallies can last three to four years.

What He Said:

“Even the most novice investor can now read the chart of the Dow Jones U.S. Home Construction Index and see that it is trading at its lowest level in five years. If, like me, you believe that stocks are an indication of what lies ahead, this important index is telling us that housing prices are headed to 2002 levels! What would that do to the economy? Such an event would devastate the U.S.” Michael Lombardi in PROFIT CONFIDENTIAL, December 4, 2007. That devastation started happening in the first quarter of 2008.
Money Buying Gold Stock Now?

Forget the Economy; These Companies Are Still Earning Big Money

Alcoa, Inc. (NYSE/AA), the first stock in the Dow Jones Industrial Average to report third-quarter earnings, missed analyst expectations. The Street was hoping Alcoa would earn about $0.20 a share. The company earned $0.15 a share. But let’s look closer.

Alcoa’s net income in the third quarter of this year more than doubled to $172 million from only $61.0 million last year; nothing to sneeze at.

And if we look even closer, we see that the world’s largest aluminum company is reflective of other large American companies. Alcoa, after posting consecutive quarterly losses in late 2008 and into 2009, slashed 20,000 jobs and closed non-profitable smelters. It cut costs, focused on profitability. And the profits started to roll in.

What the market wants is fast, big growth. We had that in 2009 and 2010. Company profits across the 30 large Dow Jones components have been very strong over the past two years.

Analysts are expecting the S&P 500 companies to report a 14% increase in third-quarter profits. Sure, that’s the slowest pace since late 2009 and a lot lower than the 19% growth in the earnings these companies experienced in the second quarter of 2001, but again, nothing to sneeze at. I think it’s steady and healthy earnings growth.

Corporate America has $2.0 trillion socked away in their coffers. That number will grow as these companies continue to post double-digit earnings growth. We’ll be surprised at how well corporate America will fare the remainder of this year even as the U.S. economy continues to deteriorate.

Michael’s Personal Notes:

September 2011 was the worst month for gold bullion prices in about three years. Gold was down 10% in price in September, which equates to almost $200.00 an ounce.

I want my readers to know that a 10% correction in gold bullion prices is not a big deal…and that a healthier correction would have been in the 15% to 20% range. Such a decline in gold prices would serve to drive speculators and “weak hands” from the gold bull market that started in 2001.

Is the price correction in the ongoing bull market in gold over? I hope so. But I wouldn’t be surprised to see some back-filling…some more downside before gold bullion makes a serious attempt to break through the $2,000 an ounce mark.

I would have been more comfortable if gold bullion prices broke down towards $1,500 an ounce in the recent correction—the metal only reached a low of $1,598 per ounce on September 26, 2011, before moving back up.

My message: I wouldn’t be surprised to see gold prices pull back again. I’m not convinced the correction is over.

Where the Market Stands, Where it’s Headed:

In October of 2007, after a 20-plus year bull market, a bear market was born. Phase I of that bear market brought stocks to a 12-year low on March 9, 2009. On that date, we entered Phase II of the bear market, a period in which stocks rise as the bear attempts to lure investors back into the stock market. This is where we are.

Phase II of secular bear markets tend to last years. With the 1934-1937 bear market rally, the duration was 35 months. So far, we’ve been in this Phase II bear market for 31 months. I believe that stock prices will mover higher before this Phase II bear market rally is over.

Phase III of the bear market will see stock prices approach their March 2009 level, possibly breaking below them and creating new multi-year price lows.

What He Said:

“Any way you look at it, the U.S. housing market is in for a real beating. As I have written before, in the late 1920s, the real estate market crashed first, the stock market second, and the economy third. This is the exact sequence of events I believe we are witnessing 80 years later.” Michael Lombardi in PROFIT CONFIDENTIAL, August 27, 2007. “As for the stock market, it continues along its merry way, oblivious to what is happening to homebuyers’ wealth. (Since 2005, I have been writing about how the real estate bust would be bigger than the boom.) In 1927, the real estate market crashed and the stock market, even back then, carried along its merry way for two more years until it eventually crashed. History has a way of repeating itself.” Michael Lombardi in PROFIT CONFIDENTIAL, November 21, 2007. Dire predictions that came true.
Gold Stock

The Strongest Indication Yet That Stocks Are Short-term Oversold

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Without getting too technical, investors have two ways to bet on the price direction of stocks.
They can go “long” the market, which means they believe that stock prices will rise. Or they can go “short” the market, which means they are betting that stock prices will fall. Going “long” is easy; all investors need to do is buy stocks. And usually, when investors have a strong general consensus that the stock market will move higher, like they last did in October of 2007, stock prices go the opposite way and fall.

Going “short” is easy, too. Investors simply borrow stocks they do not own and promise to repay later. If the stock falls in price, the person shorting the stock keeps the difference between the price he/she borrowed the stock at and the price it is repaid at. Short selling is a huge function of the market.
Borrowed stock climbed to 11.6% of the market in August from 9.5% in July, according to Bloomberg. This is the biggest monthly increase in five years.
Let’s face the facts. The stock market took a big beating this summer. Worldwide, trillions of dollars were whipped off the value of equities. Investors thought the market was headed back to test the March 2009 lows and started selling stocks and shorting stocks.
But the bear market is too smart. He doesn’t make it easy. “Not so fast, I’m not finished the rally I started in March of 2009,” the bear market told investors as stocks started to rally late last week.
Historically, stocks have rallied when investors have taken a large short position in equities. I don’t see it being any different this time around. A recipe for higher stock market prices: lots of short sellers and lots of bears. We have both in the tent right now and it’s getting crowded.
Michael’s Personal Notes:
The Bank of England (BOE) is doing exactly what the Fed did, buying government bonds. And it’s doing it big-time!
The BOE has pledged to buy the most bonds since the depths of the 2008-started crisis, as the central bank races to stop the current euro-region debt crisis from pushing Britain back into recession.
To date, quantitative easing, which is what the Bank of England and Federal Reserve have done by buying their respective government’s bonds, has had no effect on job creation or economic growth. The action of buying government debt serves two purposes: 1) it insures there is a buyer for the debt (in case foreign investors, who buy most government bonds, get cold feet); and 2) it helps push domestic interest rates down.
However—and there is always a “however”—there is a big negative to central banks buying their own country’s government bonds. The money to buy the bonds needs to be created. In the old days, the printing presses would just print more fiat currency. These days, I believe the money supply is simply expanded electronically.
The problem with more and more money in the system is that the money being “printed” brings in more supply, and as per Economic Analysis 101, the more of something there is in supply, the lower the demand. In the case of fiat currencies, the more the supply, the more paper currency is needed to buy goods and services, and that’s how we get inflation. I believe this is exactly what the 10-year bull market in gold bullion has been telling us…rapid inflation ahead.
Where the Market Stands, Where it’s Headed:
Stocks are making their anticipated comeback from a state of being severely oversold.
I continue to believe we are in a bear market rally that started in March of 2009 and that this bear market rally will bring stock prices even higher before it’s over.
What He Said:
“I personally expect the next couple of years to be terrible for U.S. housing sales, foreclosures, and the construction market. These events will dampen the U.S economic picture significantly in the months ahead, leading to the recession I am predicting for the U.S. economy later this year.” Michael Lombardi in PROFIT CONFIDENTIAL, August 23, 2007. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.

Stock Market Update: Selling Capitulation in Place

Stocks plummeted over three percent at the open on Thursday, as the selling capitulation held despite several up days due largely to the oversold technical condition.

My investment guidance is to stay on the sidelines and wait for a base to form before entering into new positions. High frequency trading, specifically on the short side, could make the selling worse, as we have seen in the past. The stock market is dangerous.

Driving the bearish sentiment is increased concern towards the slower growth and debt issues in Europe, along with weak jobs and inflation data domestically.

The worrying about Germany’s sluggish growth is conjuring up fears of another potential recession if the top country cannot reverse the situation. France is also slowing. There are also concerns that the major European banks with exposure to bad debts around the weaker European countries will be in trouble, which could trigger a financial crisis.

Morgan Stanley cut its global GDP forecast for 2011 and 2012 and added that the U.S. and the eurozone were “dangerously close to a recession.” Not exactly an endorsement. This tells me that the S&P downgrade of U.S. credit may have been the correct call.

And making matters worse was a jump in the headline Consumer Price Index (CPI) to 0.5% in July, above the 0.2% estimate and the 0.2% decline in June. Excluding food and energy, the core CPI was in line at 0.2%. This, along with a rise in the Producer Price Index (PPI), is worrisome.

The current sentiment does not look positive. In this country, we have the massive debt, the credit downgrade, stalling growth, high unemployment, and weak housing.

The charts continue to be negative, with a bearish death cross. Oil is also showing this. The near term is ominous. Be careful, as there is a lack of confidence in buying.

The near-term technical view remains BEARISH, as the key indices trade well below their respective 50-day moving average (MA) and 20-day MA on relatively weak Relative Strength.

The NASDAQ, S&P 500, and Russell 2000 continue to display a bearish death cross on their respective charts, an indication of potentially additional losses.

The downside risk remains extremely high and bearish.

I continue to sense that gains will not be sustainable. Until there is firm buying support and a base formation on the charts, it may be worthwhile to buy after a big dip and sell on a bounce. In other words, trade the current volatility.

The best call at this time continues to be gold. The October Gold broke $1,800 to a record $1,819 on Thursday morning. The chart looks bullish on strong Relative Strength. There is a golden cross on the chart, with the 50-day MA of $1,591 well above the 200-day MA of $1,467. I feel that gold prices will continue to edge higher, especially if the U.S. economy falters and another recession surfaces.

The best strategy for risk-averse traders is to protect via put options.

Again, you may want to be careful when buying on the current weakness. To be safe, stay on the sidelines.


Gold Stock Market Update: Selling Capitulation in Place

Investing in Gold: Why it’s Still One of Your Top Options in Risky Times

Greece needs more money to pay for its previous loan. Ireland is in financial chaos. Portugal and neighbor Spain are not on stable grounds and could need help. And then there are Italy and Belgium. The European Union is in trouble. Germany and France are helping to pay for the misfortunes in these other countries. Europe is facing significant growth and debt issues.

Then you have the rising inflation in China, where interest rates are edging higher. In China, inflation surged to 5.5% in May, the highest level in about three years. The Chinese central bank has increased the bank reserve ratios in an effort to stall lending. I also expect another interest rate increase to come, the fifth since October 2010. Slowing in China will have an impact on economic growth and other global economies that deal with China, including Europe, India, and the U.S.

Domestically, you have a national debt of over $14.0 trillion and a trillion-dollar deficit. There is an effort to lift the debt ceiling in order to spend more. But many states are struggling to make ends meet and are looking at severe cuts in their state budgets.

Given all of this risk, you should be investing in gold.

Gold is considered a safe-haven play versus that of silver. Investing in gold is a prudent move when the overall market risk rises, like what we are currently witnessing.

On the demand side, China is a significant buyer of gold. This is expected to continue, as the country hoards physical gold in its reserves. India is also a major buyer.

Gold is a limited resource that needs to be found and mined. There is a certain amount of global reserves in the ground, but, after that, there needs to be more exploration.

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.

On the chart, the August Gold traded at a record high of $1,577.70 on May 2. The current chart looks bullish on above-average Relative Strength. There is a “golden cross” on the chart, with the 50-day moving average (MA) of $1,517 well above the 200-day MA of $1,411.70.

Some pundits have suggested a $2,000 target on gold over the next few years. I even saw a staggering $5,000 price target on gold. Now, the latter may be the extreme, but I feel that gold prices will continue to edge higher, especially if Europe falters.

In the current climate, gold is the best bet, while silver continues to be a trading commodity.

Buy a mixture of exploration-stage gold players and small to large producers. Under this scenario, you can play both the potential aggressive gains of exploration stocks and the steady returns of the large gold producers.


Investing in Gold Stock:

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 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 Stock Market

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.”


Gold Stock Market

Stock Picking for New Opportunities—What It Might Take for Another Major Advance

Right now the broader market is taking a well-deserved break after a pretty successful first-quarter earnings season. This market needs a new catalyst if share prices are going to advance and there isn’t one present just yet, so stocks will trade on the economic news of the day. So far this month, the economic data are generally positive, but not overly so. I think we’re going to be in a slow growth environment for quite some time.

With this backdrop, it’s fair to say that there won’t be any major tailwinds for equity investors in the near future. It’s a stock pickers’ market that’s due for a correction. It is well-deserved, however, and we have to roll with the action.

In my economic analysis, there weren’t very much home runs in the earnings department. The economy just isn’t robust enough to produce some major outperformance. I would say that, generally, large-cap results were decent in the first quarter and the outlook for the second quarter is about the same. For smaller companies, which are still reporting their numbers right now, there hasn’t been much in the way of outperformance either, although several mining stocks came out with excellent financial growth due to strong spot prices. This was expected by the marketplace and even the most robust miner is selling off right now.

The stock market’s been due for a break for quite a while and it’s natural for this to occur between earning seasons. As an investor, I would be in no rush to take on new positions in this market, but I would be keeping a close eye on gold positions. This is long-term trend that’s not going away.

A number of very solid small-cap gold mining stocks are retreating in this market and this is a sector that’s ripe for some strong trading action later in the year. As I’ve been writing, I still feel that the precious metal sector represents some of the most attractive growth opportunities for equity investors and that any major consolidation or correction in the sector would be a great entry point for new positions.

If there isn’t any new catalyst on the upside, there isn’t one on the downside either. This is a stock market that will likely drift over the near term. It’s called stock market malaise and it reflects a certain wariness as to whether economic growth is sustainable this year. Institutional investors remain unsure.

Stock picking over the very near term is going to be difficult as the broader market drifts. There’s no need for any major action just yet. I don’t see the equity market advancing in any meaningful way until we get to second-quarter earnings season. The current break has definitely been earned.


Gold Stock Updates

U.S. Debt Ceiling: The Least of Our Real Problems?

As I read the financial newspapers and the popular Internet sites this morning, I realize that if there is one thing I hope I achieve in my own daily writings, it is to make my readers wary, almost suspicious of what the media is telling them.

Here’s what got me thinking like this…

Yesterday, the U.S. dollar hit a fresh, new three-year low against a basket of six other major world currencies. The media was quick to point to the bickering amongst the Democrats and the Republicans (over raising the U.S.debt ceiling) as the reason the dollar was falling to a new record low. Wherever I looked this morning, the news sites were basically saying, “Washington can’t agree on increasing the debt ceiling, the deadline is closing in, and the dollar is falling because of all this concern.”

But that’s where reporters have it very wrong, as far as I’m concerned.

Let’s take the debt ceiling issue off the table for a moment and let’s assume Washington passed a new debt ceiling limit of $16.0 trillion or $17.0 trillion. Would the greenback still be falling off the cliff in value? Of course it would.

We are passing a law that says the government can borrow even more money. The greater the debt of a nation, the weaker its currency. We are actually better off if the government doesn’t pass a new debt ceiling and it starts spending within its means.

I don’t want my readers to buy the propaganda the media spits out. At the very least, I want my readers to be aware of the fact that most people reporting the financial news today know very little about finances or economic analysis.

The following are my five core beliefs. I hope my PROFIT CONFIDENTIAL family of readers will benefit from them.

The devaluation of the U.S. dollar that started in late 2008, early 2009, will continue as: (1) the U.S.economy deteriorates further; (2) the national debt level continues to rise; and (3) the Fed prints more money.

Inflation will become a real problem in America thanks to years of monetary policy that promoted artificially low short-term interest rates and the hyper-printing of U.S. dollars.

Gold prices will rise on the back of a weak greenback and too many dollars in the system and as inflation comes back.

The euro is as done as the dollar. Either Germanywill eventually kick the weaker countries out of the euro or it will adopt its own currency.

The stock market will eventually test its March 9, 2009, lows, as Phase III of the bear market sets in.

Where the Market Stands; Where it’s Headed:

The next couple of days will bring the close of July 2011. And with another month behind us, the bear market rally in stocks that started in March of 2009 will have lasted 29 months. A tremendous feat? Not really. As I have written before, the 1934 to 1937 bear market rally lasted 35 months.

I remain steadfast in my opinion. We are in phase II of a bear market. During this phase, the bear brings stocks higher in an effort to lure investors back into them. The easy money in this bear market rally has been made. But there still is upside potential for stocks, albeit it’s limited.

While the media is obsessed with theU.S.debt ceiling limit, the Dow Jones could easily continue to ride the “wall of worry” higher.

What He Said:

“The Dow Jones Industrial Average, the S&P 500 and the other major stock market indices finished yesterday with the best two-day showing since 2002. I’m looking at the market rally of the past two days as a classic stock market bear trap. As the economy gets closer to contraction, 2008 will likely be a most challenging economic year for Americans.” Michael Lombardi in PROFIT CONFIDENTIAL, November 29, 2007. The Dow Jones Industrial peaked at 14,279 in October 2007. A “sucker’s rally” developed in November 2007, which Michael quickly classified as a bear trap for his readers. By mid-November 2008, the Dow Jones Industrial Average was at 8,726.


Gold Stock Price

Economy and Debt: America on the Brink?

I’ll try my best not to be sarcastic this morning…

But what happened to all theU.S.jobs we were promised were headed our way? The Labor Department reported this morning that only 18,000 new jobs were created in June 2011, the lowest monthly job growth in nine months. The median Bloomberg estimate called for 105,000 new jobs for June.

The unemployment rate; it’s going the wrong way, up this morning to 9.2%—the highest level in six months.

All those trillions spent to stimulate the economy, all those “too big to fail companies” that were bailed out. Did all that money really make a difference? Sure it did. It ballooned our national debt to $14.3 trillion. Now the Obama administration has new ammunition. It can go to Congress and say, “See, jobs are not being created; the economy is so fragile, we need to spend more money to stimulate it. Increase thatU.S.debt ceiling.”

It is just me, or is all this starting to sound more and more likeJapan1991-2000?

According to Canada’s Globe & Mail (7/8/11), theU.S. economy needs to add 125,000 to 150,000 jobs a month just to keep up with people entering the labor force for the first time. We are nowhere near that type of job growth.

What happens next? My thinking leans towards the Fed continuing to increase the money supply, keeping short-term interest rates artificially low, and coming up with a new version of QE2 (all which are inflationary measures). No wonder gold prices are jumping higher again this morning.

Why did I start today’s issue by saying, “I’ll try my best not to be sarcastic this morning?” Many economists believe that the way to solve our economic issues, the way to stimulate the economy, is to have the government throw taxpayers’ money at the problem.

From the early days of the credit crisis, I have been in that other group of economists; the minority that believe that economic contractions should follow their natural path, as economic expansions do—unabated by government intervention that eventually leaves its citizens with an overabundance of debt.

Let’s look at it this way. During the real estate and mortgage boom years of 2003 to 2006, did the government do anything to slow the boom down? No. It actually spurred the boom on by reducing interest rates to historical lows. Now that the economy has gone bust, we are throwing money (we don’t have) at the problem. It’s an ironic situation.

Michael’s Personal Notes:

Talking about jobs…

Our neighbor to the north,Canada, a country with a population less than one-tenth of that of the U.S., reported this morning that it had created more jobs in June than the U.S.!

Canada created 28,400 new jobs in June (twice what analysts were expecting), pushing Canada’s unemployment rate down to 7.4%—the lowest jobless rate inCanada since 2009.

The Canadian dollar remains my favorite currency. I believe that, as the U.S. dollar continues to devaluate, the Canadian dollar will be a winner.

Where the Market Stands: Where it’s Headed:

We got to within 280 points of Dow Jones 13,000, and bang—the patheticU.S.job numbers report comes out, knocking stocks back down again.

In reality, the stock market could have taken it a lot worse today. Yes, it was a very poor June payroll growth number. Add that to continued woes inEuropethis morning with more pressure on the stock prices of Italian banks—and the market is taking the negative news in stride.

If this bear market was over, today’s bad economic news could have easily pushed the Dow Jones down 300 or 400 points. Hence my belief this is a stock market that very much wants to keep rising.

What He Said:

“There is no mixed signal about this: Foreclosures in the U.S.will continue to rise, the real estate market will get weaker, and the U.S.economy will get weaker. Smart investors should seriously consider unloading their stocks of consumer-products companies that produce nonessential goods.” Michael Lombardi, Profit Confidential, March 12, 2007. According to the Dow Jones Retail Index, retail stocks fell 42% from the spring of 2007 through November 2008.



Economy and Debt: America on the Brink?

Tonight: The Biggest Speech of His Life; What Investors Can Expect

Most Americans will be glued to the television tonight to see what the leader of the most powerful country in the world has to stay about his plan to get the economy going; in specific, to create jobs.

There is no doubt in my mind: President Barack Obama will be a one-term president unless he delivers on the promises he will make tonight.

The economic situation in the U.S. continues to deteriorate rapidly:

The “underemployment rate,” which includes part-time workers who want full-time work and people who have given up looking for work, sits at 16.2% in the U.S. right now.

Last week, the U.S. Conference of Mayors (which includes the mayors of 1,191 U.S.cities with a population of 30,000 or more each) called upon Obama and Congress to create major road and bridge improvement through some form of transportation bill.

More than 6.3 million households are past due by 30 days or more on their mortgages.

My bet is that Obama will push for huge job creation in the form of huge, multi-billion-dollar programs…infrastructure improvement and help with payroll tax. The Republican-controlled Congress will balk at raising personal taxes to fund these initiatives, so we are eventually talking more debt.

Many analysts are now expecting the Fed to unleash a new form of QE3. This will pump more money into the system as more dollars are printed. Let’s face the facts. The only way our politicians and the Fed know how to stimulate the economy is to spend more and print more money.

Both actions will continue to place immense pressure on the U.S. dollar. Is it any wonder that gold prices have been going through the roof? Does $3,000-an-ounce gold really sound unreasonable now?

Michael’s Personal Notes:

Talk about big numbers…

In a study for the Dallas-based National Center for Policy Analysis, a Boston University economics professor claims that the true debt of the federal government is $211 trillion.

According to Professor Laurence Kotlikoff, the government has been “incurring enormous unofficial debt and using fraudulent deficit accounting to keep these huge bills facing our children off the books.” Social Security and Medicare are two huge government liabilities not on the books of the government.

If Kotlikoff is right, with the Gross Domestic Product (GDP) of the U.S. at $14.0 trillion a year, it would take 15 years of all the GDP the U.S. creates to erase the $211 trillion in U.S. debt.

It’s very disturbing. If the government were a business, under section SFAS 158 of GAAP (Generally Accepted Accounting Principles), adopted in September 2006, it would be required to include on the balance sheet the full net value of pension assets and obligations, measured as the difference between the fund assets and the projected benefit obligation. A company does not have to show the full value of assets and the full value of liabilities—just the net of the two. The government is special—it doesn’t need to show its pension liabilities to the public.

Hence, when we hear that our “official national debt” is $14.5 trillion, it’s only the tip of the iceberg. Our true debt is 14 times that amount. It’s a U.S.debt crisis. How can the U.S. dollar sustain itself under this mountain of debt? It can’t. That’s what the rise in the prices of gold investments and gold stocks has been all about.

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average opens this morning down 1.3% for 2011. It is my opinion that the bear market rally in stocks that started in March 2009 remains intact. Despite this bear market being “long in the tooth” and tired, it still has life left in it. Stock market investment returns are limited at this point. The easy money in the stock market has been made (mostly in 2009). I estimate that the market could advance 10% from here on the upside before the bear finally retires this phase of its cycle.

What He Said:

“Bonds could now be a buy: Bonds rise in price when interest rates fall, as their return makes them more valuable. After a bear market in bonds that has lasted for months, the action in the bond market, as I read it, indicates that the bear market in bonds could be over. I’ve always preferred quality when buying bonds, going with government bonds over corporate bonds. If you have some cash lying around, bonds could be a great deal.” Michael Lombardi in PROFIT CONFIDENTIAL, July 24, 2006. The yield on 10-year U.S. Treasuries fell from five percent in the summer of 2006 to 2.4% in October, 2011—doubling the price of the bonds Michael recommended.


Gold Stock Updates

Oil & Gold—Two Great Commodities Whose Prices Reflect the Fear in Financial Markets

The only trading action that seems to be working for long investors is in gold stocks these days. This isn’t a surprise, nor is it unexpected with the spot price of gold so high. Two more junior gold producers, AuRico Gold (NYSE/AUQ) and Northgate Minerals (AMEX/NXG), announced a deal to merge. The two juniors hope to create a new intermediate gold player and the expectation for production growth as a combined company is significant.

In this particular case, AuRico Gold is doing the buying. The company’s share price (which has almost doubled since the beginning of the year) appreciated swiftly to a recent 52-week high of $14.17 per share. Then the company announced the all-share deal to acquire Northgate. It’s a trend that we’re going to see more of over the coming quarters. With share prices lofty and bank accounts full, everyone in the gold mining business wants to bulk up before the party’s over.

The broader stock market’s trading action reflects the overall sentiment in the economy. Add in the fact that the month of September is often not a good one for stocks, and one could easily predict that the next several weeks are going to be difficult. The stock market isn’t expensively priced, but that doesn’t mean that it will be anytime soon. There’s a mini cycle going on in the stock market and it’s all about the revision of expectations for the future. Expected returns from stocks are going down big-time, as current economic data sink in. No doubt the stock market needs a major catalyst in order for it to advance. It’s unclear at this time what that catalyst will be. As is usually the case, the market will need a combination of factors to come together if it’s going to move higher in any sustainable fashion.

The S&P 500 Index did an impressive job of recovering from the 1,120 level. It clawed its way back to 1,200 and is now trying to balance itself out with the fears in the marketplace. The next major move could be anything. What’s likely in my view is that the trading action will very difficult until we get into third-quarter earnings. Any earnings warnings from corporations in this market will not be well received. The same goes for any changes in fourth-quarter visibility come reporting time. Everything now has a fragility to it—the economy, financial markets, and expectations for the future. The only exception is the market for gold; investors still view this specific asset as a haven, even though the spot price has already gone up dramatically.

The best near-term indicator for share prices continues to be the spot price of oil. A weaker oil price is exactly what the economy needs, but it also serves to illustrate declining sentiment about the future. Stocks won’t advance until the economic news shows some major improvement.


Oil & Gold—Two Great Commodities

The Biggest Bubble of Them All—Right Before Our Eyes

There’s an organization that’s been around for about 235 years. It’s more like a business today, taking in money and paying its bills.

After World War II, this business really got into high gear. It started exporting its goods all over the world. It actually lent money to its trading partners. Business was booming.

But then something happened. The business got too big. Too many managers were hired with their own agenda. The business started paying its people too much. Its trading partners caught on quickly, as they saw the big business getting bloated, and the trading partners started making their own goods.

The partners simply copied the manufacturing practices of the big business. And since the smaller trading partners had access to much cheaper labor costs, the small trading partners have become big suppliers over the past 20 years.

The big business went from being a company that lent money to its trading partners (customers) to a business that needed to borrow money from its suppliers in order to stay a float.

In regular business, it doesn’t matter if you have been around for 235 years. You go to a bank because you need money and, unless you meet the bank covenants, you will not be able to get a loan. This means that, unless you make money, you are out of business.

The big business I’ve described above is called the United States of America. It’s bankrupt. Its staff members, called politicians, spend more money than they take in. But, unlike a real business, the United States has a line of people (investors, domestic and foreign) who want to lend money to it.

And this is where this storyteller gets stuck. Why are people lining up to buy U.S. government debt? Would you invest your money in a 10-year bond that yields 2.2% per year (less than inflation) issued by an entity that has the world’s single biggest debt burden?

There’s an obvious answer. People are flocking to U.S. Treasuries because they see security in them compared to other government-issued debt. But, on the contrary, I see other governments implementing austerity measures to balance their budgets in two to three years. I fail to see this with the United States.

In this day and age, nothing is guaranteed. No, the U.S. will not file for bankruptcy or default on its debt. But it will pump the system with more U.S. dollars in a desperate effort to increase inflation—making the debt that investors and foreigners have bought worth less and less as time goes by.

Bill Gross, head of PIMCO, and the world’s biggest bond fund, was right when he said earlier this year that he was avoiding U.S. Treasuries because the returns could be risky. He was just too early in his opinion.

Never underestimate the length of time it takes to create a bubble, because we are living through one of the biggest bubbles ever created — U.S. Treasuries.

Michael’s Personal Notes:

Housing prices aren’t just falling in the United States…

This morning, it was reported that house prices in the United Kingdom fell in August the most they have in 10 months.

The Nationwide Building Society, based in Swindon, England, said that the average cost of a home in the U.K. fell about half of one percent in August from July. Most economic research reports on U.K. house prices for the remainder of this year are negative despite the prediction that the Bank of England will keep its benchmark interest rate at 0.50% until mid-2012.

The only major industrialized country left where housing is booming (yes, booming) is Canada. Canadian house prices continue to reach new record highs each passing month. In Toronto, Canada’s financial center, builders can’t put up condo buildings fast enough. Demand outweighs supply. Building cranes can be seen all over the skyline.

While economists in the U.K. have flatly blamed the slowing economies in the Unites States and major European countries for the U.K. economy stalling, Canada’s largest trading partner is also the United States. Add to that the fact that the Canadian economy actually contracted in the last quarter (negative GDP), and the only question that remains is not if, but when will the balloon pop for the Canadian housing market?

Where the Market Stands; Where it’s Headed:

As I had predicted, we closed out August in not-so-bad shape. The Dow Jones Industrial Average officially closed the eighth month of the year up half a percent for 2011. What started out looking like a catastrophe in the first couple of weeks of August was actually a buying opportunity.

I feel sorry for the thousands of investors who pulled money out of the stock market when the Dow Jones Industrials was having those 400- and 500-point daily drops. At the risk of sounding arrogant, I’m pleased we stuck to our guns, as many of our paid-for financial newsletters recommended buying equities when the Dow Jones Industrials fell below 10,800 in early August.

The bear market in stocks that began in March of 2009 enters its 31st month today.

What He Said:

“Despite all my ‘yelling’ and ‘screaming’ about gold, I believe 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 at under $300.00 an ounce when Michael first started recommending gold-related investments. Many gold stocks recommended by Michael’s advisories gained in excess of 100%.


The Biggest Bubble of the 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

Gold or Silver: What Stands Out as the Better Trade?

Stock picking at this particular point in time is more difficult than it was at the beginning of the year. The tone of the marketplace is different and expectations have mostly been met. As companies reported first-quarter earnings that met or slightly exceeded consensus, the stocks sold off. This is representative of a market that wanted to complete the trade. Now investors are looking for a new trade, but nothing big stands out. A new catalyst has yet to be discovered.

Large-caps are holding up particularly well as the broader market churns. I still think that large-cap companies will be the biggest beneficiaries of the choppy economic recovery we’re currently experiencing. If it wasn’t for global operations, then the performance of many big companies would be a lot more reserved.

I don’t see the need for taking on new positions at this particular point in time. There are always stock trades around and the broader market could keep ticking higher, but I think we’ll be in a consolidation period for a quite a while longer. I don’t expect oil prices to stay below $100.00 a barrel and I’d like to see the price of gold pull back further so as to create a more attractive new entry point. While recent consumer price data showed that headline inflation shouldn’t be a problem for the Federal Reserve, the bigger driver of gold prices is the action in the U.S. dollar. That’s what gold is basically trading on.

While investing in gold is a core part of my investing philosophy during these times, I would say that silver is beginning to stand out as a better trade for a new entrant. Silver pulled back in price much more so than gold and, really, not that much has changed fundamentally for the story. The only thing that has changed is that some speculative fervor has been taken out of the market for silver prices. Demand for the commodity is still on the rise.

I’ve actually been hoping for a correction in commodity prices and I think we should let the trading action within the sector play out a little while longer. It’s probably a bit too early for new positions in silver or gold, but they are definitely worth following.

In non-resource sectors like technology, for example, both top- and bottom-line growth in many companies haven’t been very robust. This makes the trading action in these stocks much less opportune. Recently, I came across a very well valued semiconductor company that reported great financial results in the first quarter…and the market just yawned. This reflects a marketplace that was so enthralled with commodity-related assets that it ignored all others. Over the very near term, equity trading action is likely to be mediocre.

Best Bold Stocks

The Most Attractive Sector of the Market for Risk-capital Money

Stock picking now is much more difficult than it was just a month ago, as commodity prices have somewhat deflated (particularly in precious metals) and investor attention has moved to economic news while earnings season winds down. Even though mining producers are experiencing extremely good margins for their ore, these stocks still trade commensurate with the spot price of the underlying commodity. This never changes.

Investing in gold is typically a feast or famine type of endeavor. Either the trading action is good, or it’s the other way around. To be very honest, in this type of market where it’s a slow growth economy and there’s no big sectoral catalyst to trade (like during the craze in Internet or solar stocks), the single most attractive sector to focus on for capital gains is the mining business. As an investment theme, this would be my focus in terms of speculating for big returns. In doing so within the mining industry, an investor has to focus on those companies exploring for new discoveries.

This is what you want in a speculative mining investment in my view. You’ve got a known company with respected management that’s already in production with a solid plan for increasing production over the coming years. The business is already well financed, but it’s spending money exploring for more precious metals on its properties. If it hits a big discovery, then it will be easy for the company to raise the money to mine it. So, you kind of want to be an investor in an established business that’s prospecting as well. At this level, it doesn’t matter if the price of gold dropped $50.00 an ounce the day before; if gold is over $1,000 and there’s increasing mineral reserves, then the business is highly likely to make good money.

Institutional gold investors fall into two main groups. There’s the hedge fund speculators like George Soros, who buy and sell gold trusts based on their outlook for spot prices. Then there’s money managers, who pick and invest in individual stocks based on a miner’s property and its prospect for increasing production and reserves. It’s easy to be both; a speculator in the spot price and a prospector for properties. As always in the investment business, the key is to be well-informed and to know what you’re doing.

This is where working with an investment bank that finances junior mining companies can be advantageous. It gives the investor the opportunity to gain lots of information from research analysts who visit the actual properties being analyzed and it provides the opportunity to participate in private placement financings that don’t incur commission costs when taking on shares.

Regardless of how you play it, speculating in mining stocks remains the most attractive sector of the equity market for risk-capital money at this time.

Investing in Gold Stocks

Should You Buy Gold? The Answer’s Yes, But Not Quite Yet

There’s no rush to take any new action in this market. That’s the best stock advice I can give to any equity investor with new money to play with. There are all kinds of attractive opportunities out there, but this market needs a break. Stocks need a rest and so do oil, gold and silver. Investors shouldn’t feel any pressure to make any new trades. The timing isn’t quite right yet for bold new action.

With markets in need of a correction, it’s actually quite a difficult environment to be making new picks in. Investing in gold is a key strategy, but this sector’s been so strong that all the good companies have already seen their stock prices go way up. The returns are going to be mostly incremental from existing producers. Like always, the big money will be made with juniors who are making new discoveries.

As a speculative investor, I would actually devote a great deal of my efforts to the junior mining sector, especially given the state of the global economy. The underlying price of gold is going to stay strong for the next several years and institutional investors are on board with this view. Also, the domestic economy still isn’t strong enough to generate the kind of growth that a speculative investor is looking for. Even the technology sector isn’t producing the kind of top-line growth that gets people excited.

As I’ve written before, I like a junior miner to be an existing producer, have lots of cash in the bank with little to no debt, to be currently drilling for more minerals, and have a following from the Street and institutions. There are a lot of these companies out there, but the game has changed now that gold is trading over $1,000 an ounce. Now the business model really makes sense and companies have the cash to go looking for more metal.

The mining business has always been a cyclical industry and the same goes with investor sentiment for the sector. Right now, there is a ton of cash floating around the entire industry and, for investors, it’s time to milk it.

It’s always difficult giving generalized investment advice, because it’s tough to predict markets and each investor has a different view of things. Over the very near term, I would let both the equity and commodity markets consolidate for a while. Then I would be a new buyer of micro-cap gold stocks.
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