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.
gold stock Updates

Dow Jones Gold Ratio: Making Money from this All-Important Indicator

If you are a stock market investor or a gold investor, or both, today’s PROFIT CONFIDENTIAL is a must-read. Why? Because, by the time you are finished reading this issue, you could very well be convinced long-term that the stock market is going down and gold is going up. And you can make a lot of money from these moves.

Let’s start with the important numbers all investors should be aware of:

Stock history first: The Dow Jones Industrial Average opened the year 2000 at 10,786. The same index ended 2010 at 11,577.50. In a nutshell, if you were an investor in the Dow Jones Industrial Average, your capital gain appreciation over the past 11 years would have been a paltry 7.3%. (No wonder we have always preferred micro-cap stocks, penny stocks and small-cap stocks!)

Gold history now: At the beginning of the year 2000, gold bullion was trading at $280.00 per ounce. Gold bullion closed out 2010 at $1,422 per ounce—a gain of 407% in 11 years.

Now, let’s pretend you can’t buy the stocks that comprise the Dow Jones Industrial Average in U.S. dollars, but you can only buy them with gold bullion. Taking the numbers above, in 2000, it would have taken 38.5 ounces of gold to buy the Dow Jones Industrial Average. At the end of 2010, it would have taken only 8.2 ounces of gold to buy the Dow Jones Industrial Average. In other words, when measured in gold and not dollars, the value of the 30 big stocks that make up the Dow Jones Industrials has plummeted over the past decade.

Now, when we look back at almost a century of data in respect to the relationship between gold bullion and the Dow Jones Industrials (often referred to as the Dow Jones Gold Ratio), it gets really interesting.

In the period from 1930 to 1949, a 19-year span, the price of the Dow Jones Industrial Average measured in gold bullion was under 5.0 (during that 19-year period it would have taken less than five ounces of gold to figuratively buy the Dow Jones Industrial Averages’ index).

In the period from 1974 to 1989, a 15-year span, the price of the Dow Jones Industrial Average measured in gold bullion was under 5.0 again.

As I started writing years ago, with the sharp rise in the price of gold since the year 2000, I believe we are entering another multi-year period where it will cost less than five ounces of gold to buy the Dow Jones Industrial Average. To see that happen, the price of gold needs to rise sharply, or the stock market has to come down, or both events need to occur.

Now the scary part: over the last century there have been three times when only one ounce of gold could buy the Dow Jones Industrial Average. If we are headed close to that level again (which I believe we are), fortunes will be made over the next few years on the long side of gold and short side of stocks.

Michael’s Personal Notes:

Words of wisdom from our esteemed technical analyst, Anthony Jasansky, P. Eng., on President Obama inadvertently putting the brakes on the stock market rally:

“Money talks and it has been talking very loud after Uncle Ben started the money printing presses at the old Fed in late 2008. He was so impressed by the results of the magical out-of-thin air creation of $1.75 trillion—dubbed ingeniously as ‘quantitative easing (QE)’—that, in the fall of 2010, he cranked up the printing presses again, launching the $600-billion QE2.

“Though these two huge money injections have been credited with reversing financial and economic calamity, they still fell short on some important fronts. Among the notable failings of QE are the anemic recovery in GDP, lack of growth in employment, continued weakness in residential and commercial real estate, the battered U.S. dollar, and unexpectedly higher yields of long-term treasuries and bonds.

“When recently questioned on the effectiveness of QE, the Fed’s chairman has pointed to the strong stock market as one important benefit. Without missing a beat, the U.S. President in his January 25 State of the Union speech mentioned the recovery in the stock market as being the result of government actions to prevent a depression. Knowing how perverse the market can be, Obama’s bullish assertion may turn out be a timely signal for the stocks to take a deep breather.”

Where the Market Stands; Where it’s Headed:

Could the bear market rally in stocks be over? After all, the Dow Jones Industrials suddenly fell 166 points on Friday. Last Friday was a wake-up call for investors and traders getting too cocky with this market. Stocks do not go up in a straight line week after week (as has been the case for most of December 2010 and this January).

While I need to see more action from the stock market before I throw in the towel on the bear market rally that started in March of 2009, I doubt the rally is over. This week opens with the Dow Jones Industrial Average up 2.1% for 2011.

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 was predicting a bottoming of the real estate market in 2007, Michael was preparing his readers for the worst of times ahead.

Gold Stock Market Ratio

Taking Out the Crystal Ball: 2011 Gold Bullion Forecast

The end of this year will make the ninth consecutive December 31 when the price of gold bullion was higher than the previous December 31. Gold has risen from approximately $300.00 in 2002 to $1,380 per ounce today—a gain of 360%.

At this point of the gold bull market, we are at what I call phase two. Phase one is when the very smart money starts accumulating an asset because it is so depressed that no one wants it. For gold bullion, this can be classified as the period between 2001 and 2009, a period that saw gold rise from $275.00 to $1,000 per ounce.

So, today, we are in phase two of the gold bull market. At this junction, serious investors start to take note about the rise in price of the commodity. Many investors are concerned about the future of the U.S. dollar given the debt that backs it; others have given-up on the euro. If I were to ask 100 investors today, I would guess only five percent to 10% would have gold investments in their portfolio.

What I particularly like about this phase two of the current bull market in gold is that we have so many reporters, analysts and advisors saying it’s a “bubble” already! These people do not understand the strength of a bull market in any asset once it starts—bull markets end in euphoria and speculation. We are far from that in gold.

Two years ago, we couldn’t give away subscriptions to our gold stock newsletter. Today, it is selling well, “but not flying off the shelf” as they say. Hence, I see people starting to notice what’s happening with gold bullion and I see investors interested in getting their feet wet with the metal.

If you were to ask me for an educated guess as to when phase three of the bull market in gold would start, I would have to say when gold hits $2,000 an ounce. Now here’s the important part: phase three of a bull market can go until the asset under question goes up 50% from when phase three started.

What I’m saying is that, if phase three of the gold bull market starts when gold hits $2,000 an ounce, which is still some distance away, the metal can rise another 50% to $3,000 from there, just based on speculators and the novice public getting into the metal.

If you’ve ever played baccarat at the casinos, you know the cardinal rule is to not bet against the trend. Who am I to bet against a nine-year winning streak? Gold prices will end 2011 higher than they end 2010, that’s my bet. And that makes quality gold stocks still very attractive for investors.

Michael’s Personal Notes:

I know this is somewhat off-the-wall, but I want to share it with my thought-provocative PROFIT CONFIDENTIAL readers. The following is from my colleague and co-editor Robert Appel:

“Early in 2011, no later than May, we expect a world economic crisis similar to 2008, most likely involving currency pegs and the pricing of key commodities.

Many will refer to it, with hindsight, as a ‘perfect storm’ in that different aspects of the crisis will co-mingle seemingly unrelated challenges involving growing social unrest in many countries in response to the expanding feeling of powerlessness and disenfranchisement among the middle class.

Inflation and deflation will co-exist, which will be unsettling to consumers and academics both. Interest rates will creep up, slow and steady, but nonetheless unstoppable. There will be many unsettling incidents of international brinkmanship, especially between ancient enemies, but no major war that spans borders.

Two of the biggest business surprises will be a well-coordinated attempt by the Western governments to control/choke Internet traffic and the revelation that Hollywood’s delicate business model, essentially unchanged for over a century, is no longer working, and a new one is desperately needed. Yet another former film star will run for office. Headlines will be made when scientists disclose how common cancer has become.

Gold will touch $2,200 an ounce during the worst of the crisis, but close the year just under $2,000. The broad market in December 2011 will be where it was, approximately, in December 2010.”

Where the Market Stands; Where it’s Headed:

Not much of day for the markets yesterday, just more of the same: The Dow Jones Industrial Average trades around a high not seen in 22 months, U.S. bond yields rose again, with the 10-year U.S. Treasury now yielding over 3.5%. Gold eased off, but not enough for me to jump in and buy more.

The bear market in stocks that started in March 9, 2009, continues. I’m getting increasingly concerned about rising long-term interest rates and their impact on the stock market for 2011, but in the immediate term, I believe this rally has more leg left.

What He Said:

“I’ve been pushing gold bullion and gold shares for over a year now. Bank in January 2002, I personally started buying gold shares.” Michael Lombardi in PROFIT CONFIDENTIAL, December 13, 2002. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments. Many gold stocks recommended in Michael’s advisories gained in excess of 100%.

Gold Stock Bullion

What Gold Really Means for the Economy/Investors at $1,400

As a gold bug (I officially turned bullish on gold bullion in 2002), I see every weakness in the price of gold as an opportunity to buy more gold-related investments. That has been my strategy for the past eight years—gold prices correct on the downside and I invest more.

The last time I bought more gold was when gold traded at about $1,320 an ounce. I’ve been waiting ever since for another buying opportunity and it just hasn’t developed. But investment goes up or down in a straight line, so I will eventually have my opportunity again.

If we look at the long-term bull market in gold, 2010 has been particularly strong for the metal. Many gold stocks are up over 100% this year. Gold producers have never found it easier to raise money.

This got me thinking as to what the strong bull market in gold really means for investors and the economy. Here are my conclusions:

For the economy, one word: Inflation. The government’s easy money policy, the Fed doing quantitative easing again, interest rates near zero in the U.S.: all of this is very inflationary. If the real estate market weren’t still in the dumps, we would have outright inflation right now.

Bill Gross, the head of giant PIMCO, the world’s biggest bond fund, said last week that the U.S. will not likely be able to raise interest rates for years because of the fragile economy. I disagree with Gross, because I believe that the U.S. will need to raise interest rates sooner rather than later to support the weakening Greenback.

But supposing Gross is right and I’m wrong, the longer interest rates stay at zero, the more inflation we will get (which is bullish for gold). If I’m right and Gross is wrong, and interest rates do rise, gold will rally, because interest rates will only rise to support a devaluing U.S. dollar. We all know that gold rises as the greenback devalues.

As for investors, they are obviously flocking to buy gold. Why? Because they are not only concerned about inflation, but also worried about the future value of the U.S. dollar. Sure, Greece was the first country to face a financial crisis, and then came Ireland. Looks like Portugal, Spain and Italy are next. But really, how long before it’s the turn of the U.S.? The size and valuation of the gold market are relatively small when compared to the stock market. The more investors there are jumping on the gold bandwagon, the faster and sharper the price of bullion will rise.

When gold was trading at $300.00 an ounce and I predicted it was going to $2,000 to $3,000 an ounce, I literally got laughed at. With gold trading at about $1,400 an ounce, I’m still predicting $2,000 to $3,000 an ounce for gold…and people don’t find it funny anymore.

Where the Market Stands; Where it’s Headed:

Only 69 points to go! The Dow Jones Industrial Average opens this morning only 69 points below its post-recession high. Will it happen? Will stocks break to a new high? I believe they will. Once the Dow Jones moves above its recent high of 11,451, the market will be at its highest level since October 2008.

The Dow Jones Industrial Average opens this morning up 9.1% for 2010. Throw in a dividend yield of 2.5%, and stocks are up over 11% for 2010. Unfortunately, the majority of retail investors missed the boat and did not participate in this year’s rally. Hopefully, the majority of our readers heeded our advice and jumped into stocks back in March of 2009. As you know, we’ve been bullish on stocks ever since.

A bear market rally in stocks has been underway for 21 months and continues.

What He Said:

“In 2008, I believe investors will fare better invested in T-Bills as opposed to the stock market. I’m bearish on the general stock market for three main reasons: Borrowing money in 2008 will be more difficult for consumers. Consumer spending in the U.S. is drying up, which will push down corporate profits.” Michael Lombardi in PROFIT CONFIDENTIAL, January 10, 2008. The year 2008 ended up being one of the worst years for the stock market since the 1930s.
Gold Stock Bullion Market