The Smartest Dictator of Them All Seizes All the Gold

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

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

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

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

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

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

Michael’s Personal Notes:

Boy, was he ever wrong!

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

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

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

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

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

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

Where the Market Stands; Where it’s Headed:

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

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

What He Said:

“The conversation at parties is no longer about the stock market; it’s about real estate. ‘Our home has gone up this much’ or ‘Our country home has doubled in price.’ Looking around today, it would be very difficult to find people who believe that one day it could be out of vogue to own real estate because properties would be such a bad investment. Those investors who believe a dark day will never come for the property market are just fooling themselves.” Michael Lombardi in PROFIT CONFIDENTIAL, June 6, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.

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.

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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%.