China and India: Gold Buying Bullish

Gold prices are currently under some pressure following a decline below $1,700, but I view weakness in the precious metal not as a sign to sell, but as an opportunity to buy.

The fact that gold is losing momentum at this time despite what I feel will be some tough years ahead for the European Union and eurozone along with the debt mess here is a surprise. But when the metal has increased as much as it has, there will always be those who believe that the price will retrench back to some medium-term support at around $1,600.

The price chart of cash gold appears to suggest a possible retest at $1,600. Since September, the trendline has been down. The metal has peaked on three successive moves, but each upward move was lower than the prior upward move: $1,925 (September); $1,800 (November); and $1,760 (December). Failure to hold at $1,600 could see the metal decline to below $1,500, as was the case in early July 2011. This is the current monetary risk.

But, as we move ahead, I continue to be bullish. As I recently said in a commentary, the metal may be set to move back towards $2,000 in 2012 if Europe falters and China stalls. Michael Purves, chief market strategist at BGC Partners, believes that gold stocks on price weakness, with a break below $1,600 representing a great opportunity to buy.

If you want to read more on why gold is a favorite, read Mining for Riches: Great Metals Stocks to Check Out.

The Stock Market Corrected; Guess Which Industry’s Best Poised for Capital Gains?

The spot price of gold has been in correction for the last couple of months. Gold stocks have also been correcting and I think the stock market is setting up the sector for a strong advance in the first half of 2012. The fundamentals for gold and gold stocksjust keep getting better and, now that central banks are coordinating even more liquidity to capital markets, the easy money will help boost global inflation rates.

According to Eurostat, which is the eurozone’s main statistics agency, the current inflation rate in the 17 countries that use the euro currency is running at three percent, while most of these economies are producing little to no growth. Unemployment in the eurozone was 10.2% in September and 10.3% in October and interest rates are falling. It’s the perfect brew for rising inflation.

In a report written by Thomas Biesheuvel at Bloomberg, gold stocks are said to be now trading at their cheapest valuation in the last nine years, even though the spot price of gold is trading close to its historic high. Everything in the stock market has been correcting in price and there’s a lot of good value out there, but no industry is poised for the same rate of earnings growth as gold.

The stock market experienced a price correction due to the European debt crisis and that brought gold stocks down commensurately. But, instead of snapping up reasonably priced gold stocks, gold investors have been buying gold exchange traded funds (ETFs) instead. According to Bloomberg and the Commodity Futures Trading Commission, holdings in gold ETFs grew to a record 2,350.8 metric tons, worth $127.6 billion as of last week. Hedge funds and other institutional speculators have been increasing their net-long position in gold over the last four weeks straight, which is the longest stretch since March. See Stock Market Correction Phase Over? Spot Price of Gold Looks to Be Bottoming.

So, we have positive, developing fundamentals for gold and gold stocks that are undervalued and poised to report record financial results in the fourth quarter. Now is the time to be considering new positions in gold stocks (if you haven’t already), perhaps more so than an ETF that moves with the spot price. Regardless, it’s pretty clear that the stock market has underappreciated the financial performance of most larger-cap gold stocks over the last several months.

The stock market’s latest correction was fostered by the European debt crisis, but what transpired was a severe reduction of confidence—in the prospect for global growth and the ability of eurozone policymakers to deal with the problem. Accordingly, stock market investors have been extremely reluctant to speculate in gold stocks, which I admit is a stock market sector that tends to be highly volatile and unpredictable. If the debt crisis in Europe can be contained, at least for the next few quarters, then I think gold stocks are extremely well positioned for capital gains. Valuations are reasonable and earnings expectations are strong. Investment risk still remains very high in the stock market at this time, but there are very few industries with fundamentals as strong as gold and precious metals.

Why the Pathetic New Consumer Confidence Reading Is Good News!

The New York-based Conference Board’s household sentiment index has slumped to the lowest level since March of 2009…

But hold on…don’t dismiss it as more bad news! It’s actually good news.

Sure the U.S. unemployment rate has held at about nine percent for about 30 months now. Sure, 8.75 million jobs were lost in the recession that ended in June 2009. And, with only about two million jobs created since the recession ended, the unemployment picture is not looking good. How can consumer confidence not be taking a beating?

There’s also the poor housing market. The S&P/Case-Shiller Index reported yesterday that home prices in 18-out-of-20 major U.S. cities fell again in August. It’s difficult for consumer confidence to rise when one-out-of-five U.S. home is worth less than the mortgage on it.

But think about this…

What happened to the stock market when consumer confidence hit bottom in March of 2009. We all know that stocks rose almost 100% from March of 2009.

And this exactly what I have been writing about for a month now. A couple of weeks ago, the number of bearish stock advisors hit a high not seen since March of 2009 (Source: Investors Intelligence). Now consumer confidence is at its lowest level since March of 2009.

It is during times of extreme bearishness and negative consumer confidence that the stock market rises. No, I’m not predicting that the stock market is going to double from its current level. But I am saying that investors, stock advisors and consumers are usually wrong when the majority of them have the same opinion. The stock market has historically done the opposite of the herd mentality. And I believe this time will be no different.

The more negative the consumer confidence reading, the more stock advisors who have turned bearish, the more the chances the stock market will climb the “wall of worry” higher. And that’s exactly what I believe is going to happen now. The poor consumer confidence reading released by the Conference Board Tuesday is good news for the stock market.

Michael’s Personal Notes:

Quietly, with little fanfare, the U.S. dollar has fallen to its lowest level against the Japanese yen since World War II. Yes, the country we beat in World War II—its money is now worth more than ours!

But it’s not just the yen that has been rising against the U.S. dollar. So far this month, the U.S. dollar has lost 4.4% of its value against a basket of industrialized country currencies. Actually, I’m surprised the U.S. dollar hasn’t fallen more in value against other world currencies.

Let’s face the unpleasant facts again:

The Federal Reserve has kept short-term interest rates near zero for almost three years now. On top of that, the Fed has purchased $2.35 trillion in assets to help spur the economy. The “official” national debt sits at about $15.0 trillion. When you include off-balance sheet government obligations, our debt stands at between $100 trillion and $200 trillion depending on whose report you believe.

Yes, the stock market has been rallying as of late. But we all know the U.S. economy is very fragile, very sick. We have a currency that returns zero interest rates issued by country that is awash in debt. And there are plenty of U.S. dollars in circulation to boot, thanks to the Federal Reserve’s expanding balance sheet.

From March of 2009, when U.S. stocks fell to a 12-year low, to today, the U.S. dollar index (a measure of the value of the U.S. dollar relative to a basket of six currencies: euro; yen; pound; Canadian dollar; Swedish korona; and Swiss franc) has fallen 16%. During the same period, the price of gold bullion has risen by approximately 80%.

“Michael, what is the long-term play here for investors?” What I see few people talking about is the effect of the debt crisis in Europe on the U.S. dollar. When Greece’s problems started to flare up in 2010, we saw investors running to the U.S. dollar. And we had a corresponding spike in the value of the U.S. dollar in the summer of 2010.

But today, the crisis in the Europe is graver than last year. Greece is bankrupt. Italy and Spain are not far behind. Citizen rallies against austerity cuts in Europe are becoming larger and more violent (70,000 Greeks protested against government cuts on October 19, 2011). And, against the backdrop of all this, the U.S. dollar is not rising, which is obviously negative for the greenback.

My strategy has remained unchanged. I’m exiting U.S. dollars for gold. If I’m right about future inflation, the value of the U.S. dollar will only continue to deteriorate, while the price of gold bullion rises even further.

Where the Market Stands; Where it’s Headed:

The stock market opens this morning slightly above where it started 2011. I continue with my opinion that we are in a bear market rally that started in March of 2009. The strong combination of investor pessimism, an expansive monetary policy, and stronger than expected corporate earnings will see the bear market rally continue to climb the proverbial “wall of worry.”

What He Said:

“Prepare for the worst economic period ahead that we have seen in years, my dear reader, as that is what I see coming. I’ve written over the past three years about how, in the late 1920s, real estate prices fell first before the stock market and how I felt the same would happen this time. Home prices in the U.S. peaked in 2005 and started falling in 2006. The stock market is following suit here in 2008. Is a depression coming?  No. How about a severe deflationary recession? Yes!” Michael Lombardi in PROFIT CONFIDENTIAL, January 21, 2008. Michael started talking about and predicting the economic catastrophe we started experiencing in 2008 long before anyone else.