Gold Investing: The Time to Jump Back in Is Very Near

Pardon the rudeness, but I’m salivating at the mouth this morning. After a rocky start to 2011, it looks like I might finally get my opportunity to buy more gold investments…and it could happen today.

On January 4, 2011, gold bullion fell $44.10 U.S. per ounce. The next day, January 5, 2011, it fell another $5.10 an ounce. This morning, as I write this issue of PROFIT CONFIDENTIAL, gold bullion is down another $9.90 an ounce. In three trading days, we are looking at a $59.00-an-ounce haircut for gold bullion.

In late 2010, on these pages, I wrote that I would be a buyer of gold-related investments if gold bullion reached $1,370 U.S. per ounce. The price of gold bullion reached a record high of $1,421 an ounce on November 9, 2010, followed by $1,421.60 per ounce on December 31, 2010. At today’s price, I can buy gold investments at $50.00 an ounce off the record high, which I consider a deal.

So my first step will be to buy more gold investments today if gold remains under $1,370 an ounce. My next step will be to buy more gold investments if gold gets down to $1,320 (which is a seven-percent correction off its high). Hence, I’m buying gold investments on dips on the prices of gold bullion. Unlike many other advisors, I see corrections in the price of gold as an opportunity to buy, not bail. This strategy has served me well for almost 10 years now.

My gold bug readers may find the following chart interesting. It is the close of the price of gold bullion at December 31 each year going back to 2002 (the year I really turned bullish on gold). I publish this chart in January of each year for the benefit of my readers.

Date Closing Price of Gold
Bullion per Ounce
Dec. 31, 2002 $348.00
Dec. 31, 2003 $416.00
Dec. 31, 2004 $438.00
Dec. 31, 2005 $519.00
Dec. 31, 2006 $638.00
Dec. 31, 2007 $838.00
Dec. 31, 2008 $889.00
Dec. 31, 2009 $1,097
Dec. 31, 2010 $1,421

In this business, they say “Don’t fight the tape,” also known as “The trend is your friend.” The above trend has been an investor’s dream for almost 10 years running. I intend to continue profiting from the trend of rising gold prices.

Michael’s Personal Notes:

Investors often ask me what news sources I follow each day to keep up the stock market. Do I watch the business TV stations like CNBC or Bloomberg or listen to them on the Internet or in the car? The answer is no, I do not follow the investment news on an hourly or even daily basis.

Why? Because a trend takes time to develop. Sure, I follow the economic news closely. I read three major business newspaper a day and I have my favorite Internet sites (like everyone else) to get more in-depth economic reports. But follow the markets on an hourly or even daily basis and you are no longer an investor; you are a trader.

The events that led to the real estate crash of 2007 took years to develop. Similarly, the events that led to the credit crisis of 2008 took three years to develop. The stock market low of March 2009? Well, that took two years to develop.

Stock market and commodity trends take months and years to develop. What happens hourly, daily or even weekly does not lead to a sustainable trend an investor can profit from. I’ve always made money looking at the overall, longer-term trend actions of the economy and how they relate to the stock market. In other words, I don’t sweat the small hourly, daily or weekly stuff. Neither should my readers.

Where the Market Stands; Where it’s Headed:

Yesterday, I “blew the horn” on the market and announced that I’m turning bearish on stocks as we start off 2011. A group of sentiment indicators we follow are flashing red, as too many investors and advisors have turned bullish on the stock market. If it were not for the outright expansive and unheard-of generous monetary and fiscal stimulus the government has in place, I would be outright bearish.

But the trend is your friend. Since March of 2009, I have been saying that we are in a bear market rally, and I continue to hold that opinion. Until we have confirmation by the stock market to the contrary, and aside from the fact that I’m turning short-term bearish on the stock market, in the immediate term, the bear market rally that started 22 months ago still has life left in it. But investors should tread carefully.

What He Said:

“When property prices start coming down in North America, it won’t be a pretty sight, because consumers are too leveraged. When consumers have over-borrowed so much that they have no more room in their credit lines to borrow more, when institutions start to get tight on lending, demand for housing will decline and so will prices. It’s only a matter of logic, reality and time.” Michael Lombardi in PROFIT CONFIDENTIAL, June 23, 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.

Gold: The Only Sector with Improving Fundamentals

The stock market is facing some strong headwinds over the short term and all the wrangling is a real shame considering that we’re still getting great earnings results from large-caps. It’s no wonder the spot price of gold keeps ticking higher; there’s nothing else for investors to rally around.

I still view the current environment positively, but financial markets do not like uncertainty and all these issues regarding debt ceilings and sovereign debt in Europeare wreaking havoc on confidence. In my view, corporate earnings are strong enough to support an S&P 500 Index of 1,500 by the end of the year. A number of analysts and institutional investors feel similarly, but there isn’t much buying of equities because of the uncertainty about sovereign debt.

Investing in gold is becoming a more viable strategy and, for most investors, the sector could represent a larger part of their portfolios. I’m not usually a fan of buying high with the goal of trying to sell higher; but, in this case, with all the global fundamentals we have going on right now, gold investments are the best play.

The gold sector of the stock market is ideal for speculators and, because there’s little growth to be had in the rest of the market, liquidity is great and it’s on the rise. This makes for more trading opportunities and more pronounced moves in share prices when there’s news. For event-driven traders, I would focus a large part of my attention on gold mining shares going forward.

There are a lot of micro-cap stocks in the gold sector, but less mid-cap and even fewer large gold mining companies. Quite simply, a gold exchange-traded fund (ETF) is an easy way to take on a position.

With the spot price of gold at record levels, the gold mining business is a highly profitable business model. There are all kinds of small, junior gold producers that are making money hand over fist with gold over $1,200 an ounce. Most of the established, producing junior miners have tons of cash in the bank, so future exploration and development are virtually assured.

All opportunities in the stock market occur in waves of enthusiasm. Right now, there’s not a lot to be enthusiastic about. But, the one sector that stands out as the most attractive in my view is precious metals; gold, in particular. There just isn’t the growth in the rest of the economy and, frankly, investors aren’t willing to buy it even if they see it.

The Smartest Dictator of Them All Seizes All the Gold

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

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

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

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

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

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

Michael’s Personal Notes:

Boy, was he ever wrong!

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

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

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

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

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

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

Where the Market Stands; Where it’s Headed:

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

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

What He Said:

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