Financial Meltdown, Back-To-Back “Stick Saves” & Gold

On the heels of more turbulence in key global markets, today 40-year veteran, Robert Fitzwilson, put together another extraordinary piece. Fitzwilson, who is founder of The Portola Group, discussed financial meltdown, back-to-back “stick saves,” and what this all means for battered traders and investors in the gold market. Below is Fitzwilson’s outstanding and exclusive piece for KWN.

Fitzwilson: “There is a term in ice hockey called a stick save. Instead of using the curved end of the hockey stick, the player uses the handle end to move the puck. It has been described as having no points for style, and often fails, but sometimes saves the day for the player and his or her team.

Below is a chart of the Dow Jones Industrial Average from 1970 to the present. You can clearly see two stick saves early last decade and the second during the 2008 meltdown.

The first stick save was engineered largely by the policy of driving rates to zero. While it saved the stock market and thrust the real estate markets to new heights, it sowed the seeds for the horrendous crash in 2008….

“A larger stick save was required in the 2008 debacle, requiring the completion of the zero interest rate objective as well as the creation of massive amounts of money on a global and historic scale.

It is no wonder that many people are terrified of equities when one looks at this chart. The volatility has been incredible. You can barely see the Crash of 1987 on the chart, although that was a stomach churning decline on the order of 23%.

The chart below is for gold during the same period.

While the Dow Jones has increased by roughly 14 times since 1980, the price of gold has merely doubled from the peak. Despite that disparity, most people look favorably at the chart for stocks, and are adamant that gold is overvalued.

For stocks, valuation metrics are used such as price-to-earnings ratios. For gold, there is no attempt to relate the price to the forces that drives the metal’s price. What drives gold is the excessive, massive creation of fiat currency. Since 1980, the amount of debt-based money has exploded. If that simple valuation metric of comparing the price of gold to the amount of money is applied, gold is drastically undervalued.


Demand for Gold Coins Goes Through the Proverbial Roof

Demand for Gold Coins

Similar to everything else financial, gold bullion prices follow the same main premise of economics: prices rise when demand increases, and prices decline when the supply increases.

At present, on the demand side, we have central banks buying gold bullion. In fact, they have turned into big buyers, collectively buying the most gold in 49 years in 2012. Central banks are buying gold bullion because they need it, as the fiat currencies they created are causing great havoc to their reserves. In these pages, it is very well documented which central banks are buying. What is interesting is that the list of gold bullion purchasers is increasing.

Demand from individual investors for gold bullion is also increasing. In the first three months of 2013, the U.S. Mint sold about 40% more gold bullion coins than it did in the first quarter of 2012. It sold 292,500 ounces in coins of gold bullion from January to March of this year, compared to 210,500 in the same period of 2012. (Source: The United States Mint web site, last accessed April 2, 2013.)

Now, for the supply side of the story; worldwide gold bullion production from mines in 2012 totaled 2,700 tons. Compared to 2011, the increase in gold mined was a menial 1.5% in 2012. (Source: “Mineral Commodity Summaries,” U.S. Geological Survey web site, January 2013, last accessed April 3, 2013.)

In 1990, worldwide gold bullion production from mines was 2,127.3 tons. A simple calculation shows gold bullion mine production has only increased about 27% over a 23-year period, or a compound annual growth rate (CAGR) of 1.04% per year. (Source: United States Geological Survey web site, last accessed April 2, 2013.)

When I look at the current demand and supply equation of gold bullion, I affirm my bullish status on the metal.

There hasn’t been a major world discovery of gold bullion in years. Nor are any major mines expected to come on-line in the next three years. We have supply that isn’t really changing, but we have robust demand, as central banks and individual investors alike are rushing to the metal.

The recent pullback in gold bullion prices is very normal. Only in bubbles do prices increase without rest. I continue to see gold bullion having a shiny future ahead.

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Michael’s Personal Notes:

In the first quarter of 2013, key stock indices like the Dow Jones Industrial Average and the S&P 500 rose an unprecedented 10%.

Below, I’ve charted a comparison of the performances of the Dow Jones Industrial Average and the S&P 500:

DJLA S&P 500 stock chart

In economics, the stock market is often referred to as a leading indicator. If the market is rising, as it has been, it is an indicator that the economy will improve in the months ahead. But, as this stock market has been rising, economic data have not been improving.

As I have been harping on about in these pages, the key stock indices are rising on nothing but optimism and an ever-increasing money supply—both of which can only last for so long. Economic uncertainty is still present and future expectations are dismal.

For the first quarter of 2013, 86 S&P 500 companies have issued negative corporate earnings guidance—that’s 78% of all the S&P 500 companies that have issued earnings guidance so far. (Source: FactSet, March 28, 2013.)

The Manufacturing Purchasing Managers’ Index (PMI), monitored by the Institute for Supply Management (ISM), decreased 2.9% from February to March. The index stood at 51.3 in March, compared to 54.3 in the previous month. (Source: Institute for Supply Management, April 1, 2013.)

As for unemployment, it is still very high. On Friday, the Bureau of Labor Statistics (BLS) will be reporting the jobs numbers. It won’t surprise me to see the unemployment rate unchanged (maybe even rise), because companies on key stock indices are looking to cut their costs—and the only option left for them is to decrease their workforce.

On top of this, risks in the eurozone still persist. These debt-infested countries are suffering. Greece is in an outright depression. Italy and Spain are witnessing their economic conditions quickly eroding. The two strongest nations in the region, Germany and France, are starting to see their economies slow. A significant number of U.S. companies on key stock indices derive their revenues from the eurozone.

The key stock indices may rise a bit as irrationality can go on for a while. In 2007, the economic conditions in the U.S. economy were anemic, but the S&P 500 and the Dow Jones Industrial Average were driven to all-time highs. Later we witnessed one of the steepest market sell-offs ever registered for key stock indices. The same thing could happen again this year with the markets.

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.


Michael Lombardi Critical Warning Number Six REVIEW Is this LEGIT or SCAM?

Michael Lombardi Critical Warning Number Six REVIEW Is this LEGIT or SCAM?

Today, the U.S. economy is treading on thin ice.

Some prefer to disagree, arguing that it is recovering slowly. But if that is the case, then why is the job growth so very infinitesimal? Why is the profit growth so very meager? After all, has not the U.S. government tried to breathe life into its comatose economy with trillions of reviving dollars?

A blanket of desolation looms over the U.S. housing sector. New home sales stare dismally at their deeply drenched lowest figures ever since 1963. They are not helped with a flood of foreclosed resale homes. It looks like the housing prices will continue to keep low for quite some time now. Critical Warning Number Six

The rate of underemployment in the U.S. doggedly remains at 15%. On an average, banks are not showing promising results. The American banks have been affected by the debt crisis in Europe by an amount of $1 trillion. All these are indications of yet another recession befalling the United States. Many European countries are already experiencing the whiplashes of the same.

The budget deficit of U.S. this year will be $ 1.3 trillion. Its national debt is about $16 trillion and the permitted debt increase is up to $16.4 trillion. It is predicted that the official national debt will go beyond $20.0 trillion excluding off-balance-sheet items like old-age security, Medicare and promises made by the government to its citizens. It is said that the U.S. national debt is near about $100 trillion.

In 2008, the U.S. government censured Fannie Mae and Freddie Mac, who formerly owned or gave guarantee to a maximum number of residential mortgages in America. So now, the U.S. government either owns or guarantees about half the outstanding residential mortgages in the country. Last month, the number of home mortgages in the U.S. which were either in the process of foreclosure or defaulting on payments was near to five million. Now does that not mean more losses for the U.S. government?

Politicians have added to the government spending by trillions of dollars since 2008, with the belief that the economic problems will be fixed. However, the problems threaten to get even worse, as the national debt may well be 150% of the GDP and will resemble the state of affairs that were after World War II. Back then, America made great progress economically, with a strengthened manufacturing base and a well –transformed industrial sector. Effectively, gold, which was then the global reserve currency of central banks, was replaced by the American dollar, boosting the job sector and fortifying America as a superpower.

Today the scenario in the U.S. is that of utter despair. Its credit rating has been downgraded. Food stamps are being utilized by about 44 million people in America. Mexico, India and China are leading the world manufacturers’ chart. Jobs due to the internet are almost negligible.

In 2004, the U.S. lowered their rates of interest. Resultantly, there was ample borrowing and investing of the same in real estate. This lowering of interest rates, has in the long run, steered way for inflation to stay put in America for an extensive period of time. Another indicator is that of gold, whose price has escalated almost 500% and the decade is still to conclude! And then we might well be looking at a future of hyper-inflation and spiky high interest rates! This second recession warns of a situation that will be even worse than that during the 2007-2008 economic slumps and the 1929 Great Depression. During the latter, the Wall Street crashed and its echo was heard world-wide. There was a high unemployment rate; poverty struck many a home; many had had to face low profits and in short, the economic and individual growth suffered greatly. In effect, the economic future was looked at with pessimism; not many new industries were added to aid the country’s development; the consumer debt increased and there were many such factors that lent extra burden on the already sagging U.S. economy. The construction, agriculture, shipping, mining, automobile and appliance industries were badly hit; the condition deteriorated till 1933, when stock value dropped to one fifth of its peak value in 1929. Many businesses and factories shut down, banks fared miserably, while income from farms fell to half of that in 1929. Mass unemployment presented a deep sense of concern to the nation by the year 1933. Then there was speedy growth till 1937, when again, unemployment prevailed.

Does the U.S. government presently have any money that could see the nation through the next recession? Since the last three years, a situation of false hope has been created by the Federal Reserve with a healthy-looking economy; courtesy, the overtime working of the printing presses! If this option had not been exercised, technically, would not the U.S. be called bankrupt today? Already, the interest rates have been lowered to almost zero. Can they get any lower? There is so much risk associated with this money-printing by the Fed; it is going to pump up the already- filled inflation balloon; the higher long-term interest rates will sooner or later move; the atmosphere thus created will be so oppressive that it will render the economy very hapless!

It has been observed that the period of 2008-2012 is almost a mirror image of 1934-1937 as regards the stock market picture. For instance, the stock market crashed in 1929 and also in 2008. The year 1934 saw the beginning of the bear market rally, which continued till 1937. During this period, the Dow Jones Industrial Average registered a gain of 106% from a level of 90 to 185. Later it plunged down to recover only in 1944 after a gap of seven years! Similarly, March 2009 was the beginning of the present bear market rally. Since the last three years, the Dow Jones Industrial Average has risen by about 100%. If this rally follows the same trend as of 1934-1937, it is to be expected that the stock prices will fall below their March 2009 lows in a few months while the subsequent bear market phase is in progress. But the next leg of the bear market looks to be much worse than that after the Great Depression.

Critical Warning Number Six

What does the future have in store for the U.S. Economy?

President Obama took office four years ago. Since then, the U.S. national debt has increased by about $5 trillion dollars. During this time, the Federal Reserve increased the size of its balance sheet by about $2 trillion. Since 2009, the U.S. dollar has started devaluating and as the U.S. economy worsens, the rate of this devaluation will accelerate. Presently, the U.S. dollar is the official reserve currency of seventy percent of the world central banks. Europe’s financial calamity has caused the investors to shy away from the Euro and they still believe that the U.S. dollar is secure enough. But there is all likelihood that its value will further lower against the huge mound of debt and the imminent inflation; all due to the Federal Reserve’s repeated money-printing tactics. And when this happens, it will not be too soon when foreigners forgo the U.S. dollar and look another way; to safe havens, where they feel more secure; away from a system of hyperinflation and sovereign debt issues!

Gold prices look to be rising continuously. The gold mining stocks in particular, will be in great demand. In spite of a few slumps in the year, the price of gold bullion continues to recover and move higher towards the year-end than with what price it started each year. This has been the trend seen in the past eleven years. Some weaknesses in the gold bullion prices are most likely corrections in an ongoing bull market and present a remarkable opening for intelligent investors. Gold prices will move higher when the inflation rises; when the U.S. dollar price drops down; the government spending is beyond control and when the Federal Reserve continually prints money.

The Eurozone crisis continues. The euro has weakened substantially against the U.S. dollar.

With Greece having defaulted technically on its debt; Italy trying to push its luck; Spain asking for a bailout despite the billions of euros having been pumped into its banks, the austerity measure has been met with severe hostility in Europe. Bailing out Greece is proving to be quite difficult. Can not Germany pull out of the Euro?

Short term interest rates, having fallen for 30 years, look to be bottoming out. A sixty year low of 1.5% is what the long-term 10-year U.S. Treasury is yielding at present. It seems like the end of a long-term down- cycle in interest rates is not far away.

To drive away inflation, interest rates may be raised by the U.S. government. With that, the fate of the U.S. housing market will be sealed. Can you envisage a more harrowing situation?

…Like the U.S. government, the economic situation in the U.S., the housing prices and the stock market -all breaking apart simultaneously?

As regards the stock market scene, the bear market rally in stocks will lose its set- direction and hurtle down to test its March 2009 lows. This is bound to bring the Dow Jones down (Almost 52% from where it sits today). During the Phase I of the bear market, the stock prices fall down sharply. From October 2007 to 9th of March, 2009 the Dow Jones Industrial Average plummeted by 54% from 14,164 to 6,440. In the Phase II of the bear market, the bear ensnares the investors back into stocks; giving them and analysts a sense of false security of the improving economy and that the market looks good enough to invest/ trade in stocks again. We are in this position today. The bear did just what was expected of it and the Dow Jones scrambled up above 12,000. They say that the bear market is getting old and long in the tooth. Comparing this bear market rally to that of 1934 to 1937, Phase III will get ongoing in a few months and will finally bring the stock prices below their March 2009 lows.

This is where we stand today. These observations are based on the views of Michael Lombardi, who writes for Profit Confidential. In fact, he has, in the past, predicted five major economic events. And they have all come TRUE.

They are as follows:

  1. He told his readers to get into gold in 2002;
  2. He told them to get out of the housing market in 2006;
  3. He predicted the recession of late 2007;
  4. He told his readers to get out of stocks in the fall of 2008; and
  5. He told his readers to get back into stocks in the March of 2009.

His readers have greatly benefited from his words of advice and caution, time and again.

Now he has predicted his sixth major economic event that bears the title:

Critical Warning Number Six

Considering the present situation, what should the investor and consumer do to protect him / her from the economic upheaval that is fast approaching? What type of portfolio should be positioned so that he /she can actually make income out of the same?

It is Michael Lombardi’s secret stock that goes up when the market goes down!

Look right through the declining value of the U.S. dollar;

Pay little heed to the collapse of the euro;

Disregard the fluctuating rise in gold prices;

Smile right through the speculative stock market;

Brave it out throughout the inflated economy;

Make money in adverse conditions!

What is this secret stock?

Also Read: Critical Warning 6