Oil & Gold-Two Great Commodities

Oil & Gold—Two Great Commodities Whose Prices Reflect the Fear in
Financial Markets

By Mitchell Clark, B.Comm.

The only trading action that seems to be working for long investors is in gold stocks these days. This isn’t a surprise, nor is it unexpected with the spot price of gold so high. Two more junior gold producers, AuRico Gold (NYSE/AUQ) and Northgate Minerals (AMEX/NXG), announced a deal to merge. The two juniors hope to create a new intermediate gold player and the expectation for production growth as a combined company is significant.

In this particular case, AuRico Gold is doing the buying. The company’s share price (which has almost doubled since the beginning of the year) appreciated swiftly to a recent 52-week high of $14.17 per share. Then the company announced the all-share deal to acquire Northgate. It’s a trend that we’re going to see more of over the coming quarters. With share prices lofty and bank accounts full, everyone in the gold mining business wants to bulk up before the party’s over.

The broader stock market’s trading action reflects the overall sentiment in the economy. Add in the fact that the month of September is often not a good one for stocks, and one could easily predict that the next several weeks are going to be difficult. The stock market isn’t expensively priced, but that doesn’t mean that it will be anytime soon. There’s a mini cycle going on in the stock market and it’s all about the revision of expectations for the future. Expected returns from stocks are going down big-time, as current economic data sink in. No doubt the stock market needs a major catalyst in order for it to advance. It’s unclear at this time what that catalyst will be. As is usually the case, the market will need a combination of factors to come together if it’s going to move higher in any sustainable fashion.

The S&P 500 Index did an impressive job of recovering from the 1,120 level. It clawed its way back to 1,200 and is now trying to balance itself out with the fears in the marketplace. The next major move could be anything. What’s likely in my view is that the trading action will very difficult until we get into third-quarter earnings. Any earnings warnings from corporations in this market will not be well received. The same goes for any changes in fourth-quarter visibility come reporting time. Everything now has a fragility to it—the economy, financial markets, and expectations for the future. The only exception is the market for gold; investors still view this specific asset as a haven, even though the spot price has already gone up dramatically.

The best near-term indicator for share prices continues to be the spot price of oil. A weaker oil price is exactly what the economy needs, but it also serves to illustrate declining sentiment about the future. Stocks won’t advance until the economic news shows some major improvement.

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.