Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Central Banks

Central banks are institutions that manage a nation’s currency, money supply, and interest rates. Central banks also oversee a nation’s banking system and are the lenders of last resort in a time of crisis. Central banks are normally a separate body from the political establishment. The goal of central banks is to create stability and low inflation in the system.

Why Aren’t Gold Prices Rising?

By for Profit Confidential

Guess Who Just Bought Gold for the 14th Consecutive QuarterThe numbers are in…

In the second quarter of 2014, world central banks bought 117.8 tonnes of gold bullion compared to 92.1 tonnes a year earlier—a jump of 28%. Central banks have been net purchasers of gold bullion for 14 consecutive quarters!

According to the World Gold Council, “Economic and geopolitical events throughout the world are sources of ongoing instability and uncertainty. Such events reinforce the requirement for appropriate risk management by central banks through holding gold reserves for asset diversification.” (Source: “Gold Demand Trends Q2 2014,” World Gold Council web site, August 14, 2014.)

Hog wash, I say. Central banks are buying gold bullion because they are slowly moving away from U.S. dollars as their reserve currency and replacing them with gold bullion.

In the second quarter, Russia purchased 54 tonnes of gold bullion, Kazakhstan purchased seven tonnes, and Tajikistan bought three tonnes. Combined, just these three central banks made up more than 54% of all the official purchases of gold bullion in the second quarter.

You won’t see the central banks of France or Germany buying gold bullion because they already have enough (that’s if Germany can ever get its gold back from the U.S.).

So if demand for gold bullion is rising, as evidenced by central banks buying more, gold coin sales near record highs, and gold demand in India rising again now that the government is easing tariffs on gold imports, the million-dollar question is why aren’t gold prices rising?

There is plenty of discussion on the Internet about gold manipulation and how prices are purposely being kept down. I can’t comment on that, but I … Read More

Where I’d Put My Money Now

By for Profit Confidential

Annual Supply of World Gold ShrinkingAs gold bullion prices declined last year, I said supply would contract as gold miners pulled back on exploration and closed mines that were not profitable at $1,200-an-ounce gold.

For the supply of gold bullion to increase, there needs to be more discoveries. Sadly, the opposite is happening. According to SNL Metals & Mining, gold discoveries have been trending downward. In the 1990s, there were 124 new gold discoveries totaling 1.1 billion ounces of gold bullion. But since 2000, only 605 million ounces of gold bullion in total has been discovered at just 93 discoveries. (Source: Kitco News, July 18, 2014.)

For there to be more gold discoveries, mining companies need to spend more on exploration and that just isn’t happening. In 2013, when gold prices plummeted, major mining companies pulled back on their spending. Furthermore, exploration companies that need funding found it very difficult to get money, so they also pulled back on finding gold.

But gold bullion discoveries aren’t just slowing; the time it takes to start production at a mine is increasing as well. Between 1996 and 2005, it took an average of 11 years to bring a discovery to production. Between 2006 and 2013, this has increased to 18 years. (Source: Ibid.)

With all of this (it being harder to find new gold bullion and it taking too long for production to start once gold is discovered), the supply of world gold bullion is shrinking.

And demand for gold bullion, well, it just keeps rising. Aside from investors buying gold coins and jewelry at near record levels (with India now easing its stiff tariffs on gold … Read More

What’s Up Three Times More Than Stocks So Far This Year?

By for Profit Confidential

Where Gold Will Trade in the Second Half of 2014Investors who bought gold bullion in early 2014 know it was a great decision. The precious metal has increased 10.2% in price between January and June, while the Dow Jones Industrial Average climbed by just three percent.

So far, so good—and as expected.

Going forward, it will not be surprising to me to see the precious metal outperform the stock market in the second half of the year as well.

Why will this happen?

As demand for gold bullion continues to rise and as supply declines (the exact situation we have today), gold bullion prices will have no option but to rise.

In the table below, I have plotted the production of gold bullion at U.S. mines for the first three months of the year compared to the first three months of 2013. Production at U.S. gold mines is declining month after month.

Production at U.S. Gold Mines, 1Q2013 vs. 1Q2014

Month 2013 Output (in Kg) 2014 Output (in Kg) % Change Year-over-Year
January 18600 18,500 -0.54%
February 17,300 17,100 -1.16%
March 18,700 18,200 -2.67%
Total 54,600 53,800 -1.47%

Data source: U.S. Geological Survey web site, last accessed July 1, 2014

While the chart above only details U.S. gold mining production, gold bullion production across the global economy is declining. Last year, as the yellow metal witnessed a massive sell-off in price, gold mining companies cut back on their exploration and capital expenditures budgets. This is now catching up and derailing production. And I see the situation for supply only getting worse.

Meanwhile, demand for gold bullion keeps rising.

We continue to see significant demand for the precious metal—and not … Read More

This Is Odd…

By for Profit Confidential

Demand for Stocks Outweighs Supply at This PointOne of the oddest things to happen with the stock market since it has recovered is that the number of shares trading hands each day has slowly disappeared.

In the table that I have created for you below, I list the trading volume for the S&P 500 for each June since 2009 and the percentage change in volume from the previous June.

Trading volume on the S&P 500 has dropped 60% since 2009!

Trading Volume, S&P 500, June of Each Year, 2009 – 2014

Year Volume (Shares Traded Per Month) Year-Over-Year % Change
June 2009 93,147,496,448
June 2010 91,971,043,328 -1.3%
June 2011 63,674,499,072 -30.8%
June 2012 59,703,365,632 -6.2%
June 2013 51,560,980,480 -13.6%
June 2014 38,765,629,440 -24.8%

Data source: www.StockCharts.com, last accessed July 1, 2014

What’s happening here? How can the stock market rise year after year if trading volume is down?

It’s very simple, but I’ll explain this new phenomenon in a moment. First, look at the chart of the S&P 500 below. Pay close attention to the volume at the bottom of the chart. As volume on the S&P 500 collapsed, the price of the index rose.

S&P 500 Large Cap Index Chart

Chart courtesy of www.StockCharts.com

Volume is collapsing because the number of shares companies have outstanding is being reduced at an accelerated rate. For example, in the first quarter of 2014, S&P 500 companies purchased $154.5 billion worth of their shares back (stock buyback programs). Over the trailing 12 months, S&P 500 companies purchased more than half-a-trillion-dollars worth of their own shares—$535.2 billion to be exact. (Source: FactSet, June 18, 2014.)

Add to the shrinking number of shares outstanding the fact that central … Read More

Guess Who Is Pushing the Stock Market Higher Now

By for Profit Confidential

So That's Why Stocks Have Been Moving Higher…When I look at the stock market, I ask who in their right mind would buy stocks?

While key stock market indices creep higher, the fundamentals suggest the complete opposite. But despite valuations being stretched, insiders selling, corporate revenue growth being non-existent, and the U.S. economy contracting in the first quarter of this year, the S&P 500 is up seven percent since the beginning of 2014, the Dow Jones Industrial Average is getting closer to the 17,000 level, and the NASDAQ is back above 4,000.

As I have written before, a company can buy back its stock to prop up per-share earnings or cut expenses to improve the bottom line, but if revenue isn’t growing, there is a problem. In the first quarter of 2014, only 54% of S&P 500 companies were able to grow their revenue. (Source: FactSet, June 13, 2014.)

Going forward, things aren’t looking bright either. For the second quarter of 2014, 82 S&P 500 companies have already provided negative guidance for their corporate earnings. I expect this number to climb higher.

And consumer spending, the driver of the U.S. economy, is very weak, as evidenced by negative gross domestic product (GDP) in the U.S. economy in the first quarter of this year.

So if the overall environment is negative for the equities, who is buying stocks and pushing the stock market higher?

The answer (something I suspected some time ago): central banks are buying stocks.

A study done by the Official Monetary and Financial Institution Forum (OMFIF) called Global Public Investors 2014, states that central banks and public institutions around the world have gotten involved … Read More

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