This Morning, I Bought a
Basket of Gold Stocks

What Michael Lombardi believes about gold bullion, gold bullion prices, and gold stocks right now.Since Monday of this week, the price of gold bullion has dropped $91.00 an ounce. If we look at gold for the year, gold bullion is off 17% from its price high of $1,895 an ounce reached on September 5, 2011. This is enough of a correction in the gold bull market for me to go back in and buy gold investments at what I believe are depressed prices.

This morning, I bought a gold exchange-traded fund (ETF) that invests in a basket of my favorite gold stocks.

I have these following beliefs about gold bullion:

After a spectacular 2011, a real correction in the price of gold bullion is upon us. I see this as an opportunity. Yes, I’ve read the stories that say the bull market in gold is over. (I’ve read the same stories every time gold has been off between 10% and 20% from its high.) And I see the flight to U.S. dollars—something I believe will be short-lived.

The price of gold bullion got a little ahead of itself in 2011. If we look at the 10-year bull market in gold bullion, the average annual price gain since 2001 for gold bullion has been 18.2%, with the biggest gain coming in 2010 when gold bullion jumped 29%. At its price high of $1,895 an ounce in September, gold bullion was up 35% for 2011. Too much money was getting into the gold bull market.

Yesterday, gold bullion closed at a three-month price low. According to Kitco News, despite the U.S. dollar index sitting at a fresh 11-month high, the big drop in the price of gold bullion yesterday was only 10% fueled by the strengthening U.S. dollar. Kitco says that 90% of Wednesday’s decline in the price of gold bullion can be attributed to straight selling.

This tells me that the weak, fickle money is getting out of gold.

Finally, I’m not calling the bottom for gold bullion prices yet in this correction. Yes, gold bullion is off 17% from its 2011 price high. From the spring to the fall of 2008, gold bullion prices fell 28%. Hence, I’m not jumping in today with both feet and buying gold. I’m jumping in with one foot. The other will go in if gold falls 25% from its 2011 price high.

I’m steadfast in my position that all the money printing the Federal Reserve has effectively executed over the past three years and the 50% increase in the national debt the U.S. government has achieved since President Obama took office are extremely inflationary. The gold mining stocks are trading at bargain prices. (Also see: Top Five Reasons Why Gold Bullion Prices Will Move Even Higher.)

Michael’s Personal Notes:

Did you hear this one?

Next week, the National Association of Realtors (NAR) will revise down its previously reported sales of U.S. homes from the period of January 2007 through to October 2011. The NAR said yesterday that it had made a mistake in past calculations on home sales and was double counting.

So, in reality, sales of existing homes in the U.S. have been weaker than what we have been told. Surprise, surprise, surprise. No wonder the U.S. economy can’t get going—the U.S. housing market, the backbone of the economy, is not responding to life support. Each month, as the Labor Department releases its job report, the biggest sources of job losses continue to be construction jobs.

When I want to know how the U.S. housing market is doing, I don’t look at the NAR statistics, I don’t look at new housing sales, and I don’t look at the S&P/Case-Shiller Index. These are lagging indicators. The leading indicator I follow for the direction of the U.S. housing market is the Dow Jones U.S. Home Construction Index, a weighted average of the stock prices of the 34 largest U.S. homebuilders.

And what’s this chart saying to me right now about the U.S. housing market? It’s saying that the U.S. housing market continues to be a problem. While most stock sectors have recovered from the 2008 credit crisis, only the Dow Jones U.S. Home Construction Index and the Dow Jones U.S. Banks Index, leading indicators of two related industries, are still far below their 2007-2008 highs.

This tells me that the U.S. housing market is still depressed; it tells me that the U.S. banks have plenty more bad home loans to foreclose on. The U.S. economy cannot, and will not, have a meaningful recovery until the U.S. housing market is fixed…something that could take years to happen.

Here’s the long-term problem. When the banks finally get rid of their entire foreclosed home inventory, when everything is washed through the system, two major hurdles remain:

About one in four U.S. homes with mortgages on them are worth less than their mortgages today. How many decades will it take to sort this out? And by the time the bottom in the U.S. housing market is reached, interest rates will be rising to offset the inflation created by all the money printing of the past three years. The remainder of this decade for the U.S. housing market—doomed. (See: Why We Can’t Have a Sustained Economic Recovery.)

Where the Market Stands; Where it’s Headed:

Yes, it’s been a tumultuous three trading days of the week so far. The Dow Jones Industrial Average was down 162 points on Monday, down 66 points on Tuesday, and down 131 points on Wednesday. The Dow Jones Industrial Average is getting very close to the level it started 2011: 11,557.

But no matter how you look at it, this is still a bear market rally. The stock market is up 79% since March of 2009. For the bear market rally to be over, the Dow Jones Industrial Average would need to break decisively past 9,658—that’s more than 2,165 points away from where its sits today. Yes, the rally is getting old. But I wouldn’t throw in the towel just yet.

What He Said:

“If I had to pick one stock exchange that would rank as the best performer of 2007, it would be the TSX (Canada’s equivalent of the NYSE). Interest rates in Canada remain very low and they are not expected to rise anytime soon. Americans looking to diversify their portfolios, both as a hedge against the U.S. dollar and a play on gold bullion’s price rise, should consider the TSX. Most brokers in the U.S.can buy stock on this exchange.” Michael Lombardi in PROFIT CONFIDENTIAL, February 8, 2007. The TSX was one of the top-performing stock markets in 2007, up just under 20% for the year.