Debt fears in the eurozone resulted in demand for gold coins in Europe, more than doubling in the third quarter of 2011 compared to same period of 2010, according to data from the World Gold Council. But there’s more…
Last week, investors (mostly hedge funds) increased their gold long-positions for the fourth consecutive week—the last time that happened was eight months ago (source: CFTC data).
Add this to the fact that world central banks made their biggest purchases of gold bullion during the third quarter of 2011 in over two decades, with a slew of central bank buyers entering the arena for gold bullion for the first time in years (see: Central Banks Back Buying Gold with a Vengeance) and all of a sudden it sounds like everyone’s chasing gold bullion.
Loyal readers know from my writings that I rarely chase the herd when it comes to investing. When the masses are selling, I want to buy; when they are buying, I want to sell. In the case of gold bullion, mainstream investors are only just getting involved in gold bullion.
How do I know this? Our parent company, Lombardi Publishing, estimates that gold held for investment purposes is equal to one percent of all global financial assets. In the 1960s, gold held for investment purposes was equal to five percent of global financial assets. To reach that five-percent level today (because of the explosion in financial assets), at current gold bullion prices, it would be physically impossible, as there aren’t enough gold reserves out there. Hence, the only way that gold investment as a percentage of financial assets can increase is by the price of gold bullion rising.
If the buying of gold by world central banks continues, which I believe it will, 2011 could end being the biggest year for central bank gold bullion purchases in 40 years. But, next year, the debt problems could slowly start shifting from the eurozone to America and, if that happens, gold bullion prices will run up quicker.
We are well into Phase II of the bull market in gold bullion. This is when retail and institutional investors start moving money into gold bullion. Phase III is when the speculators and latecomers arrive on the scene—something we are far from. I’m predicting that 2012 will be a spectacular year for the stocks of quality gold mining companies.
Now this is what you call perfect timing…
Last Wednesday, on November 30, 2011, six world central banks cut the interest rate at which banks can borrow U.S. dollars. The cost for eurozone banks to borrow immediately dropped and pressure temporarily came off stressed eurozone banks (see Why Michael’s Feeling Vindicated this Morning).
The very next day, Spain and France sell $8.1 billion in government bonds. But hold on, there’s more…
Today, France is trying to sell more bonds. Wednesday, it’s a Portugal bond auction. Next Monday, it’s Italy’s turn to sell bonds, and, from that date on, from December 12 to December 29, either Italy, France, Spain, Greece, or Portugal will be selling government T-bills or bonds every single business day…a total of 13 government T-bill/bond auctions for the eurozone.
Talk about perfect timing! If the Fed and the five other major central banks didn’t announce on November 30 that they were effectively boosting the money supply, how many more billions in interest would the troubled eurozone countries have had to pay on their bonds?
If you don’t believe in coincidences, the question is: what’s really going on here?
Central banks see the debt crisis in the eurozone deepening and are insuring that the system is flush with cash, so the entire system doesn’t freeze like it did during 2008. Yes, this is an action to stop credit from seizing up in the eurozone and spreading to America, but it’s just more “kicking the can down the road.” The structural problems of extreme government spending and debt, zero economic growth, and high unemployment are not being addressed, just kicked down the road some more.
Where the Market Stands; Where it’s Headed:
Last week, the S&P 500 had its best one-week performance since March of 2009, up 7.4% for the week. The extreme bearishness of investors and stock advisors in late summer (which I have often written about in these pages) brought pessimism to an extremely low level; actually close to the investor and stock advisor pessimism reached back in March 2009 (see Strongest Indication Yet That Stocks Are Short-term Oversold).
As I always write: in the majority of circumstances, the stock market does the opposite of what is expected of it. And we’ve just witnessed this event again. Stocks have rallied strongly from their 2011 low reached on October 4, 2011; about the same time that investor and stock advisor sentiment was at its lowest level of the year.
Including dividends, the Dow Jones Industrial Average is up 6.5% so far in 2011. We have four trading weeks left for the year. The bets are that the market will finish 2011 higher, just like it did each year following the 2008 credit crisis, albeit at a slower pace than in 2009 and 2010.
What He Said:
“What group of stocks are next to fall in light of the softening U.S. housing market? The stocks of companies that sell retail products to the American consumer, I believe, are next on the hit list. Many retail stocks are already reporting soft sales. In my opinion, they haven’t seen anything yet in respect to weaker sales.” Michael Lombardi in PROFIT CONFIDENTIAL, August 30, 2006. According to the Dow Jones Retail Index, retail stocks fell 42% from the fall of 2006 through March 2009.