Seeing the Glass Half Full

“Profit Confidential” Column, by Michael Lombardi, CFP, MBA

Yesterday, the price of gold bullion for April delivery fell $49.00. I’m getting the calls and e-mails from friends worried about their gold stocks. And, on the other hand, I see the smart money slowly placing bids on the junior mining companies, taking more positions as prices drop.

Here’s what we know, the bad first, or glass half-empty argument:

First, the U.S. dollar has been rising against other world currencies. Thursday, the euro fell to a seven-month low against the dollar. Why? Because the European economies are doing terribly. I wrote about this many times during the credit crisis. If we are suffering economically in North America, Europe is doing worse. A stronger U.S. dollar is a bad thing for gold bullion.

Second, there is fear that the Chinese government is going too far in slowing its economy. A slower Chinese economy will push prices down for all precious metals,

Third, and finally, deflation is big news these days. A declining stock market is deflationary, just as falling real estate prices are. Gold is a traditional inflation hedge. Gold prices move higher as inflations runs rampant; the opposite of what we are seeing today.

Here’s what we know, the good, or glass half-full argument:

By the White House’s own forecast, by the end of this decade, our national debt will be $18.5 trillion. Our government will run a deficit this year alone of $1.6 trillion. Historically, no country has been able to maintain its currency value in the face of a debt crisis.

For the past 10 years, China’s economy has been the world’s fastest growing. I doubt that growth will stop now. What the Chinese government is doing is something our government should have done in 2006 — they see bubbles developing in different pockets of the economy and they are moving to cool those bubbles, so China maintains its annual growth of seven percent to 10%. No surprises. And Chinese citizens are being encouraged to invest in gold!

I do not remember a time in American history, or at least I can’t find it in the history books, when rapid inflation did not happen after monetary and fiscal policies were generous. So much money has been poured into our financial system by the government to help fend off further economic contraction. Expansive monetary policy is usually followed by rapid inflation. Mind you, the effects are not immediate. They take time, sometimes years.

Finally, gold’s price movement upward has been anything but a straight line up. Never does an investment move straight up or down! Do you remember the period from January 2008 to October 2008? During that period, gold bullion fell in price by $200.00.

Hence, what we have today my dear friends, is a healthy and much-needed correction in the bull market in gold prices. I look at this as a glass half-full opportunity to make more money from gold-related investments.

Michael’s Personal Notes:

Yesterday, without much media coverage, the U.S. Federal Reserve closed down a few of the “emergency” liquidity programs it started when the credit crisis really hit in early 2008. These programs included aid to bond dealers, money markets, and foreign central banks.

Ben Bernanke and his crew did a remarkable job saving us from the Great Depression Part II. They pulled out all the stops and introduced some innovative financial maneuvers I could not understand.

But the question that will linger on in my mind for years is: if the government had saved Lehman Brothers when it went bankrupt in September of 2008, would we have been spared the deepest days of the credit crisis and would taxpayers have been better off in the long term?

If there is someone who detests bailing out Wall Street, it is me. When times are good on Wall Street, management takes big bonuses and shareholders get fat profits. When times are tough, Wall Street runs for public bailouts.

While books have been written on the Lehman Brothers fiasco, addressing the question of whether they should have been saved by the government or not, the one conclusion I can make is that taking a little pain is often a better remedy than a lot of pain, the Lehman Brothers case in point.

Where the Market Stands:

If you have been reading my column since early 2009, you are aware of my opinion: The bear market rally that took stocks down to multi-year lows in March 2009 did not end in March. From March 9, 2009, up until now, we have been experiencing a market rally in the confines of a bear market.

I have written many times that the bear market lows of March 2009 will be retested. The question is: when? Is the bear market rally over? Some say yes. Or are we only experiencing a correction in the bear market rally? Some would say yes to the second question as well.

It’s been nothing short of a wild ride for the stock market this year. So far for 2010, we have seen the Dow Jones Industrial Average up as much as 3.3% from the beginning of the year and down four percent (where it sits now) since the beginning of 2010.

Very interesting to see the Dow Jones close yesterday just two points above the 10,000 level. Today’s action will be very important. Watch for my full report on Monday.

What He Said:

“There is no mixed signal about this: Foreclosures in the U.S. will continue to rise, the real estate market will get weaker, and the U.S. economy will get weaker. Smart investors should seriously consider unloading their stocks of consumer-products companies that produce nonessential goods.” Michael Lombardi in PROFIT CONFIDENTIAL, March 12, 2007. According to the Dow Jones Retail Index, retail stocks fell 42% from the spring of 2007 through November 2008.