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

The Next Evolution in Gold Mining Stocks

Friday, March 16th, 2012
By for Profit Confidential

gold mining stocksThere is no question that it has been a frustrating time for investors in gold mining stocks.

Despite gold bullion climbing higher, gold mining stocks have been stuck in a trading range for quite some time. As I’ve been telling my readers, analysts look forward a few years in the future to estimate the earnings these gold mining stocks will attain.

Analysts see prices in the $1,200-$1,500 per ounce range for gold bullion in the next few years. Although I strongly disagree with this view, this perception won’t change until gold bullion continues its march higher.

This doesn’t mean that gold mining stocks can’t fight back. During other great gold bullion bull market runs, gold mining stocks paid dividends in gold bullion. I was hoping miners would take that as an example and make the practice commonplace in today’s market. It has not happened as of yet, but, finally, some gold mining stocks are taking the first steps.

Gold Resource Corporation (AMEX/GORO) has been paying regular cash dividends, but, starting this April, shareholders will have the option to convert their cash dividends into physical gold bullion and/or silver bullion.

This gold mining stock is teaming with a gold bullion dealer to facilitate the opening and management of shareholder bullion accounts. Furthermore, the gold bullion and silver bullion will be created by the company itself: Gold Resource’s “Double Eagle” one-ounce .999 fine gold bullion rounds and/or one-ounce .999 fine silver bullion rounds.

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This is an exciting development and I expect many more gold mining stocks to institute such programs in the near future, as central bank printing presses continue to heat up around the world.

Endeavour Silver Corp. (NYSE/EXK) reported record gold bullion and silver bullion production in its latest quarter last month. However, revenues were not strong, because management elected to hold a significant portion of its gold bullion and silver bullion in inventory rather than sell it. Management initiated this action because they believe that gold bullion and silver bullion prices are currently too low.

As of the end of 2011, this gold mining stock held just under one million ounces of silver bullion and 5,400 ounces of gold bullion in inventory.

This could be another action that gold mining stocks could take: investing in the very thing they produce.

First Majestic Silver Corp. (NYSE/AG) reported another stellar quarter a few weeks ago. The company invested $10.0 million from its earnings into a silver bullion ETF because of its belief that silver bullion prices will move higher.

I continue to be a staunch supporter and believer in gold-related investments. Not only is price appreciation possible with current depressed gold mining stocks’ share prices, but dividends could, in the near future, be paid out in gold bullion and silver bullion instead of the paper money that is being printed into oblivion.

Michael’s Personal Notes:

The popular media is highlighting credit expansion among consumers as proof that the U.S.economy is growing and consumer confidence is returning.

As I’ve written in these pages before, student loans have just exploded over the last few years. What if, dear reader, we remove student loans from the “wonderful” credit expansion numbers that were just released supposedly exhibiting consumer confidence? Let’s have a look:

Consumer Credit Minus Student Loans

2008: $2.43 trillion

2012: $2.10 trillion

(Source: Federal Reserve)

Consumer credit has actually contracted during the last few years. The worst part is that—as my dear readers know—student loans are funded by and guaranteed by the U.S. government. Technically, it is government credit that is expanding with student loans, but the consumer is indeed saddled with the debt.

Sometimes the stars align in strange ways. In the same week that the popular media was raving about a consumer confidence comeback, the National Association of Consumer Bankruptcy Attorneys issued a student loan debt bubble alert, citing how its membership—more than 80% of all bankruptcy lawyers—has experienced a substantial increase in the number of clients seeking relief from student loans.

Student loans in 2011 reached a staggering $867 billion. Of the 37 million student loan borrowers, 14.4% are at least one payment behind.

Students and parents are more distressed about the college education expense, because the cost has risen dramatically. According to the College Board, tuition and fees at public universities have jumped 130% over the past 20 years.

If the bankruptcy attorneys are right and student loans are in a bubble, imagine the ramifications for consumer confidence should the bubble burst.

Just like the housing bubble, people would shy away from education after hearing the horror stories of homes being repossessed to pay off student debts. Worse, others would hear about the bad credit rating students would have, which would prevent them from being able to make other large purchases.

Others would wonder how long it would take to repay student loans during one’s life, and how that extra debt burden would prevent someone from making other important life decisions.

What is the true value of an education in the U.S. economy, some would wonder?

Let’s put the bubble bursting scenario aside, dear reader, and focus on the effects on consumer confidence right now. The Federal Reserve recently reported that only nine percent of 29- to 34-year-olds got a first-time mortgage from 2009-2011, compared with 17% from just 10 years ago.

The first takeaway from the above, dear reader, is that consumer credit is not expanding. Thus the economic recovery and consumer confidence is not gaining traction, which means that stock market rally looks even more suspicious.

The second takeaway is that more people, aside from their regular debt, are saddled with student loans, which will continue to depress consumer spending and consumer confidence, which will be a drag on housing and the U.S. economy for years to come.

Where the Market Stands; Where it’s Headed:

It’s up, up and away for stocks again! The bear market rally is getting very near its top. A stock-buying euphoria may not be far off… the final big push to the top I’ve been expecting for the three-year-old stock market rally. Enjoy higher stock prices while they last, because they won’t for all that much longer!

What He Said:

“I see a deal when it’s a deal. And right now there’s a good “for sale” sign flashing on gold bullion and gold producer shares. In fact, after peaking at the $690.00 an ounce level earlier this year, gold could be a bargain at its current price of around $650.00 per ounce. As a reader, you are undoubtedly aware of my negative stance on the general stock market and the U.S.economy. As the economic problems continue to brew in the U.S., as these problems develop into others, and as they are finally exposed, what other investment but gold will worldwide investors turn to?” Michael Lombardi in PROFIT CONFIDENTIAL, March 14, 2007. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments. Many gold stocks recommended in Michael’s advisories gained in excess of 100%.

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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles