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

Will This Be Lucky Year Number 12?

Wednesday, January 4th, 2012
By for Profit Confidential

The year 2011 marked the 11th consecutive year that gold bullion prices closed the year higher than they started. Here’s the closing price for gold bullion each year since 2000:

2000 – $273.00      2006 – $638.00
2001 – $279.00      2007 – $838.00
2002 – $348.00      2008 – $884.00
2003 – $416.00      2009 – $1,092
2004 – $438.00      2010 – $1,405
2005 – $520.00      2011 – $1,530

To answer the question, “Will 2012 be another up year for gold?” (I tell you right now it will), we need to understand why gold bullion rises in price.

Historically, gold bullion prices have risen for three reasons:

1) as a store of wealth during times of questionable fiat (paper) money;

2) as an inflation hedge; and

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3) as a commodity (jewelry).

Let’s work backwards. India has over taken China as the world’s biggest consumer of gold jewelry. I was in India this summer. People in that country love gold. Those who can afford it, flaunt it. With India’s economy close to booming, as more people enter the middle class in India, demand for gold jewelry will rise in India, pushing gold bullion prices higher.

Looking at inflation, I have written many times in 2011 that I believe rapid inflation will become an end result of the Federal Reserve’s expansive monetary policy. If the Fed keeps short-term interest rates near zero until mid-2013, like it has said it will, interest rates will have been at near zero for five years. In American history, we’ve never had a period of zero interest rates for five years.

And this brings me to the third reason gold bullion prices rise: too much fiat money in the system. In its effort to expand the money supply to save the economy from a second Great Depression, the Fed “flooded” the system with money. The Fed went through two series’ of quantitative easing (a fancy way to say creating more money) and I believe QE3 could be on the way in 2012. In order to finance its activities (including buying U.S. government treasuries), the Fed expanded its balance sheet by trillions of dollars. That money didn’t come out of thin air; it was created. Historically, too much money in the system has resulted in higher gold bullion prices.

If you believe demand for jewelry in countries like India and China will dissipate…if you believe there aren’t too many U.S. dollars in the system…if you believe inflation will not be created as a result of a five-year interest rate policy of zero and trillions of newly created dollars…then you shouldn’t be in gold bullion-related investments.

But, if, on the other hand, like me, you believe that the demand for jewelry will rise in India and China, that inflation will become a real problem for America in the years ahead and that there are too many dollars in the system, you can bet on gold bullion prices rising again in 2012. The depressed junior gold mining companies…that’s where the best deals are today. (See: This Morning I Bought a Basket of Gold Stocks.)

Michael’s Personal Notes:

Two big eurozone countries are headed back to recession this year.

Spain, the eurozone’s fourth largest economy, will fall back into recession in early 2012, according to a statement made by its Economy Minister.Spain has the highest unemployment rate in the eurozone at a staggering 21.5%.Spain and its citizens are in real trouble.

Italy, the third largest eurozone economy, will also be technically in a recession in the first half of 2012. Italian consumer confidence sits at its lowest level in 16 years. We can see this in retail sales, which were at a 10-year low this holiday season (source: Codacons web site).Italy and its citizens are in real trouble.

Dear reader, I’m sure you’ve heard enough about woes in the eurozone in 2011. But here’s why it’s important to us here in North America:

Firstly,Italy and Spain are respectively the third and fourth largest economies in the eurozone. These economies cannot fall back into recession without affecting the other 17 member countries. The biggest risk (a country that could fall back into recession as well) I believe is France, the second largest eurozone member.

Secondly, banks in the United States have major exposure to eurozone countries. Hence, the risks that weak, or defaulting, eurozone countries represent are high for large American banks. Between the eurozone exposure and U.S. residential real estate bust, it’s no wonder to me that the stock prices of big American banks have yet to recover.

Thirdly, while there has been plenty of talk regarding fixing the eurozone countries with the largest debt exposure, there has been no execution.Germany continues to balk at idea of the European Central Bank (ECB) printing more money. (Our central bank; they wouldn’t think twice about printing more money to save the economy.)

Finally, both Spain and Italy have introduced severe austerity measures. New Italian Prime Minister Mario Monti was able to secure final passage on austerity measures that will put a tax on luxury goods (Italy is well-known for high-end luxury good items), increase gas prices, and create a new tax on primary residences. Sure, the austerity measures bring down government debt, but they also stifle consumer spending further.

The year 2012 will be a very difficult one for the eurozone. Please don’t think for a moment that: 1) it won’t affect the west and; 2) the same thing couldn’t happen here.

Where the Market Stands; Where it’s Headed:

We are entering 2012 fully entrenched in a bear market rally that started in March of 2009. I will be the first to admit: I didn’t believe the bear market rally would last so long. The government and the Fed have fought this bear market “tooth and nail,” extending the rally.

Shortly, the Obama administration will ask Congress to increase the federal government borrowing ceiling by another $1.2 trillion, at which point the government debt ceiling will be raised to $16.4 trillion. The Fed; it’s on track to keep interest rates near zero for five years while having expanded the money supply by trillions of dollars.

Sure, what I described in the above paragraph will eventually come back to haunt us. But, in the meantime, it will keep the bear market rally moving higher. (See also: Exactly Where We Are in This Secular Bear Market.)

What He Said:

“If the U.S. housing market continues to fall apart, like I predict it will, the stock prices of major American banks that lend money to consumers to buy homes will come under pressure—these are the bank stocks I wouldn’t own.” Michael Lombardi in PROFIT CONFIDENTIAL, May 2, 2007. From May 2007 to November 2008, the Dow Jones U.S. Bank Index of the world’s largest bank stocks was down 65%.

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  • Emelia

    Its a shame people are more woreird about hording money, instead of spreading it. Gold is a safe bet, but it doesn't do shit for the rest of us. Invest in companies people, give back .

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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

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