The securities of public corporations the main business of which is to mine for gold bullion are often referred to as “gold mining stocks.” The Dow Jones U.S. Gold Mining Index is a stock market index that is a weighted average of about 100 of the largest and most widely held gold mining stocks trading on major American stock exchanges. When the price of gold bullion is rising, the prices of gold mining stocks are rising. Similarly, when the price of gold bullion is declining, the prices of gold mining stocks are declining.

The stock market and a number of commodities are in correction and this is no surprise at all. I want to repeat my view that all kinds of solid, growing gold mining companies are becoming very attractively priced right now and, as a sector, it’s worth putting gold stocks on your radar screen.

It’s a bit too early to jump right in with the spot price of gold likely to experience more downside. From a stock market perspective, most gold stocks began pulling back hard in mid-March, affecting even the best stocks within the sector. We’ve got to see the spot price of gold bottom out from its current downtrend and then I think we’ll have another really good entry point for considering new positions.

Investing in gold has always been a risky business, but it’s a worthwhile endeavor if you’re a stock market and commodities speculator. The key, like always, is to get the cycle right—timing in the investment business is everything. Even though the long-term trend might still be intact, the spot price of gold could easily go down to $1,200 or $1,100 an ounce. Why not? Gold has been in a bull market since 2002. The current price action in spot gold is very similar to the correction that occurred 2008/2009 and I wouldn’t be surprised at all if it repeated this trend: correction, recovery, consolidation, and then re-acceleration. It does take time.

Right now, there are large, medium and small producers of gold trading for reasonable prices on the stock market. A lot of these companies have little to no debt and are sitting on large cash hoards, waiting to put that money into new exploration and development. (See Everything Gold Is Turning Into Some Serious Green.) Even though gold stocks aren’t going up right now, it is an exciting time to be in this industry.

Speculating in gold mining stocks is a difficult business. You can find the best growth story out there, but if the spot price isn’t going up, then you aren’t likely to make any money. That’s why, as a stock market speculator, the majority of the time you need the spot price tailwind behind you. Or you go the other way and short these stocks when spot prices are falling. Just like in the oil market, spot price action is everything.

What I find attractive in a gold mining stock is finding a company that offer a “package” of good business fundamentals. This means that a gold mining company should already be producing and selling ounces of gold with detailed expectations for increased production over the coming quarters and years. The company should have other properties that it’s exploring, even in conjunction with other, perhaps larger mining companies. There needs to be a track record of financial growth, along with lots of cash in the bank for further exploration activities. Finally, a decent track record on the stock market is always helpful; it shows that institutional investors know about the business and are willing to invest and/or trade the stock.

I think we have more downside ahead in the stock market and in precious metals and other commodities. We’ve been due for a correction and here it is. I do see an underlying strength in the U.S. economy that, while not robust, is a good foundation for the future. For stock market investors, be prepared for further correction.

The growth in manufacturing in the U.S. has been flat. Despite this, the Empire State Manufacturing Survey noted that input costs—oil and commodity prices for manufacturers—has risen steadily over the last few months, with February’s high level not seen since the summer of 2011…more rapid inflation (source: Federal Reserve Bank of New York).

Import prices of goods to the U.S. rose 0.4% in February and, although higher oil prices can be blamed, goods and services imported from overseas also contributed to the rise. From a year ago, import prices have gained 5.5% (source: U.S. Labor Department)! More rapid inflation.

In China, their latest Purchasing Managers’ Index for March showed that their input costs (cost of goods) were flat, but that inflationary pressures remained high (source: Markit Economics). The index noted that input costs—oil and commodity prices—have been rising over the last half of 2011; rapid inflation.

In India, their latest Purchasing Managers’ Index for February revealed that their input costs—oil and commodity prices—are rising at a historically rapid inflation rate. The rapid inflation rise in input costs has persisted for the last six months. As with China, both countries are increasing their prices to compensate, which is why import prices in the U.S. or these goods and services are higher.

In Europe, their March Purchasing Managers’ Index revealed the steepest rise—again, rapid inflation—in input prices since the summer of 2011 (sound familiar?). The inflation rate recorded matches the highest long-run average in its 14-year history!

Just so readers don’t get the wrong impression that it is just the troubled nations in Europe experiencing rapid inflation,Germany’s Purchasing Managers’ Index also reported input costs that have accelerated—i.e. rapid inflation—for five straight months to reach levels not seen since the summer of 2011.

Countries like England and Hong Kong have also experienced rising input costs when they reported their respective March Purchasing Managers’ Index. Hong Kong has been experiencing persistence rapid inflation in its input costs for manufacturers for over 30 months now!

It is easy, dear reader, to blame oil for the rise in input costs and therefore conclude that the rapid inflation is temporary. However, as the reports clearly illustrate, oil is only part of the acceleration in the inflation rate. Almost all commodities that manufacturers use are increasing in price, which places margin pressure on manufacturers and pushes them to pass on those higher commodity prices to consumers.

These higher input costs—say it with me: rapid inflation—are global in nature and have been persistent, on average, for the last six months. This is not temporary, as they show no signs of abating and, in many cases, the inflation rate is accelerating. (Also see: Will the Real Inflation Rate Please Stand Up?)

Watch that stock market rally and remember, dear reader: (1) inflation leads to higher interest rates, which are bad for stocks; and (2) one of the best hedges against rapid inflation is gold bullion and those beaten-down gold mining stocks. (Also see: Central Banks Pile into Gold on Price Drop.)

Michael’s Personal Notes:

So much for “muddling” along when it comes to economic growth worldwide…

China reported its fifth consecutive month of contraction when it released its March Manufacturers’ Purchasing Managers’ Index. During the past five months, the rate of acceleration in the economic slowdown has been increasing for its manufacturers (source: Markit Economics).

Within the numbers, new orders, which are a gauge of future economic growth, were at a four-month low. Also, the accelerating economic slowdown has pushed the index for manufacturers from an economic slowdown mode to actually contracting over the last two months.

As I’ve been reporting about China, there is clearly an economic slowdown occurring in the country. Not only is export growth slowing, but consumer demand within China is slowing as well—not a good combination.

The European Union reported its March Purchasing Managers’ Index as well, which showed a continued economic slowdown and came in below estimates. Manufacturing is shrinking at an accelerated rate. In the last two months, manufacturing in Europe has actually gone from an economic slowdown to contracting (just like China).

This is not a surprise when new orders within the index—a measure of economic growth—have been contracting for eight straight months. Unemployment has been declining for three straight months and that decline is—wait for it—accelerating.

Just to show that this is not symptomatic of just the weak countries in Europe, economists were hoping that Germany was going to escape the economic slowdown and post strong numbers. But this wasn’t meant to be.Germany’s Purchasing Managers’ Index for manufacturers for March came in at the lowest level in three months!

Germany’s index reported its first contraction in over four months. The report noted that new export business—a measure of future economic growth—slowed considerably. This is indicative of a continued economic slowdown going forward.

Since the Czech Republic and Hungary ship over half of their exports toEurope, their economies have been hit hard.

With China slowing as well, Australia, New Zealand, South Korea and Malaysia have all reported weaker economic growth numbers.

There is no question that the economic slowdown is gaining momentum and is prevalent around the world.

Can the U.S. escape this barrage of weak economic growth? Not a chance. It may take time to reach our shores, but it will eventually land, exacerbating the economic slowdown that already exists in this country.

So watch out for that stock market rally, dear reader; it is very vulnerable to this economic slowdown.

Where the Market Stands; Where it’s Headed:

As I have written above, inflation is getting out of control and economies around the world are going from slow growth to contraction—a lethal combination. Rapid inflation leads to higher interest rates. Slowing economies lead to weaker earnings for most public companies.

Stock markets do not rise when inflation and interest rates rise while economies contract—this gives more credence to my theory that we are simply witnessing an ongoing bear market rally the sole purpose of which is to bring more investors back into stocks before the next leg of the bear market starts.

What He Said:

“Starting two years ago, I was writing how the housing boom would go bust and cause the U.S. economy to suffer sharply. That’s exactly what is happening today. From what I see happening in the U.S. economy, I’m keeping with the prediction I made earlier this year: By late 2007/early 2008, the U.S. will be in a homemade recession. Hence, I expect housing prices to continue declining, soft auto sales, soft consumer spending, and a lower stock market.” Michael Lombardi in PROFIT CONFIDENTIAL, August 15, 2007. You would have been hard pressed to find another analyst predicting a U.S. recession in the summer of 2007. At the time, the stock market was roaring, with the Dow Jones Industrial Average hitting its all-time high of 14,164 in October of 2007.

There 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.

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%.

The single greatest threat to your investment portfolio isn’t a Greek debt default (although that’s a big one). The major threat is geopolitical and it has to do with the potential for war with Iranand, to a lesser extent, Syria. Investment risk in the stock market remains very high at this time. I repeat my earlier view that a conservative investment stance is warranted.

Of course, because the stock market has run so strong since the beginning of the year, it is due for a consolidation/correction. Reasonable equity valuations and help from the Federal Reserve have helped stock prices tremendously. If war breaks out in theMiddle East, you can bet that the Federal Reserve will print even more money.

 I’m actually a little surprised by the spot price action in gold, but gold’s weakness is mostly due to weakness in the euro currency, which is boosting the U.S. dollar. When the U.S. dollar strengthens, the price of gold tends to suffer. There has been a geopolitical risk premium in the spot price of oil, but so far, not really in gold. As I wrote previously, gold is worth buying, $1,600 or below. It should be a hedge position in a portfolio already.

 I just can’t say enough about the amount of investment risk that’s growing in capital markets today. It is an election year and that tends to be a positive for the stock market. But, all the structural problems in mature economies remain and economic growth in BRIC countries is slowing. Add in geopolitical problems and we have the makings of a real mess. I think stock market investors need to be extremely cautious going forward this year. I hope everything works out fine, but my “gut” is really talking to me.

 Anyway, gold is worth keeping an eye on here, especially if you don’t have any exposure. As a practical investment strategy, gold and silver should be in a well-balanced portfolio, even if just for the hedge against inflation. Gold mining stocks have been trending lower lately, following the price action in the spot market. Even though we’ve had a very good start this year, it’s a tough stock market in which to be a speculator. There is no real trend. Uncertainty about the near-term future remains very high.

 My outlook isn’t gloomy; it just reflects the landscape we have to deal with. We’ve seen some improvement in U.S.economic news, stock market valuations are fair, and the outlook for corporate earnings is low double digits. (See The Strategy for Capital Gains That’s Proven to Work.) Technology stocks have been strong (always required for a rising market) and so have retailers (meaning consumers are spending). But this doesn’t mean that the stock market won’t go down big-time if there’s a shock like a sovereign debt default or threat of war. It’s a pickle. If we didn’t have problems with Iran and we didn’t have to worry about the euro, the stock market would be a lot higher.

A “snowball” problem for America that just won’t go away could be a blessing in disguise for astute investors…

Manufacturing jobs have fallen steadily since the 1950s. Low-wage countries, especially China, have been the center of the movement of factory work and job creation out and away from the United States.

In the 1960s, manufacturer United States Steel Corporation (NYSE/X) employed over 225,000 factory workers, Westinghouse Electric, had 114,000, and General Motors Company (NYSE/GM) employed over 595,000 factory workers. The center of job creation in America was manufacturing.

Today, service companies in the U.S. dominate the economic landscape when it comes to job creation: United Parcel Service, Inc. (NYSE/UPS) employs over 400,000 people; Target Corporation (NYSE/TGT), 355,000; and Wal-Mart Stores, Inc. (NYSE/WMT) has 2,100,000 service employees on its payroll. From what I can see, job creation over the past three years has been in the service sector (with heavy emphasis on retail) and at the government level.

In his State of the Union address last week, the President was adamant about wanting manufacturing jobs to come back to America. It will probably be a major part of his re-election campaign, in a bid to spur job creation, which is sorely needed in this country. But how can it possibly happen? Isn’t it a pipedream that manufacturing jobs will return to America so the job creation engine will start running again?

China’s development and rapid job creation have led to wages rising at least 15% per annum in recent years, which means that, within five years, the cost savings to manufacturers of producing in China as compared to the U.S. will be minimal (source: Boston Consulting Group).

But manufacturers have a choice if labor gets too expense in China. They can simply move their factories to other less-developed economies where wages are rock-bottom and job creation is sorely needed. Why move back to America? The only way to stimulate job creation by creating manufacturing jobs here in the U.S. would be to revamp healthcare costs and our tax structure in order to make the U.S. an attractive place to invest.

The other major factor in determining a plant location for manufacturers is a weak currency. One cannot understate the importance of exchange rate currency costs in setting up a manufacturing plant. The reason China, India and other such developing countries were able to lure manufacturing jobs away in the first place, and so create the foundation for a surge in job creation was a favorable exchange rate to the once mighty U.S. dollar.

Have the tables turned?

Is it just a coincidence that, in the same week as the State of the Union address, the Fed came out with its policy directive of maintaining its almost-zero rate policy until 2014?

If the President is making manufacturing jobs part of his election campaign for job creation and the Fed has sent a clear message to the markets that it wants to stimulate the economy, then, in my opinion both, add up to a weaker U.S. dollar.

When the Fed announced its policy initiative last week, precious metals, commodities and stocks in general rose, while the U.S. dollar fell. Should more money printing be in the cards, you can bet that the U.S. dollar will continue to fall, as it did during QE1 and QE2.

So, dear reader, if the agenda is to lower the value of the U.S. dollar in order to revive job creation, then what will be the benefit in this market for investors to take advantage of?

Precious metals will benefit most, with gold bullion and gold mining stocks leading the way. It is my belief that gold mining stocks are cheap relative to gold bullion; but, at the very least, ensure that you have some of the shiny stuff in your possession. It will protect you from the loss of purchasing power that will come with a declining U.S. dollar. (Also see: Gold Stocks: There’s Value in Them There Hills.)

The following chart explains my words quite well.

(Source: Lombardi Financial)

Michael’s Personal Notes:

U.S. GDP numbers released Friday, a key indicator of economic growth, confirm what I have been saying for weeks…the U.S. economic growth is slowing, not growing.

Here are the full-year GDP numbers for the U.S. over the past three years:

GDP 2009: -2.4%

GDP 2010: 3.0%

GDP 2011: 1.7%

GDP (which stands for gross domestic product: the total market value of all the goods and services produced by a country in a given period) grew at a “lukewarm” 1.7% in 2011 over 2010. When compared to 3.0% growth in GDP in 2010 over 2009, the obvious question is: where is the economic recovery?

The picture becomes even more distressing when we look at fourth-quarter GDP numbers, because they point to a deceleration in growth.

On the surface, the 2.8% rise in fourth-quarter U.S. GDP was weaker than what Wall Street expected. When digging deeper into the numbers, we find that restocking of business inventories accounted for a whopping 1.94 % of GDP in the quarter. This is temporary boost to GDP.

If we remove inventory restocking from the numbers, we find that the U.S. economy grew at just a measly 0.8% in the fourth quarter of 2011, when compared to the third quarter’s 1.8% rise in GDP.

My feeling, looking at my regular economic gauges, is that there is a clear deceleration of growth as we head further into 2012.

Consumer spending, which accounts for 70% of GDP, came in 2.0% higher in the fourth quarter of 2011, missing estimates of 2.4%, but slightly better than the 1.7% pace of the third quarter. Keep in mind, dear reader, as I’ve been saying in PROFIT CONFIDENTIAL, the meager growth the U.S. economy is experiencing is on the back of sharply higher debt spending by consumers (especially over the holidays), which cannot be sustained going forward.

Let’s also keep in mind that gas prices have remained elevated thus far in 2012. With the continued escalation of tensions with Iran and the U.S. dollar falling in value against other major world currencies (except the euro), this will further dampen GDP growth going forward.

Corporate spending on capital goods rose in the fourth quarter of 2011 at the slowest pace since 2009. The corporate sector continues to be timid against the backdrop of slow worldwide economic growth, preferring to stockpile cash instead of inventory.

I’ve been talking about the terrible shape that local and state U.S. governments are in. Their budgets are stretched to the limit, with states like Illinois and California virtually bankrupt. It comes as no surprise that, in the fourth quarter of 2011, the government spending component of GDP shrank for a fifth straight quarter. Many state governments continue to struggle to get their finances under control.

Couple this with the fact that there are no major stimulus programs currently coming out of the White House and we can assume that government spending will continue to remain a drag on GDP growth in 2012.

This latest GDP report merely confirms the weak economic data that have been coming in of late. Not only does this key indicator put downward pressure on the U.S. dollar, but it also makes one wonder how the markets can continue to move higher under these economic circumstances. Eventually, slow or deteriorating economic growth will push down corporate earnings and, when corporate earnings decline, so does the stock market. (Also see: Last Bastion of Higher Stock Prices Turning Negative.)

Where the Market Stands; Where it’s Headed:

The score: What looked like a strong January for the stock market has dissipated. The Dow Jones Industrial Average starts this morning up a diminishing 3.6% for 2012.

Yes, the bear market rally that started in March of 2009 is alive and well. But it is also weak and tired, getting near the end of its cycle.

What He Said:

“I’ve been pushing gold bullion and gold shares for over a year now. Bank in January 2002, I personally started buying gold shares.” Michael Lombardi in PROFIT CONFIDENTIAL, December 13, 2002. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments.