After months of patient waiting, the gold stocks came to life yesterday. Right across the board, whether it was junior or senior gold producers, the stock prices of gold companies were up sharply Wednesday.

Hopefully, my readers have been following my guidance and seeking refuge in the gold-mining companies. Since the spring of this year, gold bullion prices have been rising sharply, while gold stocks stood pat. I have been writing that the leaders of the gold bull market would shift from the actual bullion to the gold stocks, and that’s what started happening Wednesday.

Since the middle of June, the Dow Jones U.S. Gold Mining Index (an index comprised of the largest U.S. gold-mining companies) is up 12%, while the general stock market has gone down 11% in the same time period!

But, like all good things, as the price of gold bullion hits $1,800, there are forces that want to put a wrench in the 10-year gold bull market, as many believe gold has become too speculative. Hence, this morning, we learn that CME Group Inc. (CME), the world’s largest futures market, changed the rules without advance warning and increased the minimum amount of cash speculators and investors must deposit to trade a futures contract of gold.

In summary, margin requirements, with a flick-of-a-switch, have increased by 22% this morning. You may remember, the CME did the same thing to silver (increased the margin requirements for trading silver a few months ago) and silver fell sharply in price.

Well, I have news for the market, and better news for my readers. The bull market in gold is too strong to have the metal fall in value by 30% as silver did after the CME increased the margin requirement for trading silver futures.

For my readers, any pullback on the price of gold bullion caused by the CME’s newly imposed margin requirements would present a perfect buying opportunity for the junior and senior gold-producing stocks, once again. This is how to invest in gold now.

Michael’s Personal Notes:

On Tuesday of this week, the Federal Reserve made the unprecedented action of specifically saying how long it would keep short-term interest rates low. I’m sure you have heard. The Fed will keep rates low through mid-2013.

On the news of a prolonged period of interest rates that are low, U.S. Treasuries rallied. It doesn’t matter if Standard & Poor’s has cut the credit rating of the U.S. It doesn’t matter if Congress has just given the Obama Administration another $2.1 trillion to spend. Investors want U.S. Treasuries.

Yesterday’s auction of $24.0 billion in 10-year U.S. Treasuries was the first offering of U.S. debt since Standard & Poor’s cut the U.S.’s credit rating. There was a line up to buy these bonds—and the buyers walked away with the lowest yields on record—2.14%.

At 2.14%, the dividend yield of the Dow Jones Industrial Average stocks of 2.8% sure does look competitive.

Where the Market Stands; Where it’s Headed:

It’s up and down, down and up for the markets. My readers need to understand that, when we have huge multi-100 point up and down days on the market, most of that trading is computer-driven. Very little of it has to do with individual investors buying or selling. Since the advent of index-traded funds, computer/automatic trading has become a big part of Wall Street.

What am I doing? I’m sitting back and waiting. The current situation could go one of two ways. The market could move from here to test its March 2009 lows or the first real correction of 2011 could be close to ending, at which point the bear market rally would resume its upward trend.

I’m in the camp that believes it is too early to test the March 2009 lows for a variety of reasons I have written about over the past two weeks. Some of those reasons: stocks are a better investment alternative today to 10-year U.S. Treasuries; monetary policy remains accommodative; the great majority of investors are pessimistic; corporate profits are still strong; and corporate insiders are buying stock at a pace not seen since the spring of 2009.

What He Said:

“Consumer confidence does not change overnight. In the U.S., 70% of GDP is based on consumer spending. And, in my life, all the recessions I have seen or studied have only come to an end when consumers started spending. With consumer sentiment getting worse, and with the U.S.personal savings rate near record lows, it may take years for consumers to start spending again.” Michael Lombardi in PROFIT CONFIDENTIAL, February 25, 2008. By the end of 2008, the rest of the world was realizing that the recession would be much longer and deeper than most had imagined.

While the price of gold and price of silver continue to be very strong, a lot of gold stocks and silver stocks have been pulling back in price. It’s a reflection of the current state of things, with investor sentiment seemingly stuck in a rut. We’re in a market with so much uncertainty that any call is valid and all outcomes are plausible. The stock market could completely fall apart, stay the same, or advance. A market malaise has set in and it’s almost entirely due to the sovereign debt situation.

Just last week, stocks were looking set for a decent run, as corporate earnings mostly impressed the Street. That rally fizzled pretty quickly and now the S&P 500 Index is back down at the 1,300 level, which I view as problematic in terms of the market’s overall health. What’s happening is that investors are beginning to ignore good news and event-driven trades don’t seem to have any legs. It’s a strong signal that the market is tired and very unsure of itself.

With this backdrop, there certainly is no rush to take action on the long side. Even if the sovereign debt issue were to be settled right now and the market were to make a big advance, there’s just as much probability that it would pull back a month from now on lackluster economic news. The equity market sure isn’t making it easy for traders.

The S&P 500 Index has basically been trading range-bound since the beginning of the year with declining volume. Oddly, it’s following a very similar trading pattern to the beginning of last year where stocks advanced and then didn’t do anything for about 10 months before breaking out. We could be in for a similar scenario this year where stocks might not experience any material rally until sometime in the fourth quarter. That is my current figuring.

While corporate earnings are strong, economic data are not. Last year—and so far this year—the stock market was held together by good corporate earnings, as investors were willing to wait for the economy to recover. The pace of that recovery is most certainly unclear and the marketplace is growing impatient. Couple this with all the problems associated with country debt and deficits, and you could easily make the case for an S&P below 1,300.

I think we’re going to get continued range-bound trading for the next several months with the potential for an end-of-year rally based on the expectation for good fourth-quarter numbers. Corporations are doing their part; now it’s time for the economy and policymakers to do theirs.

So, the price of gold is going up, and so are gold stocks. There really isn’t much money to be made in this market except for speculating in gold shares. It’s the industry with the best near- and medium-term fundamentals as far as I’m concerned.

The big move in gold has already taken place and equity investors should already have some exposure to this important commodity. The thing about the global economy is that we’re in a long period of slow growth with inflationary pressures. It’s the best of both worlds for gold. Add in sovereign debt worries (politicians would rather print money and create inflation than cut programs) and the emerging strength of BRIC economies, and it’s quite arguable that the spot price of gold could hit $2,000 an ounce.

There are actually very few investment-grade, large-cap gold companies. Only a few pay a dividend and, of those, yields aren’t really more than one percent. Most of the gold miners out there would compare to medium- or small-cap companies and, because of the volatility inherent in commodities, should be considered speculative equity securities. Regardless, I wouldn’t have an equity portfolio that didn’t have some exposure to gold, especially giving current economic fundamentals.

Like most things now, investors can consider a gold mutual fund or exchange-traded fund (ETF). There’s even publicly traded companies the sole purchase of which is to own and secure large numbers of gold bars. For the most part, all stocks related to gold trade commensurately with the spot price of the commodity—and there lies the greatest investment risk for a gold investor.

There was a bandwagon effect taking place in precious metals earlier in the year. Institutional investors piled into gold, silver and copper and then jumped into agricultural commodities. Right now, large money managers are desperately hoping that second-quarter earnings and visibility will be strong enough to provide a catalyst to buy stocks. Investing in gold isn’t on their minds to any great degree. But, the price of gold is creeping higher. If it ticks past $1,650, then I think we’ll have a new rush on our hands. Percentage-wise, this price isn’t far away at all. It certainly is a great time to be in the gold mining business. It’s an industry that’s flush with cash.

Precious metal commodities corrected with some fervor—especially silver. The price of gold moved somewhat lower in the recent correction, but it is still solidly above the $1,500-per-ounce level. I think that $2,000 for an ounce of gold is a real possibility over the next 12 to 18 months and it will likely correspond to some sort of currency instability related to sovereign debt. Without question, the sovereign debt issue is the gravest investment risk to your portfolio and is even more perilous than a double-dip recession.

Gold stocks actually corrected more than the spot price and I would be a new buyer of gold shares at this time. This presumes of course that equity investors don’t already have some exposure to this important market sector. The resilience of the spot price of gold in recent months is, in my mind, a strong signal for the future. The U.S. dollar doesn’t really have to go down relative to other currencies for gold to keep ticking higher. The rate of inflation doesn’t have to be pronounced either. All that’s required is just a little bit of everything—sovereign debt worries, a slightly weaker dollar, and two-percent to three-percent inflation—and the spot price of gold can easily break into new record territory.

Investing in gold is a must these days and it’s been a fantastic trade for a number of years already. The spot price of silver did get ahead of itself, as speculators bid that commodity more than any other in the hope of global economic recovery. I wouldn’t be surprised at all to see silver move over the $40.00-per-ounce level in the near future, especially if second-quarter earnings come in solid.

As I say, the gold trade has made for good investing for several years now and my best prediction is for this upward price trend to continue. Right now, there are large, medium and small producers of gold that are 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. I hate to say it, but this decade is going to be a golden age for precious metal miners. It’s a great time to be in this industry, with spot prices high and bank accounts full.

Speculating in gold mining stocks is a difficult business. What I think makes for an attractive investment within this industry is finding a handful of companies that each offer a “package” of good business opportunities. 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. 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 always helps—this means that institutional investors know about the business and are willing to invest in/trade the stock.

I believe in the commodity price cycle and a fundamental backdrop to support higher gold prices. Accordingly, gold stocks should continue to be some of the best equity holdings over the next few years.

I have to tell you, I thought it would be Spain. My thinking of the order in which the sovereign debt crisis would engulf Europe was first Greece, then Spain, then Italy.

But it looks like I was wrong. Italy, home of my favorite Italian wine, is next.

It all started on June 18 when Moody’s Investor Services said that it was weighing whether to cut Italy’s credit rating. Since then, government bond yields have been rising in Italy.

Italy has regained only a small fraction of the gross domestic product (GDP) growth it lost during the global recession (Italian GDP in the first quarter of 2011 rose only one-tenth of one percent over first-quarter 2010 GDP). Unemployment is high. Interest rates are rising and a sex-scandal-plagued Silvio Berlusconi is occupied with trying to maintain his position as Prime Minister as uncertainty over his capacity to govern rises.

Here’s why I believe the sovereign debt infection is spreading to Italy.

Yesterday, the shares of Italy’s forth largest bank, Unione di Banche Italiane, fell five percent to 3.63 euros—below what it had priced its shares in a one-billion euro rights offering it was trying to close yesterday.

The stock price of Italy’s largest bank, UniCredit, was down about nine percent yesterday. Intesa Sanpaolo, the country’s second largest bank, saw its stock price tumble seven percent yesterday.

When the stock prices of major banks fall so quickly, investor panic usually sets in. And that may be the situation in Italy right now. Moody’s Investor Services said Thursday that it may downgrade the credit rating of 13 large Italian banks.

It looks like the bond vigilantes are closing in on their next target. Poor euro; how will it ever get a break?

Michael’s Personal Notes:

What a day for the stock market Thursday…

First we had the International Energy Agency (IEA) announce that it would release 60 million barrels of oil into the marketplace. That pushed stock and commodity prices severely lower. Then Greece announced that it has struck an austerity deal, which brought stock prices back the other way.

Why the IEA is releasing so much oil is a mystery to me. I’ve read all the news reports last night and this morning, but I just don’t get it. This oil is being released from “emergency oil supplies.”

Some reports said the oil was being released to reduce the shortage of oil caused by loss of production in Libya. But the market reacted as if this was an oversupply situation. After all, Saudi Arabia is increasing its oil production to near record daily levels.

There are obviously some political motives behind the scenes here…so I’ll just leave it at that.

But for investors, I see opportunity. Gold bullion was down over $30.00 per ounce yesterday. I haven’t seen that kind of downside movement on gold for months.

But when I looked at my gold stocks, I noticed that they closed Thursday at the same level they closed Tuesday. Gold stocks holding steady while the yellow metal falls in price?

As I have been writing for a few weeks now, the share prices of gold exploration and development companies are forming a base here. Yesterday’s sharp pullback in gold bullion’s price was a good indication that the gold stock prices are near their bottom. If this was two months ago, and gold was down $30.00 an ounce, gold stock prices would have pivoted downward quickly.

Where the Market Stands; Where it’s Headed:

Let them release 60 million barrels of oil, let Greece and Italy fall. It doesn’t matter to this bear market rally. No matter how bad the news gets, the market continues to trade above its 200-day moving average—a big technical positive for stocks.

Stocks love to climb a “wall of worry.” And we seem to have plenty of that around lately. I’m sticking with my guns: The bear market rally that started in March 2009, although tired and long-in-the-tooth, still has life left in it.

What He Said:

“What group of stocks is 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.

“Uncertainty” and “worry” are the words describe the current state of the equity market without corporate earnings and new visibility. Second-quarter earnings season can’t come soon enough—it’s what the market is desperately waiting for.

We have a situation where stock prices are bouncing around on the news of the day and an investing marketplace that is hoping that the sovereign debt issue can be contained. This has given a short-term boost to the dollar, but the longer-term trend is for a declining currency. This means that the outlook for the price of gold remains strong.

Investing in gold has proven to be a highly profitable endeavor over the last few years, but everything needs to take a break once in a while. Both silver and gold got a little ahead of themselves, but they definitely were good trades. If I were to pick one precious metal to focus on going forward, it would be gold.

Here we have an industry that’s awash in cash, is highly profitable, and that has limited prospects for large new discoveries (like oil). Gold stocks trade commensurate with the spot price of the commodity (with the exception of major new discoveries) and, in the next upward spike in gold prices, I think we’ll see a wave of consolidation within the industry. Medium-tier producers will want to use their common shares as currency to bulk up on production before the next major leg up in the spot price. A lot of gold mining companies believe that the spot price of gold can hit over $1,750 per ounce this year.

I’d be a buyer of new gold shares in this market. Uncertainty is everywhere, but when a gold mining company says that it expects to produce a certain amount of gold and other byproducts, as well as what the costs are going to be, it’s pretty easy to figure out the kind of cash this business is going to generate. Because the estimating process for mineral resources and extraction is regulated and the industry has high standards of reporting, investors can have a good level of confidence in drill results and business plans for production.

As always, you want to consider an existing producer that’s also drilling for more gold around existing properties. You want a business with lots of cash in the bank, a highly educated and respected management team and, finally, a rising commodity price environment for spot prices.

In the gold mining universe, there are a lot of companies from which to choose, but there aren’t a lot of companies that are producing over 100,000 ounces a year. This makes stock picking within the industry that much easier.

Investing in gold isn’t for everyone; but, in this economy, there’s not a lot of business growth around. In terms of financial success, outperformance is still with precious metal producers and, while everything occurs in waves, the fundamentals, in my view, keep shaping up for gold.

It looks like the old investor adage “go away in May” is going to play itself out once again. It may not be until the fourth quarter that stocks can find a new uptrend, as the economy needs more time to find its footing. What’s happening now in the equity market is a reckoning among investors’ expectations. It’s not really about share prices. The time horizon for decent investment returns from stocks is expanding and the actual amount of those expected returns in shrinking. The market right now is about declining prospects for stocks and it’s reflected in the S&P 500 Index being below the 1,300 mark.

The next major support level for this broad market index is 1,250. It seems likely to me that stock prices will drift downward to create that level over the next three weeks. Stock market malaise could be with us for the entire third quarter, as expectations continue to be revised.

We still have to remember, however, that stocks have had a great run since 2009 and they haven’t really experienced any major correction since then. While investor expectations are being adjusted, it does make it easier for the broader market to accelerate when the economy and corporate earnings turn upward. My guess is that this won’t happen until the fourth quarter this year.

The best buys in this market right now continue to be with large-cap, dividend paying companies. At the very least, a decent handful of these kinds of stocks should be on investors’ radar screens. The market isn’t finished going down as yet, but barring any major shocks to the system (like a Greek debt default), I expect stock prices to tread water for a while. With all the current information, getting some large-cap, dividend equity investments before the fourth quarter seems to me like a decent strategy.

The price of oil remains a good proxy for the short-term trading action in stocks. Longer-term, a weaker oil price will have a direct stimulative effect on the economy. As for gold, this is an investment theme with staying power; however, the near-term trading action seems bent on going lower. This is natural, as investors want to unwind the trade after gold (and silver) has hit record price highs. There’s still lots of room for gold exposure in an equity portfolio today. There’s too much investment risk and inflationary risk in the global economy to do without it.

The next quarter or so should be a good time to consider a high-dividend-paying oil and gas investment. These stocks have corrected with the spot price of oil and are quickly becoming attractively priced. If OPEC increases its production like it says it wants to do over the near term, oil price softness will present a good entry point before the economy accelerates.

It looks like the current trading action in stocks is the correction/consolidation that we should have had earlier in the year. Investor sentiment was perhaps too optimistic and economic reality has now caught up to the marketplace.

The only things that investors really care about are the numbers, and in those numbers they want to see growth. Investors sell when businesses aren’t growing and they even sell when business remains the same. The reality of a slow growth economy is now settling in and, no matter what the government or Fed does now, the economy is on its own.

We’re likely to get continued weakness in stocks until we get into second-quarter earnings season. If those numbers are bad, then stocks would be in serious trouble. The good news is that expectations for the second quarter remain quite solid. Not all industries are experiencing the same level of economic activity, and that’s to be expected. With this backdrop, however, it’s pretty reasonable to conclude that the equity market won’t be taking off anytime soon, which is a simple reflection of the current state of things.

As mentioned in this column many times over the last several months, there’s no rush for investors to be taking on new positions, especially at the speculative end of the market. Stock picking is much more difficult in a slow growth environment and the returns from speculating on corporate events are less robust in a bear market. From my perspective, we’re still in a bear market for stocks and the S&P 500 Index still hasn’t achieved the same level that it was trading at over 10 years ago.

Faster-growing economies like China and Brazil are what are keeping the earnings growing at large corporations. Without these emerging operations, the earnings results from S&P 500 companies would be a lot different. Because the world’s mature economies are growing slowly and the U.S. economy still has to work through the housing crisis, I think the stock market is experiencing the same kind of pattern it did from the mid-1960s to 1980. We’ve already been into the current stock market consolidation for a good 10 years now and there’s more to go. It’s one big trading range that, without dividends, would have meant negative investment returns from stocks.

Since last September, most investable assets have gone up significantly in price. Stocks, oil and gold have all been due for a correction because of that run-up. What the market is going through now is a reality check and a reminder that economic growth can’t be manufactured or engineered. The economy is still in the process of balancing itself out after a bubble period in housing. Once this situation is fixed, the economy will start growing again in a meaningful way.

The only thing that really matters to the stock market is corporate earnings. The numbers are everything, and that’s what equity investors need to be focused on.

I’d be a new buyer of large-cap, dividend paying stocks right now. The market hasn’t pulled back much over the last two years and, every time it has, it’s been a great buying opportunity. The stock market is reasonably valued at its current level and the expectation is for a solid year of corporate profit growth. Job numbers, housing prices, and ISM surveys are all important, but, as the owner of a business, it’s always the bottom line that counts.

Even though I’m advocating that investors with money to spend consider buying stocks right now, I’m not saying that investors should load up on speculative issues. Far from it. Investment risk in the world remains very high. This is mostly due to the sovereign debt issue in Europe, which keeps flaring up every month or so. A lot of big investors over the years have contemplated the end of the euro currency; if it were to happen, the result would be disastrous for capital markets over the short term. It wouldn’t be the end of the world, of course, but financial markets would likely take a huge hit. So, because this risk is present and real, equity investors need to be fairly conservative with their holdings. And, if we are going to experience a period of slow economic growth in the U.S. economy, then investors need to be awfully choosy about which companies they invest in. Ever wonder why a company like Caterpillar Inc. (NYSE/CAT) has been such a powerhouse wealth creator for shareholders just over the last year? It’s because the company is well-diversified in the world’s fastest growing economies.

I think some individual investors have a tendency to forget just how risky stocks are. Putting money into the stock market is taking a gamble—you’re betting on a company’s ability to generate profits, while recognizing that the business cycle exists. Without question, equity securities (which are shares in a company that trade in a secondary market) are 100% risk-capital instruments. Therefore, it pays to have a healthy regard for risk, no matter what the broader market is doing.

Everybody likes a bandwagon. Take gold, for example. The spot price of the commodity has been going up for years now, but it isn’t until the media headlines take hold that a lot of new investors jump in and buy gold or gold stocks. As the old saying goes, once it’s in the newspaper, the story is mostly over. This still rings true today.

Right now, it’s difficult to be a buyer of stocks. The economic data is lackluster and we’re in between earnings seasons. But, it’s often this kind of uncertainty that creates good entry points for new positions. Now is a good time to be considering well-managed, large-cap, dividend-paying stocks. The right large-cap company can beat the best high flyer the market has to offer.

In Friday’s issue, I discussed the idea of generating some cash through writing covered call options should the market trade flat.

At this juncture, stock markets are pausing and showing some uncertainty. And, while I do not pretend to have a crystal ball, I do firmly believe in adopting strong risk-management to protect your investments and hard-earned capital. This is my best stock market advice.

The last thing you want is to watch your gains disappear.

One of my favorite strategies I like personally to protect investment gains is the use of put options as a defensive hedge against market weakness. This strategy is called a Protective Hedge. Don’t be scared by the name or the fact it employs derivatives, as the strategy is straightforward.

Under this scenario, investors may be somewhat bearish or uncertain and want to protect the current gains against a downside move in the stock or the market with the use of index put options.

For those of you not familiar with options, a buyer of a put-option contract buys the right, but not the obligation, to sell a specific number of the underlying instrument at the strike or exercise price for a specified length of time until the expiry date of the contract. After the expiry date, the particular option expires worthless and any responsibility is eliminated.

The buyer of the put option pays a premium to the writer of the option, who gets compensated for assuming the risk of exercise. The writer of the put option is obligated to buy the stock from the holder of the put should it be exercised by the expiry date.

For the writer of the put option, the amount of premium received for assuming the risk is generally directly correlated to the volatility of the stock and market. The more volatile the stock, the higher the premium paid for the option. And low volatility translates into lower premiums.

You can buy puts for stocks and sectors. If your portfolio is heavy in technology, you can buy puts on the NASDAQ. Or let’s say you have benefited from the run-up in gold and silver to record historical highs; in this case, a good strategy may be to buy put options on The Philadelphia Gold & Silver Index, which tracks 10 major gold stocks and silver stocks.

If you are heavily weighted in technology, you can buy put options in PowerShares ETFs (NASDAQ/QQQ), for example, a heavily traded put used for defensive purposes.

It’s that easy. Just take a look at the various indices that closely reflect your holdings or put options on individual stocks that you may have a large position in.

In this market, safety is the key.

As we all know, the U.S. reached the maximum debt level at which it can borrow (its debt ceiling) earlier this week. The U.S. has borrowed $14.3 trillion and cannot borrow more unless Congress increases the debt ceiling limit.

The government says that it has dipped into its federal pension funds to pay its bills. And what does the market do? It closes an eye and yawns. The yield on the 10-year U.S. Treasury actually fell yesterday to 3.1%. The bond market is experiencing a “little” rally despite the government having to dip into its pension funds to pay its bills.

Frankly, the bond and stock market doesn’t care at this point. It’s keeping that eye closed. It feels, like we all feel, Congress will eventually give in and raise the amount the U.S. government can borrow like it always has in the past.

But the market has the other eye wide open on this one…

By the middle of this May, the U.S. Mint had sold 85,000 ounces of American Eagle gold coins—on track to being their best sales month in about a year.

The last time sales of gold coins reached that level, the price of gold bullion rose 21% in the following year.

Gold, having hit a high of $1,541 per ounce earlier this month, is back down to $1,491 this morning, a drop of 3.2%. But the gold stocks were getting soft back in April and stayed soft for most of May…until yesterday.

I believe the share prices of the gold mining companies are starting to firm up again. In fact, over the last couple of days, the gold mining stocks have led bullion higher. The market has one eye wide open on this one. A strong price base has been established for the gold mining stocks…and the patient gold investors are about to get rewarded.

The market closes one eye on the debt problem, and opens the other to the developing commodities story.

Michael’s Personal Notes:

The same thing will happen here in North America…

Yesterday, the United Kingdom’s Office of National Statistics reported that inflation in the U.K. jumped to 4.5% in April. Core inflation, which excludes the volatile food and energy items, came in at the fastest pace in 14 years—3.7%.

Bets that the Bank of England will be raising interest rates sooner rather than later have increased substantially.

We will experience the same sequence of events here. The inflation rate in America will eventually pop. The Fed will react by raising short-term interest rates. We will hear the pundits say that the Fed kept rates too low for too long.

As I have been writing for weeks now, inflation is becoming a problem throughout the world for several reasons. The United States will not be immune to inflation woes.

In the U.K., two-year government bonds yield 1.02%. In the U.S., a two-year U.S. Treasury yields only about half of that—0.53%. Is the direction of U.S. short-term interest rates not staring us in the face?

Where the Market Stands; Where it’s Headed:

Very interesting to note…

The number of stock advisors bullish on the market has fallen sharply, while the number of stock advisors expecting a correction in the stock market has risen sharply (source: Investors Intelligence Advisors Sentiment, 5/18/11).

Traditionally, stock market advisors are wrong on their consensus opinion: if they expect the market to rise, the opposite happens. If they expect the market to fall, it usually rises. The more there are of them who expect a correction in stock prices, the less likely it is that it will happen.

I’ve been writing that I expect a little more pop from this bear market rally; say another 10% on the upside. Given the bearishness starting to prevail amongst stock advisors, the chances of the bear market rally continuing are now stronger.

The Dow Jones Industrial Average starts this morning up 7.8% for 2011.

What He Said:

“Prepare for the worst economic period ahead that we have seen in years, my dear reader, as that is what I see coming. I’ve written over the past three years how, in the late 1920s, real estate prices fell first before the stock market and how I felt the same would happen this time. Home prices in the U.S. peaked in 2005 and started falling in 2006. The stock market is following suit here in 2008. Is a depression coming? No. How about a severe deflationary recession? Yes!” Michael Lombardi in PROFIT CONFIDENTIAL, January 21, 2008. Michael started talking about and predicting the economic catastrophe we started experiencing in 2008 long before anyone else.

The latecomers to the gold bull market have been feeling the heat the last couple of days.

After reaching a record high of $1,540 an ounce only seven business days ago (on May 3), the price of gold bullion has fallen $55.00 to $1,485.

But it’s not the price of gold bullion that has investors and speculators worried. After all, the price of bullion is up $252.70 an ounce, or 20.5%, over the past 12 months. The fear and concern lies with the price action of the gold stocks.

As a reader e-mailed us yesterday, “Michael, I enjoy reading PROFIT CONFIDENTIAL each day and appreciate your wise advice. I have been invested in gold stocks for the past four years and have done reasonably well…but am perplexed at the recent performance of stocks in relation to the metal price. (Gold) stocks are standing pat when gold is rising and selling off when gold declines.”

I’m sure the majority of my readers invested in gold are noticing the same thing as the above reader.

But, in a bull market, this is what separates the men from the boys. The latecomers to the gold bull market (the “boys”) are dumping their gold stocks as fear sets in over weakness in the yellow metal. The seasoned gold investors (the “men”) see gold stocks forming a solid base here. The men are buying the gold stocks on dips, not selling them.

The gold bull market is 10 years old. It’s not a market for trading. It is a market for seizing the trend and staying with it. During this bull market, there have been times when gold stocks have led the advance higher before gold bullion and there have been times when gold bullion has led gold stocks higher (which is where we are now).

Nothing has changed in the world to change my view on gold. The Fed hasn’t stopped the printing press. The government hasn’t reined in its reckless spending. Long-term interest rates haven’t come down; neither has inflation.

Everyone has an opinion, a belief. Personally, I see the weakness in the price of gold stocks as an opportunity. And that’s why I’m buying more of them today.

Michael’s Personal Notes:

“Gas prices reach all-time high, commuters express need for gas cap locks,” read the headline on the 680news.com web site. But have no fear, our government is telling us that inflation is under control.

I believe that China is telling the truth about its inflation rate. And it’s dealing with it.

Yesterday, China announced inflation for April was running at 5.3%. The Chinese government would like to see the rate at four percent and, in its attempt to reach that goal; China has been raising interest rates and the reserve requirement ratio for its commercial banks.

I’ve been writing for months that the inflation “problem” in North America is much bigger than the government or media acknowledges. I’m still of the opinion that the Federal Reserve will come out with another form of QE1 and QE2 when QE2 ends next month. The greater the Fed’s efforts to expand the money supply, the greater the long-term hyperinflation risks.

Where the Market Stands; Where it’s Headed:

End of the bear market rally? After all, the Dow Jones Industrials was down 130 points yesterday. Not a chance.

You obviously read my column for the reason that I have a different angle and view on what is happening in the marketplace than most economists and analysts. Sure, the bear market rally is tired and close to topping out.

But watching the ticker tape yesterday, I believe that the market downdraft had more to do with a response to the guilty verdict of Galleon Group LLC’s Raj Rajaratnam than anything else. The securities police are tightening the strings on Wall Street players and Wall Street’s response was, “We don’t like it.”

The bear market rally in stocks that started in March of 2009, although very tired and long in the tooth, continues.

What He Said:

“When I look around today, I see falling stock prices…I see falling house prices…and prices for retail goods stores declining. The media has it all wrong blaming (worrying about) inflation. In my opinion, the single biggest threat to the U.S. economy and to the Fed in 2008 is deflation. You can bet the Fed will expand the money supply and drop interest rates aggressively, as deflation starts to rear its ugly head.” Michael Lombardi in PROFIT CONFIDENTIAL, December 17, 2007. Michael was one of the first to warn of deflation. By late 2008, world economies were embedded in their worst state of deflation since the Great Depression.

Right now the broader market is taking a well-deserved break after a pretty successful first-quarter earnings season. This market needs a new catalyst if share prices are going to advance and there isn’t one present just yet, so stocks will trade on the economic news of the day. So far this month, the economic data are generally positive, but not overly so. I think we’re going to be in a slow growth environment for quite some time.

With this backdrop, it’s fair to say that there won’t be any major tailwinds for equity investors in the near future. It’s a stock pickers’ market that’s due for a correction. It is well-deserved, however, and we have to roll with the action.

In my economic analysis, there weren’t very much home runs in the earnings department. The economy just isn’t robust enough to produce some major outperformance. I would say that, generally, large-cap results were decent in the first quarter and the outlook for the second quarter is about the same. For smaller companies, which are still reporting their numbers right now, there hasn’t been much in the way of outperformance either, although several mining stocks came out with excellent financial growth due to strong spot prices. This was expected by the marketplace and even the most robust miner is selling off right now.

The stock market’s been due for a break for quite a while and it’s natural for this to occur between earning seasons. As an investor, I would be in no rush to take on new positions in this market, but I would be keeping a close eye on gold positions. This is long-term trend that’s not going away.

A number of very solid small-cap gold mining stocks are retreating in this market and this is a sector that’s ripe for some strong trading action later in the year. As I’ve been writing, I still feel that the precious metal sector represents some of the most attractive growth opportunities for equity investors and that any major consolidation or correction in the sector would be a great entry point for new positions.

If there isn’t any new catalyst on the upside, there isn’t one on the downside either. This is a stock market that will likely drift over the near term. It’s called stock market malaise and it reflects a certain wariness as to whether economic growth is sustainable this year. Institutional investors remain unsure.

Stock picking over the very near term is going to be difficult as the broader market drifts. There’s no need for any major action just yet. I don’t see the equity market advancing in any meaningful way until we get to second-quarter earnings season. The current break has definitely been earned.

What a few months it has been for gold. With war worries in Libya to debt concerns in Europe and the United States, along with rising demand out of China and India, it appears to be the perfect storm for driving gold prices higher. In fact, the break at $1,500 was much sooner than I had expected and, based on the chart, prices could go even higher, albeit the buying may be somewhat ahead of itself and hence vulnerable to some profit-taking.

The June gold broke to a record high of $1,535.10 on April 28 and is looking to go higher. The chart showed a bullish inverse head and shoulders formation in March. Prior to this, there was a bullish V formation in January and early February. The June gold made a strong breakout at the $1,440 resistance that was in place since November 2010 in early April.

Along with the upward push, the trading volume in the June gold been surging during the breakout and this is bullish. The contract is above its 50-day moving average (MA) of $1,441. The bias remains bullish. The moving average convergence-divergence (MACD) has been flashing a buy signal since early April; but be careful, as we could be in store for a reversal.

Investing in gold is a safe haven play when the market risk rises.

Gold has rallied in each of the last 10 years and shows a beautiful bullish price chart. My gold advice would be to accumulate gold on weakness.

The situation in Libya could worsen and there are also tensions in Iran and other Middle East countries. This means added global risk. Oil is trading at over $112.00 per barrel on the threat of more disruption in oil from Libya and other oil-producing countries.

In my view, the key determinant of how gold will fare will depend on the direction of stocks along with the geopolitical tensions.

If the Middle East situation worsens, it would drive up oil prices, which would impact economic growth at a time when the economies continue to be at risk.

Also, don’t forget about the mounting debt and deficit in the United States. The country has over $14.0 trillion in debt and is paying billions in interest daily. Many states are struggling to make ends meet and are looking at severe cuts in the state budgets.

Silver has also followed gold higher, with the May silver futures contract above $48.00 an ounce. It appears set to take a run at $50.00. The near-term picture with silver is also extremely bullish on strengthening Relative Strength, but at the same time overbought. Silver is a play on the economic recovery, as it’s found in electronics.

I also like copper as a play on the recovering global economies, especially in industrial applications and housing.

My advice on playing the commodities is to buy gold stocks, silver stocks, and oil stocks on weakness.

The good old times must be back.

So far this month, 31 major companies have filed with the U.S. Securities and Exchange Commission to go public, the highest number since the summer of 2007.

Corporate earnings? They’re booming again, too. Just look at some of these first-quarter earnings reports:

Ford Motor Company (NYSE/F), the second largest U.S. car maker, made $2.55 billion. Johnson & Johnson (NYSE/JNJ) made $3.48 billion. The Goldman Sachs Group, Inc. (NYSE/GS), fifth largest U.S. bank, posted a $2.74-billion profit. Wells Fargo & Company (NYSE/WFC) posted a $3.76-billion profit. JPMorgan Chase & Co. (NYSE/JPM) made a $5.56-billion profit.

Five companies; $18.0 billion in first-quarter profit.

Why did I choose these five? Because all of them reported earnings substantially higher than in the same period of 2010! Corporate profits are back big-time and this is adding fuel to the bear market rally in stocks that investors have been so enjoying for 26 months now.

But when we look closer at the five companies I list above, all five, except for Ford Motor Co., have their stocks selling substantially below their five-year highs.

The stock market is a leading indicator, not a lagging indicator. By pricing the stocks on my list above, except for Ford, well below their five-year price high, the stock market is telling us that it does not believe that the better-than-expected earnings reports will continue.

As for Ford, the company’s stock is trading close to its highest level in 10 years. As we all remember, this is the only major car company that did not get a bailout from Washington during the credit crisis.

Michael’s Personal Notes:

Gold investors are noticing that, while gold bullion is rallying to new record highs ($1,509 per ounce as I write this morning), the gold stocks are lagging the rally in gold bullion. Why is this?

In my 10-year involvement in this gold bull market, I’ve often noticed that either gold stocks or gold bullion lead the bull, but rarely both. We are in one of those periods where gold bullion is breaking to new price highs and the gold stocks are failing to follow…it’s almost like the gold stocks do not believe that gold prices are moving so high!

I believe that gold stocks are forming a strong base from which to make their next advance. There’s no escaping it…higher gold bullion prices lead to higher profits for gold mining companies. Just this morning, Barrick Gold Corporation (NYSE/ABX), the world’s largest gold-producing company, reported that it made a $1.0-billion profit in the first quarter of 2011, up 22% from the same period of 2010.

There are many good buys in the junior and senior gold stock sector right now.

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average has climbed 1,038 points so far this year, up 8.9% for 2011. The S&P 500 opens this morning at its highest level since June of 2008.

I’ve been calling it a bear market rally since March of 2009 and all I can say is that this bear has failed to disappoint. As I have been saying for over two years…technically, you do not trade against the trend, which has been upward. And, fundamentally, you do not “fight the Fed.” We are living in the most accommodative monetary policy period in history. Short-term interest rates are near zero. The Federal Reserve is taking actions we’ve never seen before.

Add to all this a strong corporate earnings quarter and, bang, the rally marches on. But there are cracks in the lining, my dear reader. Long-term interest rates are rising, the U.S. dollar is under immense pressure to devalue, inflation is becoming a problem, and memories of the worst recession since the Great Depression are fading fast.

Enjoy the profits from this bear market rally while they last, because they will not last much longer. Upside profit potential in stocks (five percent to 10% higher) does not outweigh the risks.

What He Said:

“Overbuilt, over-speculated, over-financed and overdone. This is the Florida real estate market right now. For those looking to buy for personal use or investment, hold off! The best deals are yet to come. I continue with my prediction that the hard landing in the U.S. housing market, which is now affecting lenders, will have significant negative effects on the U.S. economy.” Michael Lombardi in PROFIT CONFIDENTIAL, April 3, 2007. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.

There are a lot of bellwether companies to report over the next couple of weeks and the trading action in stocks will be focused on that news. I still don’t think that this earnings season has been anything to write home about. For a number of large-cap companies, the earnings have been solid, but there haven’t been any grand slams. The fact is that this economy can’t produce much in the way of outperformance, with the possible exception of gold stocks.

Railroad stocks are still looking great in this market and that’s always a good sign that general economic activity is getting better. The railroad companies operate like the accounting concept: first in/first out. They see improved economic activity first and they see it go just the same. The major railroad stocks are trading just off their price highs. CSX Corporation (NYSE/CSX) just reported a 30% improvement in earnings, as freight volumes increased. Street analysts already raised their earnings guidance for the company’s second, third and fourth quarters, all of 2011 and 2012. If you want to know where the broader stock market is headed, just follow the railroad stocks.

Investing in gold and other precious metals continues to pay off regardless of what’s happening in other sectors of the economy. The new $7.8-billion bid by Barrick Gold Corporation (NYSE/ABX) for copper producer Equinox Minerals Limited (TSX/EQN) is the latest big acquisition in the mining business. Equinox Minerals has been a powerhouse moneymaker. The stock did very well over the last 10 months, and then pulled back with copper prices. Then, a Chinese company made an unsolicited bid for the company, but the Street figured that another, friendlier bid would surface (and rightly so). The stock traded well above its original takeover price and now the trade is over.

You can bet that, with gold prices and silver prices trading right at their all-time price highs, more mergers and acquisitions will be coming. This sector in my view remains perhaps the most attractive for equity speculators in the current environment. And this is knowing that most of the good gold stocks in that universe have already gone up. With mining companies almost drowning in cash, they have nowhere else to put this excess cash flow but to purchase other miners. I can almost see the investment bankers drooling over the prospects of more deals coming down the pipeline.

I do feel that the equity market looks tired and that a correction or meaningful consolidation is increasingly likely after first-quarter earnings season is over. As I’ve written recently, investors don’t need to be in a rush to take much action in this market. Things look like they’re topping out.

I was beginning to get a little worried that this earnings season was going to be a dud. Just like the economy, there is growth out there, but it isn’t uniform. Investor sentiment is still somewhat sideways about the state of things. I still see the main stock market averages as getting close to topping out. It should happen within the next two quarters.

The commodity price cycle remains in full force and just about everything related to precious metals, oil and agriculture is going up in value. It’s a unique time in capital markets, as we don’t get a fully fledged upward commodity price cycle all that often. In my view, it’s a long-term trend that should be fully embraced.

Investing in gold is a priority if you want to have exposure to the current cycle. As you know, most precious metals have already experienced significant price increases over the last several years. The spot prices of gold and silver continue to hit new highs at this time. For investors in this sector, established junior producers with strong exploration potential offer some of the most compelling opportunities for risk-capital equity speculators. The entire precious metal industry is swimming in cash and there’s going to be a lot of buying and selling of whole companies this year and next.

Interestingly, a lot of commodities have seen their prices move commensurately with stocks over the last while. It’s like the globalized economy (and speculators) are speaking with one voice. I do think both stock prices and most commodities can experience further price appreciation over the very near term, with the likelihood of a correction happening soon. If this happens to both stocks and commodity spot prices, I’d definitely be a new buyer of gold shares.

I prefer the buy-low/try-to-sell-high investment strategy as a general rule. There are always momentum trades in the stock market. There are always special situation opportunities. But in the case of gold and silver, I’m a long-term bull, so I don’t have any problems with investors speculating in shares that have already experienced big price moves. The key to successful gold mining speculation as an equity investor is to buy a “package,” which is a known miner with well-regarded management that’s growing production and earnings, and boasts excellent prospects for further mineral discoveries that can come into production. The investing universe for these kinds of companies is actually quite small.

So far this year, I’ve seen some substantial capital gains among stocks of precious metal producers; not because of strong spot prices, but because of takeover bids. Mergers and acquisitions in this industry are ripe for acceleration and it’s a key component of the risk/return ratio with mining companies.

For now, it’s time to enjoy the good financial results in large-caps. I’m confident that the good news will continue, but not for every industry. I think we’ll get a correction soon and this means a great opportunity to add to precious metal positions.

It’s a tough market for equities right now because there’s no expectation for major growth. So far, big companies haven’t said enough on the subject and, with other less-than-enthusiastic news, the stock market is waffling. In fact, the main stock market indices could experience a total breakdown here if the numbers from corporations don’t start improving.

Investors bet big on strong first-quarter results and while, so far, big companies are reporting growth, they’re not reporting numbers that are beating consensus and this means that share prices are very unlikely to advance. In this kind of environment, new stock picking should go on the backburner. It’s a wait-and-see market and, like the economy, first-quarter earnings results aren’t going to be uniform at all.

Texas Instruments Incorporated (NYSE/TXN) just reported first-quarter financial results that missed consensus. This important benchmark company in the semiconductor industry reported growth, but nothing to write home about. Like many stocks in the technology sector, this one looks like it’s rolling over.

And the banking industry hasn’t reported numbers that have been up to snuff. Yes, there is growth, but, from my perspective, the numbers aren’t improving enough to warrant new positions in the sector. This is the situation the broader stock market finds itself in right now. First-quarter numbers are generally better, but not by much.

I come back to the gold mining industry as one of the few sectors with any growth left in them. Now that everyone is newly worried about debt and deficits (because Standard & Poor’s says so), upcoming currency wars are making the case for gold that much better every day.

With the news we have right now, I have to say that investment risk in equities remains high. The broader market already went up solidly in anticipation of strong first-quarter earnings. Companies so far aren’t beating consensus and they aren’t guiding higher. This presents a dilemma for investors with money to spend on stocks. Does the risk justify the potential return? Should you be a buyer of new positions in this kind of market? I say no to both questions, and it isn’t that I don’t expect the economy to improve or that corporations won’t keep growing their earnings. With the news we have right now, the growth isn’t strong enough to justify any bold new moves. We’re at a time now when a lot of previous expectations are coming together. What develops next is anyone’s guess. One thing I know is that I wouldn’t sell any gold or silver. This is the only growth industry left and it might just be the only store of value going if the sovereign debt issue cascades.

“It’s too late, the easy money has been made,” is the most common response I get from investors when I ask them why they do not have exposure to the gold bull market. Nothing could be further from the truth.

Yes, gold’s had a phenomenal run-up in price, rising from under $300.00 an ounce in 2002 to $1,480 today—a gain of 393%. I wrote these now famous words in PROFIT CONFIDENTIAL back on December 13, 2002: “I’ve been pushing gold bullion and gold shares for over a year now. Bank in January 2002, I personally started buying gold-related investments.”

And, while many investors feel that it is too late to get into the gold bull market, I continue buying in. Actually, I’ve been buying gold-related investments all the way along; most recently when gold was trading at $1,400 an ounce.

Here are two reasons why I keep buying and why I believe the biggest gains for gold investors lie ahead:

Firstly, the shares of quality gold-producing companies are lagging the rise in the price of the metal. Look at the shares of Barrick Gold Corporation (NYSE/ABX), one of the world’s largest gold-mining companies. Back in 2002, Barrick’s stock traded at $20.00. Today, it trades at $53.00, a gain of 175%, while gold bullion is up 393% in the same time period.

Same thing with Newmont Mining Corporation (NYSE/NEM), another major gold producer. Its stock traded at $25.00 in early 2002; today, it trades at $57.75, for a gain of only 130%—gold bullion, over the same time period, beat the gain three-fold.

The stock market works on supply and demand. The more demand for a certain stock or type of stock, the higher the price goes. The great majority of mutual funds in existence today are not investing in gold stocks. As time passes and gold prices continue to rise, investment professionals will start to view gold as a “must have” in their portfolio. Demand for quality gold stocks will rise. Gold stocks will start to fare better than gold bullion itself.

The second reason why the biggest gains for gold investors lie ahead has to do with the basic profitability of the major gold mining companies. Barrick, Newmont, and Goldcorp Inc. (NYSE/GG) have fixed costs at their existing mines, so their profits rise sharply as gold prices rise. Look at it this way: a gold mining company has a cost of production of $800.00 an ounce. At $1,480 an ounce for gold, the company is enjoying a gross profit of 85% on its cost of gold.

Now, if gold prices went to $2,500 an ounce (which I expect gold bullion to easily surpass), the gold mining company producing gold at $800.00 an ounce all of a sudden sees its profit margin jump to 213% and, bang…the stock price takes off.

The biggest profits in gold lie ahead, because we are still in that phase of the gold bull market where stocks are lagging the price advance of the underlying commodity. Bottom line: investment professionals still do not believe gold is worth having in their clients’ portfolios and the great majority of investors do not have exposure to gold. As we enter phase three of the gold bull market, gold stocks will start to lead, as opposed to lag, the advance in gold prices.

Michael’s Personal Notes:

It was bound to happen…

The big news this morning: New York-based Standard & Poor’s credit rating agency downgraded the U.S. AAA credit rating from “stable” to “negative.”

I’ve been writing about this coming event for months. The quickly rising national debt of the U.S., and lack of any meaningful effort to reduce our annual deficit would sooner or later cause the security of debt instruments to come under question.

How it usually works: first a country’s debt rating is cut (like the U.S. debt rating was cut today), then interest rates in that country rise to offset the new perceived risk in its debt securities (in this case, U.S. Treasuries).

First we had long-term interest rates rise, now short-term interest rates will come under pressure to rise. If the stock market goes down big-time today, which I expect it will, the reason will be the market’s increasing realization that higher interest rates in the U.S. are just around the corner.

Where the Market Stands; Where it’s Headed:

The bear market rally that followed the early 1930s stock market crash started in October 1934 and lasted until August 1937—35 months—and took the Dow Jones Industrial Average from a level of 90 to 185, a gain of 106%.

The current bear market rally in stocks started back in March of 2009 and is enjoying its 26th month of gains, having brought the Dow Jones Industrial Average up 93% so far. As I have been writing, the current bear market rally is not over yet. While upside potential is limited, there is another five percent to 14% left on the upside for this market.

The Dow Jones Industrial Average opens this week up 6.6% for 2011.

What He Said:

“If I had to pick one stock exchange that would rank as the best performer of 2007, it would be the TSX (Canada’s equivalent of the NYSE). Interest rates in Canada remain very low and they are not expected to rise anytime soon. Americans looking to diversify their portfolios, both as a hedge against the U.S. dollar and a play on gold bullion’s price rise, should consider the TSX. Most brokers in the U.S. can buy stock on this exchange.” Michael Lombardi in PROFIT CONFIDENTIAL, February 8, 2007. The TSX was one of the top performing stock markets in 2007, up just under 20% for the year.

Three major trends in the financial markets, all from which investors can make money, continue their development this morning…

Trend #1: Rising long-term interest rates. The 10-year U.S. Treasury hit a yield of 3.6% Friday morning. My forecast calls for the bellwether 10-year Treasury to easily sail past 4.0% this year.

I’ve been predicting that bond investors would take a hit since the summer of 2010, and that’s exactly what has been happening. The yield on the 10-year Treasury sits today at the same point it did in January of 2008—but short-term interest rates were a lot higher back then. Pressure is now mounting for short-term rates to rise as well.

The writing is on the wall with this one: long-term interest rates are rising despite the Fed’s QE2 effort, which is omnibus. Investors shorting long-term bonds are booking, and will continue to reap serious profits this year.

Trend #2: Stock prices will continue to rise in the immediate term. We told our readers to jump into stocks in March of 2009, and have kept them in stocks since then. The Dow Jones Industrial Average has risen 93% since March 9, 2009. Yes, the easy money has been made in the stock market, but there is another five percent to 10% upside profit potential.

Each passing day, more and more investors are becoming convinced that the worst is over for the economy. They will be proven wrong, but, in the meantime, the cash on the sidelines will push stock prices higher. The bear market rally of the past two years has been a true classic, panning out just as I expected, with more upside left.

Investors can continue to reap immediate-term profits from the stock market (almost anything, except real estate stocks, has been going up over the past 25 months), but, as long-term yields hit four percent and get closer to five percent, the market rally will be deflated like one big balloon.

Trend #3: Gold prices are at about halfway in their bull market cycle. This morning, gold bullion is up another $12.50 an ounce, closing in on $1,500 per ounce. Since 2002, I have been yelling, screaming, to anyone who would listen: Buy gold related investments! I continue to believe that gold is headed to $2,500 to $3,000 per ounce.

The U.S. dollar index chart ($USD) is about to break major support, the Fed is getting nervous about long-term inflation, and the Chinese are on a buying spree trying to get their hands on as many decent precious metal exploration and development companies they can. There are plenty of quality gold stocks listed on senior stock exchanges that will deliver serious profits to investors this year.

There you have it. My closing commentary for the week…three major financial trends investor can still profit from today.

Michael’s Personal Notes:

The widely expected move by the European Central Bank to raise interest rates yesterday, after keeping them artificially low for three years, marks the first time in 40 years that Europe has moved to raise interest rates before the U.S.

The European Central Bank (ECB) raised interest rates by one-quarter point to 1.25%. The equivalent bank rate in the U.S. is between zero and one-quarter percent. Germany’s economy is booming, inflation risks are high, and the ECB is acting. Two more rate increases of one-quarter point each are expected by the ECB this year.

The European Central Bank has now joined the ranks of Canada, India, China, New Zealand, Australia, Poland, and Sweden in raising interest rates post-recession. The U.S. Fed, usually the global leader in setting interest rates policies, will soon be the laggard in joining the global trend of rising short-term interest rates.

Where the Market Stands; Where it’s Headed:

A bear market in stocks still presides. Expect continued immediate-term rising stock prices. The short- to long-term picture continues to deteriorate.

What He Said:

“You’ve been reading my articles over the past few months and have seen how negative I’ve become on the U.S. economy. Particularly, I believe it’s the ramifications of the faltering housing sector that are being underestimated by economists. A recession doesn’t take much to happen. It’s disappointing more hasn’t been written on the popular financial sites and in the newspapers about the real threat of a recession happening in 2007. I want my readers to be fully aware of my economic opinion: I wouldn’t be surprised to see the U.S. economy in a recession sometime in 2007. In fact, I expect it.” Michael Lombardi in PROFIT CONFIDENTIAL, November 13, 2006. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.