“Considering gold bullion has gone up about 500% since 2001, how can we be so sure gold bullion in not in a bubble?” This is a common question we hear from new PROFIT CONFIDENTIAL readers.
Here are our top five reasons why we believe gold bullion prices, far from being in a bubble, have much higher to move. (Also see: Answered: Can I Still Make Money Buying Gold Now?)
- Few investors are aware of the bull market in gold bullion that started in 2001. If we were to take a survey of retail investors, our best guess is that less than five percent at this point have purchased gold mining stocks or gold producing stocks. Few investors understand how the actions of the government and the Federal Reserve are resulting in the price of gold bullion rising.
- The U.S. dollar, a fiat currency once issued by a creditor country, is now issued by a debtor country. The U.S. dollar is the reserve currency of about 70% of world central banks. As the debt of U.S. has spiraled out of control, the currency of America, the dollar, has gone from a system where it was once partially backed by gold bullion reserves to a currency that is mired in debt.
- The monetary policy of the U.S. has been to expand the money supply, create more dollars, to keep monetary policy expansive. Economics 101 dictate that the more of anything there is in supply, the less the eventual demand. The U.S. dollar is not exempt from supply/demand rules. Too many dollars in circulation? What other currency can investors run to when the U.S. dollar gets into trouble? The euro is finished, the yuan isn’t ready. Gold bullion is the only alternative.
- Inflation, in our minds, will be a huge problem for Americans in the months and years ahead. Too many dollars continue to be printed, short-term interest rates are near zero for five years, the Fed buying U.S. Treasuries…how can inflation not rise? Or perhaps this is a better question: Hasn’t the 10-year-old bull market in gold bullion been warning us about inflation? (See Economic Analysis: And Then Came Rapid Inflation.)
- Financings on the TSX, the Canadian-listed exchange, which is a hub for gold mining stocks and gold producing stocks, plunged 50% in October 2011 from October 2010. Financing for gold mining companies is far from booming. During periods of bubbles, like we saw with tech stocks in 1999, companies in that sector are out raising big money in the markets. This isn’t happening with the gold mining companies.
Michael’s Personal Notes:
Why is Wall Street abandoning Obama?
There’s no lack of critics of Wall Street for its contribution to the 2008 American credit crisis. Wall Street took the mortgages of Americans, who maybe should have never qualified for those mortgages, and resold them to unwitting investors as mortgage-backed securities.
The rest is history. When the housing market burst, the owners of those mortgage-backed securities were left holding the proverbial “bag.” Major American banks that made loans to consumers to buy homes who should have never qualified for those loans in the first place were left with bad mortgages. The shares of the big U.S. banks plummeted in 2008 and 2009; the average American Joe saw his investments dwindle in value. A homemade credit crisis crippled America’s economy.
And what did the Obama Administration do? It bailed out Wall Street and the banks. The Fed made emergency loans available to the big banks during the credit crisis. The government ended up needing to buy equity in the third largest bank in the U.S., Citigroup, Inc. (NYSE/C), to help keep it out of bankruptcy at the peak of the credit crisis. There were several big companies Wall Street took public that the government directly bailed out.
Now that President Obama is raising money for his re-election campaign, Wall Street, which the Obama Administration helped so much during the credit crisis, is abandoning him. According to the Washington-based Center for Responsive Politics, Wall Street, Obama’s biggest backer for the 2008 presidential campaign, has fallen by the wayside in respect to donations to the Obama re-election campaign.
The employees of Microsoft Corporation (NASDAQ/MSFT) are Obama’s biggest business campaign donators. The Goldman Sachs Group, Inc. (NYSE/GS), somewhat of a credit crisis catalyst company, held that number one ranking during the 2008 election. Google Inc. (NASDAQ/GOOG), Oracle Corporation (NASDAQ/ORCL), and Cisco Systems, Inc. (NASDAQ/CSCO) are all big Obama supporters. The high-tech companies are leading donations to President Obama’s 2012 re-election campaign.
Wall Street? After donating $16.0 million to Obama’s presidential campaign in 2008, Obama has received a paltry one-tenth of that from Wall Street so far for his current presidential re-election bid: only $1.6 million.
Looks like Wall Street isn’t repaying the favor and bailing out Obama.
Where the Market Stands; Where it’s Headed:
We are in a Phase II bear market. During this phase of the secular bear market that started in October of 2007, stocks move higher, rebounding off their Phase I bear market low (6,440 on the Dow Jones Industrial Average on March 2009). During a Phase II bear market, investors are lured back into stocks. That’s exactly what has been happening since March 2009; investors have been coming back to stocks.
But this phase of the bear market is getting tired and “long in the tooth.” My readers should enjoy the profits this bear market rally will bring, as Phase III of the bear market will eventually bring stock prices back to test their March 2009 lows.
What He Said:
“Why Google stock will go higher: Most investors in Google, surprisingly, are retail investors. And that’s why the stock can go higher—because only 20% of the stock is owned by institutions. If the institutions jump in and buy Google, the stock will certainly move higher.” Michael Lombardi in PROFIT CONFIDENTIAL, June 2, 2005. Michael recommended Google stock as a buy on June 2, 2005, when the stock was trading at $288.00. On November 5, 2007, when Google reached $700.00 U.S. per share, Michael advised his readers to sell their Google stock and to put the proceeds into gold-related investments. Coincidently, gold bullion was also trading at about $700.00 per ounce in November 2007. Michael’s message was to trade each $700.00 share of Google into $700.00 of gold, because he saw gold as a much better investment.