Please follow my story this morning.

Far away from North America, in Madrid, Spain, thousands of protestors are marching to protest high unemployment and poor government. They have marched for weeks.

The unemployment rate in Spain is 21%. According to The Associated Press, unemployment among those aged 16 to 29 in Spain stands at 35%. The thousands in the march are very well organized, accompanied by physiotherapists and masseurs (The Globe and Mail, 7/24/11).

Back to America…

On Thursday of this week, the U.S. may have its largest municipal bankruptcy ever in Jefferson County, Alabama. The county, with a population of 660,000, has struggled for three years under $3.0 billion of sewer bonds that have matured and that the municipality cannot repay. Creditors, led by JP Morgan Chase & Co., want their money. About 500 county employees are on unpaid leave.

The road from Madrid, Spain, to Birmingham, Alabama, is a long one. The problems in Greece, Portugal, Spain and Italy are mature and are only getting worse. How do citizens survive with 21% unemployment? 

In America, I believe our problems are only starting. Remember, the government and the Federal Reserve have done everything in their power to keep the economy going. We are starting to see stress on municipalities and states that cannot balance their books or repay their debt. 

Imagine the havoc that higher unemployment, a rapidly devaluing greenback, higher interest rates and higher inflation will play with municipalities and states? I really wouldn’t be surprised to see large, organized citizen protests become the new phenomenon in America in 2012.

Michael’s Personal Notes:

Wrong, wrong, wrong. They’ve called it all wrong.

The financial news sites this morning are reporting that gold is hitting a new record high on fears about the debt ceiling for the U.S.government not being raised. “Gold surges to record as U.S.debt impasse threatens default, AAA Rating,” is a headline that Bloomberg ran this morning (7/25/11).

In my humble opinion, gold is not rising in price because Congress will not raise the U.S.debt ceiling. It’s actually the opposite—gold is rising because the debt ceiling will be raised. And when it’s raised, the official U.S. debt will run up from its current $14.3 trillion to maybe $16.0, $17.0 or even $18.0 trillion.

That’s what gold is really worried about…spiraling national debt, which brings about a devaluation of the U.S. dollar and possibly inflation.

It’s a forgone conclusion that the U.S.debt ceiling will be raised. Politicians—both sides of the house—would not dare to have the U.S.default on its obligations.

Where the Market Stands; Where it’s Headed:

It’s more of the same for the market as far as I’m concerned. The assault toward Dow Jones 13,000 is on. The bear market’s last gasp will be bringing the Dow Jones into 13,000 territory, as it attempts to lure more investors back into stocks.

As the Dow Jones plows through 13,000, inexperienced reporters and analysts will tell us that the agreement between Obama and Congress to raise the debt ceiling is causing stocks to rise. Rubbish.

The higher the national debt, the greater the risk  for higher interest rates. We are near the end of a Phase II bear market.

The Dow Jones Industrial Average opens this last full week of the month up 9.5% for 2011.

What He Said:

“I personally expect the next couple of years to be terrible for U.S. housing sales, foreclosures and the construction market. These events will dampen the U.S economic picture significantly in the months ahead, leading to the recession I am predicting for the U.S.economy later this year.” Michael Lombardi in PROFIT CONFIDENTIAL, August 23, 2007. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.

There are very few stocks that are actually doing great in this market. If the main stock market averages go up, it’s mostly because of large-cap, dividend-paying stocks that are more heavily weighted. There is an opportunity in this kind of market, however, for momentum trading, particularly if you have a stock that’s already gone up and is trading right around its high. Because so few stocks are what you’d consider to be outperforming, larger traders are rallying around these kinds of positions due to the fact that there are so few in the marketplace at this time.

For the most part though, trading action in equities can be considered quite muted in the absence of a defined trend. The story continues to be about large-caps and will likely remain this way for the rest of the year.

Stock picking in this kind of environment is tough for new positions, especially before a new earnings season begins. That’s why there’s no rush for investors to consider new positions as far as I’m concerned. Event-driven trading will soon be upon us and speculators should look for corporate visibility that beats previous estimates. It’s unclear how much appetite the broader market has for upward price moves in stocks, but I think it’s reasonable to conclude that a lot of investors have been sitting on the sidelines during the lull between earnings seasons.

The gold and biotechnology sectors are some of the best areas in this market for risk-capital speculators. I don’t see the spot price of gold following the trend in the oil market, and biotechnology always trades on its own news (discoveries, drug approvals, etc.) regardless of sentiment. But, as we all know, there’s no wind at our backs. It’s not that kind of market at this time and there’s no catalyst for investors to rally around. That’s why earnings season can’t come soon enough.

The stock market’s already betting that the technology sector will underperform in the second quarter. A lot of investors also aren’t expecting much from large financial institutions, which still have a lot of bad debt to deal with on their books. Again, the most important index to keep an eye on is the Dow Transports. This is the single best benchmark for the stock market’s overall health. If the railroads begin to fall apart, then so will the rest of the stock market and the economy.

With the economy slowing down, anything is possible over the coming quarters. This means that we could experience another technical recession. One thing I don’t expect is runaway growth, because the fundamentals just don’t support it quite yet. The economy hasn’t corrected itself from the housing meltdown and, in my view, it can only really accelerate in a sustainable way once the excess inventory in the system is taken up and real estate prices move higher. This is why large-cap, dividend-paying stocks will be some of the best performers in the stock market. There isn’t enough economic growth for big capital gains just yet.

I hate to harp on this, but I continue to see some exhaustion on the charts and additional downside moves ahead of us, especially if the S&P 500 April low of 1,294 is not reached.

With the traditionally slower summer months ahead, I expect that trading will be flat from the already lackluster interest in stocks. My investment advice would be to be extra cautious.

Stocks have declined in six straight sessions to June 8 on a lack of any sector leadership. Financials are losing more ground on continued focus on restructuring the sector. Technology is weak, with the NASDAQ now up about one percent this year. The area that I continue to like is gold, as the August gold is holding above $1,530 and is bullish.

All four of the key indices are below their respective key 50-day moving averages (MAs)—a bearish sign. There’s some exhaustion on the charts and potentially more downside weakness.

Key chart developments include the S&P 500 trading lower, below its April low of 1,294. Failure to hold could drive the index to its 200-day MA of 1,245. The Russell 2000 is also below 800. The Russell 2000 is down about eight percent from its 2011 high, while the NASDAQ is down about seven percent. Technically, the picture looks moderately bearish in the near term on weak Relative Strength. Watch for buying support due to an oversold technical condition.

Stocks are clearly continuing to trend lower. About 56.35% of all U.S. stocks are above the 200-day MA, down from 78.89% a month ago. For the shorter-term moving averages, the monthly decline has been more significant. Only 17.80% of U.S. stocks are above their 20-day MA, down from 62.52% a month ago.

In all, the charts look ominous.

I’m nervous. The Federal Reserve is nervous. Fed Chairman Ben Bernanke said that the economy is slowing more than expected. Bernanke also failed to say anything about a third phase to the quantitative easing, even though the QE2 comes to an end in a few weeks. There is some optimism towards the second half, but there will be many hurdles to overcome, including jobs and housing.

The Beige Book indicated that four of the Federal Reserve’s 12 bank regions (New York, Philadelphia, Atlanta, and Chicago) slowed in April and May. The overall feeling from the report is some slowing of the U.S. economy, which is not unexpected.

Add in the colossal mess in Europe—in Greece—and you’ll understand my concerns.

And, while there is a desire to buy for many investors, be careful and wait until you if there is firm buying support before you jump in. We could see a sucker’s rally. It may be time to take a break.

Why don’t the markets believe him?

Yesterday, President Obama said that he would cut $4.0 trillion from annual deficits over the next 12 years. He plans to raise taxes and cut government spending.

The stock market hardly budged. The U.S. dollar and U.S. Treasuries hardly moved. You’d think all three would rally on the news of trillions to be cut from our debt.

Gold, which has been rising in price for the past 10 years as the greenback has declined in value, actually rose in price yesterday. One would think that, on hearing that the government is finally doing something about its debt nightmare, the precious metals would fall in price. The opposite happened.

So why did the markets yawn?

Maybe the markets don’t believe that the Republicans will work with Obama on his proposed $4.0 trillion in deficit cuts, or maybe they feel Obama will not be in power in two years to see them through.

But here’s the real reason we got yawns from the markets yesterday on the proposed trillions of dollars in deficit cuts:

As we all know, the U.S. debt will sit at $14.29 trillion by about May 16, 2011. The Obama Administration predicts that the government will pile on another $3.8 trillion in debt over the next five years (a number I find far too conservative). When you add the two together, we will be sitting on $18.09 trillion in debt by 2016.

We’d surely surpass $20.0 trillion to $21.0 trillion in debt by 2020—150% of GDP in a rising interest rate environment.

But those numbers don’t take into consideration interest rates rising at the pace I believe they will rise, unexpected natural catastrophes, wars, or economic deterioration as opposed to economic growth. Bottom line: the picture could get much worse; maybe downright ugly.

Economic analysis: More people are employed by government in the U.S. today than by the U.S. manufacturing and U.S. construction industry combined. Take a trillion from high-income earners and they will spend less, hurting the economy. Cut expenses by trillions and you will get more unemployment, hurting the economy. It’s one of those “damned if you, damned if don’t” situations, and the markets know it all too well.

Michael’s Personal Notes:

I couldn’t believe Obama’s words yesterday. They are a mimic of what we have been saying here in PROFIT CONFIDENTIAL for two years. In announcing the proposed $4.0 trillion in deficit cuts, the President said:

“If our creditors start worrying that we may be unable to pay back our debts, it could drive up interest rates for everyone who borrows money, making it harder for business to expand and hire.” Obama gets it now, but unfortunately it’s too late.

The amount of government debt piled on by government, the amount of easy money made available to Wall Street and big banks by the Fed, the unprecedented buying of U.S. Treasuries by the Fed—all super inflationary. That’s why gold continues to rally in price and the greenback continues to fall in value.

Where the Market Stands; Where it’s Headed:

The best way to describe the bear market rally: getting tired.

Back in December of 2010, after being bullish on stocks since March of 2009, I changed my tone to say that the bear market rally would continue to take stock prices higher in the immediate term, but, in the short term, stocks were turning bearish. That’s exactly how it’s playing out.

To me, “short term” is six to 12 months. “Immediate” is now. We’ve had a great continued rally in stocks right through to today. If we get a final blow off from stocks, the most I expect is five percent to 10% on the upside from here.

What He Said:

“‘Home sales down 8.4%, could be the bottom,’ read the headline in last Friday’s USA Today. What do they know that I don’t? They know what realtors and their associations tell them and that’s about it. Unfortunately, the real estate news is predominately written by reporters—not real estate investors with years of experience to share. The hard facts about the real estate market in the U.S. are truly scary. How can the U.S. economy escape the hard landing in U.S. home prices? As we’ll soon find out, it simply can’t!” Michael Lombardi in PROFIT CONFIDENTIAL, January 31, 2007. While the popular media was predicting a bottoming of the real estate market in 2007, Michael was preparing his readers for the worst of times ahead.

They moved quickly…

While I’ve been talking (maybe screaming) about getting out of U.S. government bonds because I think interest rates are headed higher, the folks at Pimco, who run the world’s biggest bond fund, took real action.

Pacific Investment Management Co. (“Pimco” for short) eliminated all government-related debt from its flagship $237-billion Total Return Fund in February.

In a posting on the company’s web site, Pimco says that the yield on U.S. Treasuries is too low to maintain demand for U.S. debt. The people at Pimco simply believe that interest rates are headed higher, thus it’s not a good time to own government bonds. Bill Gross, head of Pimco, recently wrote in a research report posted on Pimco’s web site that inflation is a more serious threat than most realize.

And that’s really what I’ve been writing about since last summer: Inflation will rise with the unprecedented amount of liquidity in the financial system. Interest rates will rise in advance of inflation. The proof is in the pudding: The bellwether 10-year U.S. Treasury has risen from a yield of 2.4% in October 2010 to a yield of 3.4% today. Even the Japanese crisis failed to rally U.S. government bonds (see more on that below).

Hence, when I say I’m short- to long-term bearish on stocks, with a 30-year down cycle in interest rates now complete and interest rates starting to rise, with gold confirming that inflation will be a problem in the months and years ahead, with a government that continuously fails to exercise fiscal responsibility, a perfect scene is being set for phase three of the bear market.

Michael’s Personal Notes:

It’s being called the “Japan Trigger.”

The worst-kept secret in the financial world is the devaluation of the U.S. dollar. What I find most interesting is that, in spite of devastating world economic events, we are failing to see any significant rally in the greenback sustain itself. In the aftermath of a huge natural disaster such as Japan is currently experiencing, the U.S. dollar is failing to rally. Just how sick is the greenback?

My colleague and expert stock market technical analyst Anthony Jasansky, P. Eng., said it best in an e-mail to me over the weekend:

“Michael, in the short term, with the U.S dollar being so oversold, it should be rallying. Most analysts thought Japan’s disaster would be the trigger. The same goes for the U.S. Treasuries. However, if the U.S dollar and U.S. Treasuries cannot rally following the latest world catastrophe, which would normally be favorable to the greenback, I would view it as another bearish sign. The Euro and Middle East crises have failed to give the U.S. dollar a lift. Now the Japanese disaster, so far, is failing to lift the greenback and U.S. Treasuries. The U.S. dollar could be in dire straights.

Our Hearts Pour Out:

With great sadness, we’ve all witnessed the devastation to families in Japan. Thousands lost their lives to the earthquake and its after-effects. This morning, millions in Japan have no water or electricity.

Here at Lombardi, we’ve appointed a committee to find the most effective way to contribute to those in most need in Japan. We’ve decided that 20% of all our profits from Lombardi Publishing operations this month will be donated to Japan earthquake victim relief causes.

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average opens today up four percent for 2011. There are markets that trade down sharply on bad news and markets that trade up sharply on good news. By monitoring the reaction of stocks to events in the economy and world marketplace, astute investors gauge the strength of a market’s trend.

Frankly, I’m surprised to see the resiliency of this stock market. No matter how bad the news (Japan’s earthquake disaster, Libya’s threat to the oil market, signs of world inflation returning), this market just shrugs off the bad news and holds its own.

The bear market rally in stocks, born two years ago this month, remains intact.

What He Said:

“Investors have been put into an unfair corner. Those that invested in stocks because they got caught in the tech boom (1999) have seen their investments gone. Now, those that have leveraged heavily to play the real estate game, because it is the place to be (2005), could see the same fate as the stock market investors. Thanks again, Mr. Greenspan.” Michael Lombardi in PROFIT CONFIDENTIAL, May 27, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.

There’s a real competition among industrialized countries going on. And it’s not about who has the fastest growing country or who is exporting more. The game is called currency devaluation. Every major industrial country wants its currency lower so it can export more than it imports. It’s all about cheap currency, cheap money.

And who’s winning the currency war? America, of course. Below, is a list of industrialized countries and their respective central bank rates:

Next to Japan (a country that has been dealing with deflation for almost 20 years), the U.S. has the lowest central bank rate. Over the past few weeks in these pages, I have called it the “quiet devaluation” of the greenback.

Let’s say I’m a businessperson from any of the above countries except Japan. I want an apartment in New York. The further the U.S. dollar dives in value against the currency of my country, the cheaper that apartment gets for me. Same concept holds for stocks…the more the U.S. dollar falls in value, the more attractive those well-known American stocks look. And let’s not forget travel. A lower greenback brings tourists back to the U.S.

For the U.S., luring investors in to buy real estate and stocks does what the Fed desperately needs. It pushes prices higher, alleviating deflation concerns. As Americans, we want our real estate moving up; we want our stocks rising in price. But the problem with all this? It is just temporary fix.

The U.S. has gone from a manufacturing economy to a service economy. Playing with our currency to make American goods, services, real estate, stocks and other investments look attractive to foreigners is a long-term mistake. What I call short-term gain for long-term pain. Do we really want a country that falls more and more into foreign ownership?

What I didn’t include in my list above was China. The one-year lending rate is 6.06% in China. A one-year deposit rate (similar to the American one-year CD or the Canadian GIC), pays three percent. Interest rates in China have been rising to cool the economy—the total opposite of what is happening in the United States. This illustrates where the strength is in economic power.

So what is the point of all this? Simple. The significance of the devaluation of the U.S. dollar in the “American Plan” is being underestimated. The cheaper our dollar goes, the higher the stock market rises. But it is a short-term fix. If our dollar goes too low—and it’s just on the cuff of breaking to a record low on the downside—the less our debt obligations become to the foreigners. Politicians need to stop taking the short-term attitude they are accustomed to defaulting to. But long-term attitudes do not buy votes.

Gold will obviously benefit from the devaluation of the greenback, and that’s why the metal has moved up from $300.00 to $1,400 U.S. an ounce and will continue to rise. The stock market loves a cheaper U.S. dollar, because that means foreign money continues to pour into stocks, not out of stocks. Hence, why I have been saying in the immediate term this bear market rally will continue to rise. That’s the best stock advice I can give.

Michael’s Personal Notes:

One of the most common questions I get e-mailed is, “How high do bond yields need to rise before the stock market is negatively affected?”

Well, we’ve all known for years that the bond market and the stock market have moved in the same direction. As interest rates fell over the past 30 years, so did bond yields, pushing the bond and stock markets higher. The bond market has been a terrible place for investors to be in since the fall of last year, as the 10-year U.S. Treasury yield rose from 2.4% in October of 2010 to about 3.4% today.

So, if the bond market is falling on rising interest rates, when do rising long-term rates start to affect the stock market? In my opinion, when long-term interest rates hit four percent, the stock market starts to suffer. If the bellwether 10-year U.S. Treasury went to a yield of six percent (which is what I believe we will see in the next couple of years), it would be a disaster for the stock market.

Bottom line: bond yields of four percent to six percent put real downward pressure on the stock market. Unfortunately, that’s where we are headed with this new interest rate cycle.

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average opens this last day of the week up 4.2% for 2011. I don’t see the Libya situation as something for the stock market to get terribly worried about. Getting Qaddafi out of Libya is the best thing that can happen for that country and the world. I see oil prices spiking because oil producers push crude prices up on any opportunity to make more money. But I do not see gold rallying on the Libya crisis, which tells me the situation is already a forgone conclusion.

I’m still worried about America’s serious domestic problems—rising long-term interest rates, out-of-control government spending, the quiet devaluation of the U.S. dollar. Hence, short- to long-term, I’m bearish. But in the immediate term, I believe the stock market rally that started two years ago next month has more life left in it.

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 in 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.

My view on the state of the stock market is that the S&P 500 Index will hit 1,500 this year. That’s about a 15% gain from the current level and would represent a gain of about 20% for the entire year. The stock market’s due for a break, but my economic analysis shows that investor sentiment is strong enough to carry the market higher throughout the year. The earnings are there. The growth is there. And we shouldn’t forget that stock prices tend to lead the economy.

My stock market advice now is not to take too much action. While the market is not overvalued by any means, it is fairly valued and a good portion of the broader market is trading right at the 52-week high. So, if you like to buy low and sell high like I do, this makes that investment strategy more difficult. You have to have a lot of patience and a lot of self control to wait for only the most attractive opportunities to bet on.

One area of the stock market that continues to be the most attractive for speculators in micro-cap stocks is mining. I keep harping on the subject. There are great opportunities in junior mining stocks right now, even with the spot price of gold and silver trading at record highs. Like I’ve written before, the key drivers of mining shares are new discoveries and the underlying spot price of the precious metal. It’s a tough business to be a speculator in this industry, but, then again, it isn’t easy making money in other sectors either.

When you’re in a rising commodity price cycle, not surprisingly it pays to allocate more of your portfolio to this area. A lot of individual investors have traditionally focused on the technology sector to find growth, but this isn’t necessary in the current environment. With gold and silver prices trading where they are now, even the fastest growing micro-cap technology company can’t generate the same kind of earnings growth compared to a mining company with increasing production. The business model is just that good in the resource sector right now.

History suggests that commodity price cycles always end, so, in a sense, speculators have to milk the cow while it lasts. But, I find it difficult to imagine a big retreat in precious metal prices in the near and medium terms. Developed economies are still in recovery mode and, with the huge increase in global money supply, the argument against inflation is pretty thin.

Even oil and gas stocks are seeing a marked improvement in their trading action, and natural gas is still in the doldrums. With declining production on a global basis, I also find it difficult to imagine WTI oil any lower than $85.00 a barrel.

The action in the broader market is stronger than most people think. Investors want to be buyers of stocks because there is no other place to invest with the same kind of near-term upside. To me, 1,500 on the S&P 500 seems very reasonable.

Gold has edged higher in each of the past nine years, and it is set to close off its decade-long bull market. Buying has been driven by a combination of speculative trading in physical gold, gold ETFs, and buying as a safe-haven investment.

Lombardi Financial first turned bullish in 2002-2003 and has remained so ever since. Although at times the bullion has had a rough ride, metal prices have turned around significantly after first breaking above $400.00. I believe the spot price of gold can easily creep up to $1,500 in the near term; as early as in the first quarter of 2011.

There are some bullish pundits who are even suggesting a $2,000 longer-term target for gold based on rising demand out of China and India.

For starters, world governments have committed trillions of dollars to various bailout packages. Those bailouts will have also left a debt trail of gigantic proportions.

In the U.S. only, about $2.0 trillion of the bailout money has been procured through auctioning government debt instruments. In turn, the budget deficit is going to be enormous and, as a result, the U.S. dollar is continuing to be weak in 2010. This could continue into 2011, as the government’s financial situation moves deeper into the red. Note that, the lower the dollar goes, the better it is for gold prices.

In addition, the Federal Reserve has pumped hundreds of millions of dollars into the U.S. financial sector in an effort to create liquidity, encourage lending, and entice consumers to start spending again. It sure is taking time, but all this money is bound to reverse the effects of deflation and result in inflation, which has always been the best thing there is for gold prices.

The February 2011 Gold on the COMEX recently broke to a record high of $1,432.50, well above both its 50-day moving average (MA) of $1,3650 and 200-day MA of $1,243. We are seeing a bullish golden cross on the chart, with the 50-day MA above the 200-day MA.

The near-term technical view is moderately bullish, but the Relative Strength has been weakening, which has resulted in the failure to hold above $1,400.

The simple truth is that gold is a trustworthy and realistic investment instrument that should be in every investor’s portfolio. Gold’s traditional role as a safe haven has made it the underdog in the world markets. It is an investment that people turn to only when stock or bond markets aren’t performing well, or when monetary policies are running amok. Yet there is a sense that gold may be increasingly seen as a credible and realistic investment vehicle and not just as a safe-haven instrument for parking capital.

What’s with utility stocks and why should investors care?

Watching the price action of the utility stocks is very important to investors, as the utility stocks are leading indicators of interest rates. By watching the price action of these stocks, we can relate their price direction to where we expect interest rates to go.

Interest rates are of fundamental importance to all kinds of investors, from active stock market investors to retirees looking for income, to businesses that need to borrow money for their businesses, to even currency traders. The direction of interest rates is of utmost importance to investment decision-making.

After peaking in December of 2007 at 210, the Dow Jones Utilities Index sits at only 150 today—still down 29% from its high. While other stock sectors, like retail, are close to breaking above their 2007 price highs, the utility stocks are struggling. Why, and what does this mean for interest rates?

Before we get to the “why” we need to look at where the utility stocks have been. As a big believer in stocks being a leading indicator, the run-up in the price of utility stocks in December of 2007 foresaw the record-low interest rates we would experience in 2008 and 2009.

While the official Federal Funds Rate remains between 0.25% and zero, the utility stocks are not rising because, in my opinion, they now foresee interest rates rising in the near future. As you know, if interest rates rise, the price of utility stocks declines, as their yields become less attractive when interest rates rise. Stocks in general decline as interest rates rise.

If we look at all the pieces of the puzzle—record-high national debt that the U.S. government needs to continue financing via the issuance of bonds; pressure on the U.S. dollar to decline in the face of rising national debt; pressure on domestic inflation to rise as the Fed’s too-easy money policy goes on for too long—they all point to higher interest rates ahead. The price action of the utility stocks this year confirms my concern over higher interest rates in 2011.

Michael’s Personal Notes:

A two-page spread appeared this weekend in Toronto’s Globe and Mail with the heading, “The Case Against Gold.” The article points out that demand for jewelry is on the decline and the supply of gold is rising, and compares the “bubble” in gold bullion to the previous bubbles in high-tech stocks and real estate.

Everyone’s entitled to their opinion. But I disagree with what the writer of, “The Case Against Gold,” had to say for several important reasons:

If we take inflation into account, the price of gold has yet to break to a new price high. Demand for jewelry is obviously falling, as consumers cannot keep up with the rising price of the gold used in jewelry. Bubbles, just like the high-tech bubble of 1997 to 1999 or the U.S. real estate bubble of 2003-2006, can go much higher than common sense could ever expect.

Finally, gold has always been a safety net and an inflation hedge. Investors and consumers do not know the long-term effects that rising record U.S. debt will have on the greenback. Similarly, we do not know the long-term effects that the unprecedented easy money policies of the Fed will have on inflation. These are the fears that will drive gold.

Where the Market Stands; Where it is Headed:

The Dow Jones Industrial Average opens this morning 41 points below its 52-week trading high. I believe the chances favor a breakout by the market to a new high, as opposed to downside action. Both the S&P 500 and the NASDAQ broke to new 52-week highs last week…I don’t see the Dow Jones far behind in terms of a new high. If I look back at recent trends, the Dow Jones has lagged behind both the S&P 500 and the NASDAQ in terms of market direction.

Total return (growth and dividends) this year for the stock market will be in excess of 10%—a better performance than bonds by far, but one only half the return investors would have gotten by being invested in gold bullion.

The bear market rally in stocks that started in March of 2009 continues.

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 two or three 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 guessed.

It’s increasingly likely that stock prices will keep their positive bias going into 2011. That is, if there isn’t a major shock to the system like a new war or sovereign debt default. At the end of the day, the earnings picture, along with accommodative monetary policy, is supportive of rising stock prices. Goldman Sachs just predicted a solid year for stocks next year and the firm favors technology, cyclicals and commodities. They forecast that gold prices will keep ticking higher, but the price rise will slow in 2012, as the Fed begins to raise interest rates.

I’m still worried about the sovereign debt issue in Europe. This kind of risk can linger for a long time and come out of nowhere to kill a bull market. Equity investors have been patient for a number of years now and we’re all looking for a new cycle to rally around. The stock market goes up in anticipation of the future, so don’t be surprised if the broader market rallies even in the face of weak employment and housing numbers.

Practically speaking, a great way for an investor to play a 2011 rising stock price scenario would be to just invest in the index and then trade individual stocks as the opportunities arise. While history shows that small-caps tend to perform best coming out of a recession, I’d have a tendency to stick with large, dividend-paying stocks if I was a new buyer. No matter what the stock market does over the coming quarters, investment risk remains high.

I usually don’t like the buy high and try to sell higher investment strategy, but I think investors can do this with resources. If the Federal Reserve is going to entertain more monetary stimulus, then the outlook for the dollar remains weak. Real assets like oil and gold should continue to move higher in the current environment and there’s no doubt they are attractive momentum plays. Naturally, any equity portfolio should already have some exposure to these commodities.

Last quarter, corporations said that they expected their businesses to get better in the fourth quarter and going into 2011. Many cyclical companies reported that they were actually able to increase their selling prices without affecting demand for their products. This is always a good sign.

One key sector to keep an eye on is in transportation. In fact, if you want to know where the broader market is going, all you have to do is follow the railroads. Right now, most of these stocks are hitting new 52-week highs and several are hitting new all-time record highs. I suppose, this is as good a signal as any.

You would have to be living in a cave not to notice the bull market in commodities. As with any bull market, the logical question is whether it is sustainable or not and, if it is sustainable, what is its lifespan? Some of the top economists in North America are comparing the latest market stampede into commodities with people lost in a desert seeing a mirage and are warning of a rude awakening in the coming months. So, which is it: a sustainable secular bull market or a mirage of precious water in the desert for thirsty men?

Well, raw numbers, without a doubt, shout “bull,” loud and clear. Investor gains are keeping them returning for more. Spot gold, for example, touched, albeit briefly, an all-time high of $1,420.90 per ounce last week before dropping back under its new resistance level of $1,400. At the same time, copper is attacking its record high as well, while silver has hit a 30-year high before retreating about three percent on the same day. As for oil, it is hovering around its two-year high, spot trading within a narrow range between $86.00 and $88.00 per barrel.

At face value, commodities, it seems, are soaring, and commodity-based economies, like those of Australia and Canada, are prospering. Sure, the world would be a better place if there were not a “but” coming up every time something good is happening, but (pun intended), there is one. What those fearful of the commodity bull are saying is not that commodity fundamentals are inherently stronger than those of other asset classes, but that their resurgence has more to do with the U.S. monetary policy than with factors such as supply and demand imbalances.

QE2 is what has everyone’s knickers in a knot as of late. The U.S. Federal Reserve is widely expected to unleash another round of quantitative easing (read, “buy more treasuries and print more money into the financial systems”), the purpose of which is to drive the greenback into the ground to make the U.S. exports more attractive in the international markets. In addition to the fact that, globally, commodities are priced in the U.S. dollar, there is also the perception that the financial market risk has eased somewhat. As a result, some economists are attributing these two factors as the main drivers of higher commodity prices at the moment, but are doubtful this will provide enough fuel for the current commodity rallies to continue for much longer.

This is fine reasoning, I agree. But it is also such a small part of the bigger picture that does not fundamentally skew the short- and medium-term prospects for commodities. What is omitted from this reasoning is the potential impact that excess money supply may end up creating—higher price levels or inflation. Additionally, the global economy is not recovering either as quickly as anticipated or as radically as many had hoped it would. The global economic output for 2011 is expected to be a very modest four percent, while in North America an utmost unimpressive 2.5%. As for Europe, let’s just say if they pull off 1.5%, they’ll be lucky.

The way I see it, the stampede into commodities is investors’ response to all this volatility and economic uncertainty. Investors no longer trust policy decisions. They cannot rely on the G-20 to find solutions that will benefit the greater good of the planet, not just their respective regions. They fear the decoupling of Wall Street from the rest of the economy, as well as newly coined terms like “currency wars,” or “haves and have not economies.” Nothing seems solid and reliable anymore. So, when they buy gold, they see something tangible in their hands, the value of which is not likely to evaporate like the value of paper money.

Those are the layers that are impacting commodity prices as of late and I don’t see them go away anytime soon. In my view, the mirage here is not soaring commodity prices; rather, the mirage is the global economic recovery. And as long as there is a need to seek safety in these tumultuous times, commodity prices will keep soaring.

Commodities are hot; in fact, “sizzling” is probably a more realistic indication of the momentum in energy and metals. So expect to pay more for gas at the pumps and jewelry. Perfect—just in time for the holiday shopping season.

Take a look at gold. The December gold futures are hot and broke above a recent chart top of $1,388.10, followed by $1,400 to $1,422 as of Tuesday morning trading. There appears to be no stopping the upward push by gold on the chart, albeit is heavily overbought.

I had mentioned a possible break of $1,400 in the near term, but, to my surprise, it came earlier than I thought due to the heightened market momentum. The strong break at $1,388 is critical, as it help us avoid a bearish double top for now. The near-term picture is bullish and the Relative Strength is above average, so there could be more gains in the near term. Watch to see if $1,400 holds and a move towards $1,500 occurs prior to the New Year.

December Silver has been following gold higher, with the continuous silver futures contract at a 30-year high, above $28.00 an ounce.

Yet I’m not convinced that the buying is or the current price levels of gold and silver are truly justified. Debt and deficit issues in some of the European countries, including Greece, Spain, Portugal, and Ireland, are worrisome and create some issues in the Eurozone. The European Union had adopted a massive austerity program aimed at helping keep the economies in Europe afloat and allowing growth to come back. This adds risk and drives buying to gold.

My view is that gold and silver are not correctly priced in the market. The reality is that part of the gains has clearly been driven by heightened market speculation by traders of futures and Exchange Traded Funds (ETF) specializing in gold.

Just like equities where speculative trading drives stocks up to unrealistic levels, we are seeing a similar situation arise in commodities, especially the precious metals. This is not to say that gold and silver will not be heading higher, as they likely will based on the trend. The concern is the potential of a pullback given the rapid rise of gold and silver.

If you are trading gold and silver ETFS, you can ride the momentum, but be careful, as shorts are increasingly coming into play. There are many momentum traders now, but if they exit, prices will likely fall. For now, ride the momentum.

If you are playing options, you can trade a straddle strategy that allows you to make money on any key move up or down. Take a look at the SPDR Gold Trust (NYSE/GLD); there are numerous option strike prices and expiries available to initiate a straddle strategy.

It may have been a global recession when it started, but it’s certainly not a global recovery, especially for the U.S.

While the Federal Reserve tinkers with the second phase of what it calls “quantitative easing” (basically, an indirect way to increase the supply of money in the system when all else has failed), the ramifications of which we will feel for months or years, other countries are raising interest rates to slow growth and fight inflation.

Australia, Canada and India have all increased their interest rates over the past several months. Why?

There are several reasons why interest rates have risen in these three countries. Firstly, the central banks are moving rates higher to get away from “emergency” low levels. Secondly, they want to cool economic growth. Thirdly, they are concerned about inflation, especially in India where consumer prices are rising at the second fastest rate amongst the G-20 countries.

But for America and Japan, it’s a very different story. They are not enjoying the economic rebound of countries like Australia, Canada and India. At the same time, the U.S. government has not imposed any austerity measures (like France and England did) to reduce government spending.

Hence, how can the U.S. dollar not be damned? How can gold not rise?

You have major developed countries raising interest rates. You have the U.S. in such a fragile state, where higher domestic interest rates are sure to cause the dreaded double-dip…where politicians have yet to announce any major cuts in spending to bring the $1.4-trillion annual deficit under control…where the central bank is trying every trick in the book to expand the money supply.

If you were a foreign investor, where would you put your money? In a country with rising interest rates and declining national debt or in a country where the economy is so pathetic that rates cannot rise and government cannot help but spend over $100 billion more a month than it takes in?

(In the longer term, the U.S. will have to unwillingly raise interest rates to make U.S. denominated bonds attractive; otherwise foreigners will no longer finance our debt.)

The 10-year bull market in gold is telling us that the U.S. will be dethroned as the reserve currency of the world.

At the same time, the bull market in gold is also telling us that the new reserve currency of the 21st century will not be fiat currency. No, not the Canadian dollar, not the Australian dollar or the Indian rupee (although they will continue to rise in price against the U.S. dollar)—none of these will cut it as a reserve currency (I do reserve judgment on the yuan).

But only old-fashioned gold, the yellow metal that was first accepted in coin format in 600 B.C., a currency that can only be mined with a man’s bare hands, a currency without any debt behind it, can be the real reserve currency of the world.

Michael’s Personal Notes:

Two news stories hit the wire last night that I want to comment on…

General Growth Properties Inc. has exited from the biggest real estate bankruptcy in U.S. history and split itself into two companies. General Growth, the second-large U.S. mall owner, filed for bankruptcy back in April 2009, when it was saddled with $27.0 billion in debt that it could not refinance.

In my opinion, there is more blood that will flow from the real estate bust. There will be more big-company casualties and home foreclosures have still to reach their peak. But, at some point, maybe one, two or even three years down the road, real estate stocks will become great buys. I’m obviously waiting anxiously for that time. The Dow Jones U.S. Home Construction Index is still down 80% from its 2006 peak.

While General Motors Co. has hit the road trying to round up investor interest in its IPO, all the major car companies are experiencing stronger than expected customer demand. This has propelled recent quarterly earnings. However, I believe the “easy money” from the auto stocks rebound has already been made. The Dow Jones U.S. Automobile Index is only 20% away from its 2006 high. A new softening in consumer demand, a “bump on the road” as they say, will whack the auto stocks back down. I’m staying away.

Where the Market Stands, Where it’s Headed:

The stock market has gone nowhere the past two days. I see some investors taking profits from the big 14% run-up stocks have taken since late August. But, frankly, I’m surprised that we are not seeing more profit-taking and lower stock prices, the lack of which I see as a big positive for the market.

The Dow Jones Industrial Average opens this morning up 8.8% for 2010. The bear market rally that started in March 2009 is alive and well.

What He Said:

“There is no mixed signal about this: Foreclosures in the U.S. will continue to rise, the real estate market will get weaker, and the U.S. economy will get weaker. Smart investors should seriously consider unloading their stocks of consumer-products companies that produce nonessential goods.” Michael Lombardi in PROFIT CONFIDENTIAL, March 12, 2007. According to the Dow Jones Retail Index, retail stocks fell 42% from the spring of 2007 through November 2008.

The S&P 500 Index broke the 1,200 level and it’s significant in terms of the rally that began just at the end of August. It was only a few short months ago that investor sentiment was in terrible shape and no good news could move share prices higher. We’ll see how far stock prices can keep rallying. The market is due for a correction, but it seems likely that the near-term action will continue to be higher. Investors are happy to be buying stocks in this market.

It’s also increasingly likely that gold will hit $1,500 by the end of the year; an accomplishment that might happen solely due to a weaker dollar. The way the action is now in commodities and equities, being fully invested is rewarding.

The global marketplace likes gold, because U.S. Treasuries are offering less attractive yields due to Fed action. It’s the right time and the right fundamentals for gold to keep rallying. While there’s no sure thing in capital market, the probabilities of further gold price appreciation are high.

If we start to get a meaningful turnaround in the employment situation, then the current stock market rally will have some real legs. The other big economic quotient is the state of the housing market, but home prices don’t need to accelerate for stock prices to move higher; they only need to stabilize.

The other big “if” is the inflation situation. Consumer prices for a number of goods are going up now. Consumer price inflation will only serve to create a more difficult situation for individuals, because incomes are not going up to compensate for the higher cost of raw materials. We could very soon get into a circumstance where commodity and stock prices rally higher, while consumers become less wealthy due to the higher cost of staple goods. It’s a situation that could cause a lot of pain for consumers and create a lot of wealth for investors.

Right now, the economic data do not support the current trading action in stocks in my view. The fundamental economic situation is currently being triumphed over by the monetary policy situation. This isn’t sustainable and, unless the numbers for employment, retail sales, incomes, etc. improve, then the equity market is setting itself up for big disappointment.

The World Bank just raised its 2010 growth outlook for China’s economy to 10% from 9.5%. In 2011, the Washington-based institution is predicting that China’s economic growth will slow to 8.7%, but inflation will be kept under control.

Chinese equities have been experiencing the same equity rally that’s occurred in U.S. equities over the last couple of months, and I think there’s a solid foundation for a new bull market in Asia. The World Bank is calling on China to do more to stimulate domestic consumption, so that it can rely less on global exports for growth. This would also go a long way to begin easing China’s large trade surplus with the rest of the world, which is becoming a thorny issue for the major reserve currency countries.

I’d be a buyer of Chinese equities right now. Readers know that I like smaller-cap, U.S.-listed Chinese equities due to their attractive valuation at this time. But, I’d also be a buyer of a large-cap Chinese fund or ETF as a way of expressing a bullish view on Asia’s economic growth.

In a world that’s desperate for growth, global investors are increasingly looking at Asian economies that are outperforming at this time. In China’s case, the systemic wealth creation among urbanites is fostering a new era of personal consumption that’s changing the kind of opportunities available to investors. No longer is the big growth in industries related to plants and equipment. Selling jewelry to consumers is now a better proposition for a businessperson or an investor.

The prices of gold, silver, copper and other precious metals are being positively impacted by China’s economic growth, not just a weakening U.S. dollar. Really, if you only wanted to own one asset that was a play on all of China’s positive economic fundamentals, you might as well just buy gold.

We’re at a point now where most Western economies are only expected to generate moderate to lackluster economic growth over the next several years. China and India are the world’s only two big countries that are keeping things afloat for a lot of international corporations.

I’d be a buyer of Chinese equities right now. For individual positions, I’d stick to the speculative end of the market. For large-caps, some sort of basket makes sense. Equity markets around the world have been going up lately, because there’s very little in returns available from other capital markets. There’s nowhere else for investors to put their money with the expectation of a decent return. Within the equity landscape itself, China’s equity market is ripe for a move

Three important points on gold this morning:

This is not the time to trade gold.

As we move from the second phase to the third phase of the gold bull market, the metal is having $20.00 to $30.00 per ounce daily moves. These types of gyrations make trading the metal almost impossible. As I have been saying since 2002, take a position in the metal, buy more on big price dips, and just sit tight.

The non-believers are slowly jumping on the bandwagon.

Ask investors just a year or two ago about gold and they had no idea it was in a bull market. Today, we have more financial analysts getting on the gold bandwagon than at any time since the gold bull market started…and that’s getting me nervous about a price correction.

Last week, a report from RBC Capital Markets said that it expects gold to reach $3,800 U.S. per ounce in three years. I’d prefer to see this kind of exposure well into phase three of a bull market, not at the end of phase two.

(For new readers: In a bull market, phase one is when the very smart money gets into an investment because they see an investment undervalued [think gold 2002-2006]. Phase two is when other prudent investors get in [think gold 2007-?]. Phase three is when the rest of the investing public and the speculators get into a bull marker looking for quick profits. We have yet to enter phase three in this gold bull market.)

Follow the bellwether stock.

The granddaddy of gold stocks, Newmont Mining (NYSE/NEM), reported yesterday that it made 537 million dollars in the third quarter (up 38% from the same quarter last year) on sales of $2.6 billion. Newmont says that its overall cost to mine gold is about $500.00 an ounce. The higher gold prices go, the more money this baby makes.

The price of Newmont stock on the NYSE continues to move to record highs.

Michael’s Personal Notes:

Growing up in my parent’s house as a child, if there was one thing my mother taught us, it was that if you don’t understand something, don’t fake it.

And, in all honesty, I can’t figure out what is going on in Washington.

I heard President Obama’s White House news conference yesterday. As CNN Breaking News put it in a news release, “Midterm elections confirm Americans are deeply frustrated with pace of economic recovery, President Obama says, ‘No kidding.’”

So Obama is saying he wants to do more for small business. He’s finally getting it that small business in America make up most of the employment in this country and they are ones that need to be helped.

Here’s what I don’t get: it took the Democrats losing control of Congress to get the message that voters don’t like excess government spending and non-focus on small business?

A Bloomberg Global Poll back in September found that 77% of investors say Obama is too anti-business. If business fears the current Administration, how will they ever loosen their purse strings and spend the trillions in cash they’ve accumulated?

Where the Market Stands, Where It’s Headed:

The Dow Jones Industrial Average opens this morning up 7.6% for 2010.

The bellwether Dow Jones Industrials is only 42.88 points away from breaking to a new 52-week high. I mentioned this because of the technical importance behind it. If the Dow Jones breaks to a new 52-week high (as I predicted it would a few issues ago), the “head and shoulders” pattern that was established this past May will come into question.

While the majority of stock market advisors (especially the old-timers) have been negative on stocks for the majority of 2010, I have remained bullish. I’m sticking with what I believe: corporate profits are better than expected, monetary policy cannot possibly be more accommodative than at present, there are not many investment alternatives to stocks.

I’m looking for the bear market rally that started in March of 2009 to keep moving higher.

What He Said:

“Home sales down 8.4%, could be the bottom,” read the headline in last Friday’s USA Today. What do they know that I don’t? They know what realtors and their associations tell them and that’s about it. Unfortunately, the real estate news is predominately written by reporters—not real estate investors with years of experience to share. The hard facts about the real estate market in the U.S. are truly scary. How can the U.S. economy escape the hard landing in U.S. home prices? As we’ll soon find out, it simply can’t!” Michael Lombardi in PROFIT CONFIDENTIAL, January 31, 2007. While the popular media were predicting a bottoming of the real estate market in 2007, Michael was preparing his readers for the worst of times ahead.

In recent trading sessions, gold has kept up its steady upward pace, while silver rose to a 30-year high and palladium hit a nine-year high on Monday this week. The driving forces behind precious metals’ performances are simple to explain—the dollar is sinking and the demand for alternative investments (to money, mind you) is surging. As evidenced by the U.S. Dollar Index, which is a six-currency yardstick of the dollar’s strength in international markets, the Index has dipped further on a widely expected decision by the Federal Reserve to unleash “QE2,” another neat abbreviation for the second round of quantitative easing.

The main goal behind QE2 is maintaining interest rates that are low in order to incite organic growth. But how we are supposed to have organic growth at the expense of the world’s reserve currency remains a mystery. In recent trading sessions, gold responded to this conundrum by having both its futures and spot prices trading strongly above the old resistance level of $1,300 per ounce.

As the dollar weakness continues, so does the dip-buying. The latter is triggering surges in demand for precious metals, as investors, both large and small, continue to focus on protecting whatever wealth they have left after the crash of 2008 and the recession of 2009. So far this year, precious metals have posted significant gains due to most central banks around the world insisting on low costs of borrowing, so that consumer spending should receive the boost it has needed.

To illustrate, for the nine months of 2010, gold has gained 24%, while silver has advanced 48% and palladium even more, surging 60%, compared to their 2009 year-end levels. In addition, precious metals have outperformed global equities, treasuries and most base metals. As a by-product, exchange-traded funds where precious metals have been the underlying assets have also seen significant surges in investment.

Perhaps these statistics collected by Bloomberg will help in putting things into perspective. For 2009, the global aluminum industry had generated revenues of $50.2 billion, which represented a compounded annual growth rate (CAGR) of only 2.1% over the period from 2005 to 2009. In addition, the global base metals market’s aggregate revenues for 2009 were $172.5 billion, generating a CAGR of 5.1% for the same period from 2005 to 2009. Furthermore, the global material sector had total revenues of $6.87 trillion in 2009, which represents the same growth rate of 7.1% compounded over the same period. And, the global coal and consumable fuels market recorded total revenues of $367 billion in 2009, which represents a CAGR of 10.3% for the period from 2005 to 2009.

As for gold, the global gold market recorded total revenues of $73.5 billion during 2009, which represents a CAGR of 20.1% for the period from 2005 to 2009. And, although gold may be trailing behind silver and palladium so far in 2010, note that the global precious metals and minerals market, which excludes gold, has generated total revenues of $32.3 billion in 2009, representing a CAGR of a modest 4.4% over the period from 2005 to 2009.

Whichever way you look at it, the statistics don’t lie. Investors see gold as a safe haven, as a viable alternative to money and as a way of dealing with global volatilities that have certainly changed the game for many since the crash of 2008. True, gold will have short-term ups and downs; but, in the long term, the threat of inflation and more volatility is almost palpable and likely to keep the secular bull market in gold going for the foreseeable future.

Since early 2009, gold is up 45%, currently hovering around $1,300 an ounce. Caught in the brushfire, towns in which gold mining companies, large or small, have made their home are displaying the classical symptoms of a boom: rising home prices; unrelenting construction; insatiable demand for skilled workers; and just an overwhelming sense of optimism that things are finally changing for the better.

One such region nests in Ontario, Canada; the province’s northern gold belt, along which many long abandoned mines are going through a renaissance of epic proportions just because investors have finally come to their senses and realized that gold is the only true safe haven against global economic instabilities and the ever-weakening U.S. dollar.

According to Brock Greenwell, a statistical analyst with Ontario’s Ministry of Northern Development, Mines and Forestry, “I’ve been here a long time and 2010 is looking like a record year for gold exploration. It’s unprecedented.”

According to the latest mining statistics out of Ontario, there are 12 gold mines operating in the region, with four more ready to commence production in 2012. Considering that operating costs by mining companies for 2010 are likely to hit $620 million, compared to $389 million spent last year, it is more than likely that more new mines will come online in the near future. As Greenwell put it, “It’s an absolute boom. There are 40-plus companies here at any given time.”

So, who is there “at any given time?” Canada’s Red Lake gold belt, located about 500 kilometers northwest from Thunder Bay, is considered one of the world’s richest high-grade gold regions. For example, Goldcorp (NYSE/GG) has its blockbuster Red Lake mine there, which, along with adjacent complexes and exploration projects, employs close to 1,200 people. There is also Rubicon Minerals (AMEX/RBY), known for making significant capital investments in its Phoenix Gold Project — 60.0 million dollars at the last count — located in the Red Lake gold zone where the company owns about 65,000 acres of prime exploration property.

At the same time, small towns in and around the golden belt are barely keeping up with the demand, from housing to infrastructure to labor force. They are so unprepared for the boom that they don’t even have an adequate tax structure to fund everything that the Red Lake gold mining industry requires. Yet, regardless of the municipal growth woes, gold exploration and development is not abating. In addition to the already operating mines, new drilling technologies, capable of going deeper than ever before, are now unearthing new ore bodies on old and often abandoned gold properties.

Clearly, if there was a star on the dark sky after the crash of 2008, it was gold. In the short and medium terms, you would be hard-pressed to find an analyst who is not bullish on gold. But not many will commit to an opinion on gold in the long term.

Here is what I think. I don’t even have to wish for financial trouble to arise somewhere else in the world. The mess we have got ourselves into in the U.S. will take years to untangle. The financial and credit crisis has deep roots, the pulling of which could take a decade, if not longer. Adding fuel to the gold’s flaming fury is the fact that the U.S. must keep printing the money to keep its head above water. So, if anyone would ask me if I’m bullish on gold in the long term, I have two words: “You bet!”

In my lifetime, I believe I will wake up once more to the news headline, “Gold up $100 Today as U.S. Dollar Crashes.”

The popular media is slowly starting to pick up the gold bull market story. Investors are getting interested in it, the smart money is buying in, but gold is still only in the second phase of its bull market. Once the third and most speculative stage sets in, we will see the big single-day prices rallies in the metal.

So far for October, the majority of the rise in the price of gold can be related to the decline in the price of the greenback compared to a basket of the world’s other most popular currencies. If you’ve looked at a chart of the U.S. dollar lately (against other currencies), it reads like a straight line down.

Yesterday, I read a variety of stories about how the Bank of Japan’s decision to drop interest rates to zero caused stocks and gold to rally. But the reality is that investors are running away from the U.S. dollar and into assets of all types. Investors are finally getting it: owning the stocks of companies that earn money, pay a dividend, and grow is better than owning U.S. denominated bonds. Similarly, gold is really the only alternative currency to the devaluing U.S. dollar.

Gold is up over $1,000 U.S. per ounce since I started recommending it as a buy back in 2002. I’m often asked, “Michael, why did you see gold as buy in 2002?” Back then, two of our analysts wrote a report on how Greenspan had a secret plan to reduce interest rates to bring the value of the U.S. dollar down to help our exporters.

My realization was that, as the U.S. dollar fell in value, the 70% of the countries around the world that used it as their reserve currency would get squeezed and would look to abandon the U.S. dollar as a reserve currency. Their only alternative: gold.

By pushing interest rates so low in the summer of 2004, Greenspan not only succeeded in starting the devaluation of the U.S. dollar, but he also unwittingly set the stage for the greatest real estate bubble in American history — a bubble that eventually burst, causing the worst recession since the Great Recession.

To fight the recession, the U.S. government increased debt to record levels, putting more strain on the U.S. dollar. Gold has many “thirsts” that fuel its rise. One being a falling U.S. dollar. The second being increasing U.S. national debt, because a currency backed by a lot of debt is a currency in trouble. Both thirsts are being fed to gold right now.

Michael’s Personal Notes:

The Dow Jones rallies big-time yesterday, gets close to breaking past 11,000 again, and the media is all over it (but no big deal for readers of PROFIT CONFIDENTIAL, because I’ve been telling you all year that the bear market rally that started in March 2009 was still intact), but, in reality, the rallying stock prices are just an illusion.

Why?

If we look at a chart of the Dow Jones Industrial Average, yesterday, with the index rallying just short of 11,000, the Dow Jones was trading at about the same level at which it traded in the year 2000. Ten years later; stocks are the same price level. And economists say that Japan had a lost decade!

It’s been a busy decade for the U.S. in that we had a dot-com crash in 2000, a real estate boom that peaked in 2005, a hard real estate bust that started in 2007, and a credit crisis that developed in 2008, but, for stocks in general, it really has been a lost decade. The poor fellow that bought a straight index fund or plain-Jane equity mutual fund in 2000 is no better off today with that investment than he was 10 years ago. In fact, he is worse off, because of fund management fees.

Is it any wonder that the great majority of retail investors have missed the bear market rally that started last spring? They just don’t trust stocks anymore.

Where the Market Stands:

You may remember my lead story in PROFIT CONFIDENTIAL at the beginning of October: “Best September for Stocks Since 1939! Now the Encore.” Well, it’s been quite an encore so far in October. The rally in stocks I have been predicting and expecting went into full steam yesterday, with the Dow Jones up almost 200 points.

The Dow Jones Industrial Average opens this morning up five percent for 2010. I’ve been writing for weeks that investors have few places to put their money; specifically that investors would move out of bonds paying paltry returns and move back into stocks. That is exactly what is happening with the flow of investor funds.

I see the bear market rally that started in March 2009 as intact.

What He Said:

“Despite all my ‘yelling’ and ‘screaming’ about gold, I believe only a few of my readers and a small fraction of the general public has taken a position in gold. Why? Because gold’s not trendy…buying condominiums for investment is! If you are an investor, you need to seriously look at investing in gold stocks, because gold bullion prices will likely continue to rise.” Michael Lombardi in PROFIT CONFIDENTIAL, September, 21, 2005. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments. Many gold stocks recommended by Michael’s advisories gained in excess of 100%.

The S&P 500 eyed key chart support at 1,130 on September 28, but managed to hold at 1,132. That was a key development, as the index broke above a key chart marker at 1,150 last Thursday and is looking to close above for the first time since May 13.

The bulls appear to be in control, but I do not feel totally convinced that gains are sustainable and feel that a correction is in the works before markets can trend higher.

The fact that all of the key stock indices are moving higher above the chart tops is bullish, but I still question the lack of strong trading volume. During the down days last Wednesday and Thursday, trading volume on the NASDAQ rose, which is bearish.

The bullish investor sentiment is clearly helping stocks, but you should watch the overbought condition. The trend of the NYSE NHNL had been edging higher, with 55 of the last 59 sessions bullish. In the technology area, investor sentiment on the NASDAQ has been mixed, with 33 bullish readings since May 6. The past 17 straight sessions have been bullish.

My concern is with the lack of trading volume, especially with the spike on September 24. And, unless we see higher volume, I feel that the current upside rally may not be sustainable. Should the chart tops fail to hold, we could see a downside move back towards the 200-day moving average (MA). The overbought technical condition will pressure rallies.

The near-term technical picture remains bullish, but you should watch for selling pressure due to the overbought condition.

Failure to hold could set up a bearish triple-top formation. A “death cross” continues to be in effect on the charts, in which the 50-day MA is below the 200-day MA.

In addition to equities, gold and silver have also been hot. The October futures gold blasted above $1,300 to trade at $1,314 an ounce. The analysts and editors of Lombardi Financial turned bullish in 2002-2003, and have remained so ever since. Although at times the bullion has had a rough ride, metal prices have turned around significantly and I believe the spot price of gold can easily creep up to $1,500 in the near term. The near term is bullish on strong Relative Strength, but the condition is overbought.

Silver is also following gold higher around $22.00 an ounce. Silver sometimes moves in sympathy with gold, but is a play on electronics demand.

On the energy front, oil prices have been rallying. Oil is bullish and broke above a key chart top at $80.00 and its 200-day MA of $80.65 to over $81.00. The near-term picture is bullish on relatively strong Relative Strength. I’m not convinced that prices will hold and feel a return to the $70.00-$80.00 range is in the works. This level is what OPEC wants to see. If it’s too low, profits fall. Too high and it could impact the global economic recovery.

As always, ride the gains, but take some profits along the way.