As I have been writing in these pages, after a bull market that has gone on for 12 years, the recent pullback in gold bullion prices should be seen as a correction in an ongoing bull market in the metal. I see the pullback as a buying opportunity.
While news headlines flash a bearish sentiment towards gold bullion prices, the gold bears are screaming about how much money central banks have lost due to the plunge in prices and the gold miners are facing pressures. The usual gold bullion consumer countries, India and China, are seeing robust demand.
According to the All India Gems & Jewellery Trade Federation, India is experiencing its greatest demand this year as gold bullion prices have declined. (Source: Bloomberg, April 18, 2013.)
In China, customers are lining up to buy gold bullion. According to the director of sales and operations at Chow Sang Sang Holdings International Limited, the number of gold bullion products sold in the Hong Kong and Macau area during the weekend of April 13 soared 150%.
Other countries in the global economy are witnessing increased demand for the metal as well. As talk of gold bullion entering a bear market continues, consumers from countries like Australia and Japan have ramped up their gold buying.
Gold bullion sales at The Perth Mint in Australia have soared. The treasurer of The Perth Mint, Nigel Moffatt, commented on this situation by saying, “the volume of business that we’re putting through is way in excess of double what we did last week.” He added, “there’s been people running through the gate.” (Source: “Golden times for Perth Mint,” The Age April 17, 2013.)
In Japan, at Ginza Tanaka, a precious metal store in Tokyo, gold bullion buyers waited for three hours to buy the metal. (Source: Reuters, April 16, 2013.)
Regardless of what I hear from the gold bears, I am still bullish on gold. The reality is that central banks will continue to print paper money no matter what. They don’t have any other option. But the more paper money they print, the greater the fall in the value of their currencies.
Do the bears realize central banks have moved away from being net sellers of gold and have been net buyers now for a while? Readers of Profit Confidential know that in 2012, central banks bought the most gold bullion in 48 years.
It would not surprise me to see central banks rush to buy more gold bullion, just like consumers are doing right now in India, China, Japan, and Australia.
Philip Morris International Inc. (NYSE/PM), an S&P 500 company in the consumer goods sector, reported disappointing corporate earnings for the first quarter of 2013. The company’s profits fell more than 1.6% from the same period last year. Wall Street analysts were expecting Philip Morris to show corporate earnings of $1.34 per share, but the company only earned $1.28 per share. (Source: MarketWatch, April 18, 2103.)
PepsiCo, Inc. (NYSE/PEP), another major company on the S&P 500, registered first-quarter corporate earnings that were 4.7% lower than the same period last year. (Source: Reuters, April 18, 2013.)
UnitedHealth Group Incorporated (NYSE/UNH), the largest health insurer in the U.S. and a constituent of the S&P 500, reported that corporate earnings fell in its first quarter due to rising medical and operating costs. UnitedHealth earned $1.16 per share—11.4% lower than last year’s first quarter, when corporate earnings were $1.31 per share. (Source: Reuters, April 18, 2013.)
Similarly, Nucor Corporation (NYSE/NUE), a steel producer on the S&P 500, reported a drop in corporate earnings of 39% in the first quarter of 2013. The company only earned $0.28 per share compared to $0.46 in the same quarter of 2012. (Source: CNBC, April 18, 2013.)
Dear reader, throughout history, the key stock indices have risen when their companies posted better corporate earnings. As it stands, big-cap companies haven’t performed as expected; rather, I see softer corporate earnings than before. In the first quarter, the S&P 500 companies are expected to show negative growth in their corporate earnings.
In the past, to boost their corporate earnings, some well-known companies on the S&P 500 bought back their shares and cut their labor forces to boost per-share earnings. These two practices can only last for so long.
The U.S. economy is not witnessing economic growth. At the very best, consumers are watching their pockets. Consumer confidence is bleak. The number of Americans using food stamps is increasing. When consumers spend less, businesses sell less. As corporate earnings continue to soften, we’ll see the demise of the rally in the S&P 500 and other key stock indices. In fact, it may have already started.
What He Said:
“Bonds could now be a buy: Bonds rise in price when interest rates fall as their return makes them more valuable. After a bear market in bonds that has lasted for months, the action in the bond market, as I read it, indicates the bear market in bonds could be over. I’ve always preferred quality when buying bonds, going with government bonds over corporate bonds. If you have some cash lying around, bonds could be a great deal.” Michael Lombardi in Profit Confidential, July 24, 2006. The yield on 10-year U.S. Treasuries fell from five percent in the summer of 2006 to 2.4% in October 2011—doubling the price of the bonds Michael recommended.