Gold is not the only precious metal we comment on in our Profit Confidential. We also regularly write and analyze other metals such as copper and silver. In fact, our analysis and guidance on the precious metals copper and silver has been right on the money! The unprecedented growth China is experiencing, in our opinion, will lead to generally higher precious metals prices, especially for copper and silver. Start reading Profit Confidential today to see what we have to say about the major precious metals, where we see prices headed, where we find the best investments among precious metals now!

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

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

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

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

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

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

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

The prices of gold and other precious metals are in correction and therefore gold and other precious metal stocks are in correction. I think it’s particularly important for stock market speculators to be paying attention to this sector as it corrects. There are a lot of very attractive mining companies out there with lots of cash and great producing properties.

No matter what the story, the fact of the matter is that precious metal stocks trade commensurately with underlying spot prices. They tend to trade on their own, not lockstep with the rest of the stock market. A mining company could be generating outstanding production and earnings growth, but stock market investors (I should say speculators, because mining stocks are 100% risk-capital investments) are always looking to the future and that means if the spot price is going down, so must precious metal stocks.

As a stock market sector, precious metal stocks have been in decline for some time now and valuations are getting to be very attractive. If you were interested in speculating in this sector, I’d put together a list of five top companies right now within the group and start following them. The spot prices for gold and silver may continue to correct for another couple of quarters, but I really feel that the upward commodity price cycle isn’t finished quite yet, especially with the underreported inflation in the U.S. economy.

Precious metal stocks take their lead from gold prices and, at $1,600 an ounce, the correction in gold hasn’t been that bad at all. Because precious metal stocks are considered to be risk-capital investments, speculators within the group tend to follow a herd mentality. This is especially the case with institutional investors. This is why it’s a stock market sector that can really pay if you get in ahead of the group. As is almost always the case, once the news is in the headlines, most of the money has already been made. If there ever was a stock market sector that is perfectly suited for the buy-low, sell-high investment philosophy, I can’t think of a better one.

Precious metal stocks are tricky to get right as an equity market speculator, because there are so many factors at play in order to run a successful mining business. There’s always the potential for equipment failure (which stops/slows production), a change in government policy, or exploration drilling that doesn’t meet expectations. But when everything comes together correctly and the spot price of the underlying commodity turns upward, precious metal stocks can generate excellent stock market returns in a short period of time. (See One of the Best Sectors for Risk-capital Speculators.) It’s similar to the biotechnology sector where a new drug discovery or approval can send shares soaring.

Right now, the stock market isn’t much interested in precious metal stocks and that’s why equity speculators should begin paying closer attention. I don’t think the correction in precious metal prices is over, so, generally speaking, I’d be waiting and watching.

The underlying problem with consumers and their lack of participation in any economic recovery can be simply narrowed down to three facts:

U.S. consumer spending increased by 0.8% in February over January (source: U.S. Commerce Department), the highest month-over-month increase in seven months. This is the good news.

But consumer incomes rose just 0.2% in February, with income growth remaining relatively flat for the last six months. This is the bad news.

As my readers know by now, I like to take consumer income after taxes and then adjust for inflation to get the real disposable income number that the Commerce Department should be reporting (what I believe is a better reflection of the average American’s true purchasing power).

Real consumer disposable income decreased—that is, fell—by 0.1% in February, the third decrease in the last four months and flat for over a year. More bad news.

To tie it all together; consumer spending rose in February, but consumer income fell in February. Hence consumers dipped into savings yet again in February, with the American consumer savings rate dropping in February to its lowest level since December 2007…before the recession hit!

How can consumer spending be maintained at this pace if real disposable income is falling? How long can consumers dip into their limited savings (or borrow) to maintain this pace of consumer spending?

In 2008, just before the crisis began, employee incomes across all of the U.S. represented 66.14% of all of the income generated in this country. By December of 2011, employee incomes across all of the U.S. were just 61.82% of total income (source: Bloomberg).

Corporations have benefited in the last few years with higher profits. Consumers on the other hand have seen their incomes drop over the three year period—and if we take inflation into consideration, consumers are really falling behind.

My bottom line is that we cannot experience a true economic recovery if consumer spending is about consumers dipping into their savings (or borrowing) to spend. Similarly, we will not experience economic growth if consumer income is declining. We are not experiencing a true economic recovery. Watch the rally in stocks—it’s a bear market trap.

Michael’s Personal Notes:

China’s appetite for gold bullion will not subside anytime soon.

I’ve been writing for some time now, dear reader, about China’s desire to see the yuan (also referred to as the renminbi) become a global currency on par with the U.S. dollar and the euro. Combined with this desire is the need to back the currency with enough gold bullion, again on par with the euro and the U.S. dollar.

The 17 countries of the euro combined hold 10,401 tons of gold bullion, while the U.S. holds 8,133 tons of gold bullion and China sits with just 1,054 tons of gold bullion. China has a long way to go to reach the level of the other two major currency blocks.

However, make no mistake about it; China holds probably close to double the amount of gold bullion the country says it does, simply because it has been accumulating so aggressively. The proof is in the recent development, which continues to point to China’s determined inroads to have its currency used internationally.

These moves are not a good sign for the U.S. dollar longer term, dear reader. These countries have made a conscious decision to trade in their own currencies, which means that, while they used the U.S. dollar as the means to settle contracts in the past, they are now going to use the yuan.

Australia views China as its most important trading partner. For the first time in its history, Australia has signed a currency agreement, initially beginning at $31.0 billion, but which will expand. The future agreements and contracts will be settled in yuan.

After the signing of the agreement on Christmas Day of 2011, Japan has initiated the first steps in buying 65 billion yuan worth of Chinese government bonds. China is Japan’s largest trading partner, but only a very small portion of their trade was settled in yuan. That is officially set to change, at the expense of the U.S. dollar.

Dubai’s Emirates NBD, the largest bank in the United Arab Emirates, has sold its first debt in Chinese yuan in its history. Although it is only for $119 million, this is the first such debt in the Arab gulf region to be denominated in yuan. The United Arab Emirates and China have signed an initial agreement of $5.5 billion as trade, debt and investments are settled in yuan, instead of the U.S. dollar.

In July 2012, the Hong Kong Mercantile Exchange is planning to launch yuan-settled gold bullion and copper futures contracts. Over the next year, the exchange is looking to offer another 12 industrial metals futures contracts denominated in yuan. This would be the first of its kind in Asia. Although they have already launched gold bullion and silver bullion futures contracts in Asia, these contracts are settled in U.S. dollars.

The above is more proof of China’s aggressive moves to make its yuan an international currency at the expense of the U.S. dollar. Since China is clearly serious about this objective, it is going to need a lot more gold bullion with which to back its yuan.

If you’re wondering who is buying gold bullion on those price dips, wonder no longer.

Where the Market Stands; Where it’s Headed:

It’s been a difficult couple of days for the stock market. After the Dow Jones Industrial Average hit a multi-year of 13,297 on Monday, April 9, 2012, almost 300 points evaporated in the two following days.

Is the market rally over? No, I do not believe it is. We are getting near a top in the bear market rally that started in March of 2009, but we are not there yet. Aside from the Internet-related stocks, we have yet to see the heavy signs of speculation or bullishness that usually accompany market tops.

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.

China’s appetite for gold bullion will not subside anytime soon.

I’ve been writing for some time now, dear reader, about China’s desire to see the yuan (also referred to as the renminbi) become a global currency on par with the U.S. dollar and the euro. Combined with this desire is the need to back the currency with enough gold bullion, again on par with the euro and the U.S. dollar.

The 17 countries of the euro combined hold 10,401 tons of gold bullion, while the U.S. holds 8,133 tons of gold bullion and China sits with just 1,054 tons of gold bullion. China has a long way to go to reach the level of the other two major currency blocks.

However, make no mistake about it; China holds probably close to double the amount of gold bullion the country says it does, simply because it has been accumulating so aggressively. The proof is in the recent development, which continues to point to China’s determined inroads to have its currency used internationally.

These moves are not a good sign for the U.S. dollar longer term, dear reader. These countries have made a conscious decision to trade in their own currencies, which means that, while they used the U.S. dollar as the means to settle contracts in the past, they are now going to use the yuan.

Australia views China as its most important trading partner. For the first time in its history, Australia has signed a currency agreement, initially beginning at $31.0 billion, but which will expand. The future agreements and contracts will be settled in yuan.

After the signing of the agreement on Christmas Day of 2011, Japan has initiated the first steps in buying 65 billion yuan worth of Chinese government bonds. China is Japan’s largest trading partner, but only a very small portion of their trade was settled in yuan. That is officially set to change, at the expense of the U.S. dollar.

Dubai’s Emirates NBD, the largest bank in the United Arab Emirates, has sold its first debt in Chinese yuan in its history. Although it is only for $119 million, this is the first such debt in the Arab gulf region to be denominated in yuan. The United Arab Emirates and China have signed an initial agreement of $5.5 billion as trade, debt and investments are settled in yuan, instead of the U.S. dollar.

In July 2012, the Hong Kong Mercantile Exchange is planning to launch yuan-settled gold bullion and copper futures contracts. Over the next year, the exchange is looking to offer another 12 industrial metals futures contracts denominated in yuan. This would be the first of its kind in Asia. Although they have already launched gold bullion and silver bullion futures contracts in Asia, these contracts are settled in U.S. dollars.

The above is more proof of China’s aggressive moves to make its yuan an international currency at the expense of the U.S. dollar. Since China is clearly serious about this objective, it is going to need a lot more gold bullion with which to back its yuan.

If you’re wondering who is buying gold bullion on those price dips, wonder no longer.

Where the Market Stands; Where it’s Headed:

It’s been a difficult couple of days for the stock market. After the Dow Jones Industrial Average hit a multi-year of 13,297 on Monday, April 9, 2012, almost 300 points evaporated in the two following days.

Is the market rally over? No, I do not believe it is. We are getting near a top in the bear market rally that started in March of 2009, but we are not there yet. Aside from the Internet-related stocks, we have yet to see the heavy signs of speculation or bullishness that usually accompany market tops.

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.

It makes for great headlines, as mainstream media tells everyone about the S&P 500’s impressive run. For the first quarter of 2012, the S&P 500 rose 12%. The S&P 500 is now just seven percent away from its all-time high.

As I’ve been writing, this rise has come without the participation of the retail investor, which is us, dear reader. Now, historically, it is always the retail investor that participates last in the bear stock market rally trap, before Phase III of a bear market takes hold and drives stocks lower. So I urge my dear readers to heed this warning.

The retail investor was severely burned in 2008, which is why he/she is hesitant to jump back into this stock market rally and the S&P 500. What usually happens is that, as the S&P 500 continues to rise, the retail investor believes he/she is missing out on a great opportunity to earn high returns, and so finally capitulates and buys, at the worst possible time.

As I’ve been highlighting on these pages day after day, the economic reports that have been released recently are not as rosy as the headlines would suggest.

The housing recovery has still not materialized. The average American’s real disposable income has not appreciated—as a matter of fact, real disposable income is falling—which means that the consumer, which is 70% of the U.S. economy, is not able to spend.

The jobs numbers have been somewhat stronger, but most of the jobs created recently are low-paying, while the labor participation rate—those aged 16-64 that are actively engaged in the U.S. labor market—remains at 30-year lows. People have given up looking for work!

Add to this the fact that gas prices remain stubbornly high and U.S. manufacturing is still weak, and this makes it harder to build a case for the S&P 500 to continue its climb higher.

As if the U.S. didn’t have enough to handle with its own economic problems, Europe is in a recession and China—along with many parts of Asia—is slowing down as well. That slowdown has been accelerating in 2012, which will provide another hurdle for the S&P 500 and this stock market rally to jump in order to reach record highs.

This is a classic bear trap, where the stock market and the S&P 500 appreciate, while the economic fundamentals continue to deteriorate. As history has shown, eventually, the S&P 500 and the stock market always reflect the economic fundamentals.

The strong stock market rally of this year feels like the calm before the storm, which is what I believe it is.

I continue to believe that the stock market rally, which began in March of 2009, has fed on the U.S. government taking on too much debt, an artificial, prolonged period of interest rates at record lows, and money printing by the Federal Reserve. (See: The Land Debt Built). A true stock market rebound is built upon strong economic growth, where the economy increases the wealth of everyone involved…the opposite of what is happening today.

Beware the bear market trap, dear reader; it is playing itself out exactly as I predicted it would.

Michael’s Personal Notes:

There are several key indicators that are questioning the record quarterly rise in the S&P 500, but one sticks out today.

Corporate insiders are officers, directors and the largest shareholders of public corporations. It is critical to follow whether insiders are buying or selling their company’s stock; it could be an indication that they expect to see their company’s stock rise or fall in price.

When corporate insiders are buying large amounts of stock as a group, investors usually think it is time to buy. Conversely, when insiders are big seller, it could mean something is up and so investors might consider selling.

Trim Tabs Research has seen its key indicator, the sell-to-buy insider ratio, go from 5-to-1 in January ($5.00 dollars’ worth of insider selling for every $1.00 dollar of insider buying) to 15-to-1 in February, continuing to 20.8-to-1 in March!

This is the most bearish insiders have been since early in 2011, according to this key indicator. In March of 2012, corporate insiders sold $4.7 billion worth of stock.

This increase in insider selling was confirmed by a key indicator created by Argus Research, which agrees that this level of insider selling has not been seen since February of 2011.

This represents two consecutive months now where insider selling—a key indicator—has accelerated and reached more significant levels. This is certainly a warning sign from a key indicator that investors should heed.

Another key indicator can be found in the forecasts of the companies in the S&P 500 themselves. Of those companies that still provide forecasts, 61% of them have lowered their profit forecasts for the first quarter of 2012, 31% have lifted their forecasts for the same period, and eight percent have kept their profit forecasts the same for the first quarter of 2012 (source: Bloomberg).

As I’ve been talking about in these pages, profit margins for corporations have stopped climbing—a key indicator. In 2011, on the back of productivity and layoffs, corporations were able to improve their profit margins.

Now that corporations have improved and cut where they can, the only way to improve profits is by increasing sales. Again, with Europe in a recession, China slowing down and the U.S. economic recovery remaining weak, sales are going to be harder to come by.

Speaking of profit margins, the last of the key indicators I wanted to address today is that of rising commodity prices. Within the S&P 500 is another index that measures the performance of 24 more common commodities—a key indicator. This total return index includes energy, industrial metals like copper, agricultural products like corn, livestock like cattle, and precious metals like gold bullion.

This S&P 500 commodity index—a key indicator—gained 5.9% just in the first quarter of 2012 and is up 14% over 12 months, with energy, agriculture and livestock being the main drivers of that move upwards.

This general rise in commodity prices will continue to put pressure on corporate profit margins, as 2012 continues to roll along.

The S&P 500 has had an incredible 12% move in the first quarter of this year. However, the key indicators of increased insider selling, more corporate profit warnings and higher commodity prices are strongly questioning how this move can be sustained in 2012. (Also see: U.S. Durable Goods Orders an Ominous Sign.)

Where the Market Stands; Where it’s Headed:

There isn’t much more that I haven’t already said above: corporate insiders are big sellers of stocks, corporate profits are cooling, inflation could push up interest rates, and the economies of Europe and China are in trouble. The bear market rally in stocks that started in March of 2009 is getting closer and closer to the end of its rope.

What He Said:

“Even the most novice investor can now read the chart of the Dow Jones U.S. Home Construction Index and see that it is trading at its lowest level in five years. If, like me, you believe that stocks are an indication of what lies ahead, this important index is telling us that housing prices are headed to 2002 levels! What would that do to the economy? Such an event would devastate the U.S. ” Michael Lombardi in PROFIT CONFIDENTIAL, December 4, 2007. That devastation started happening the first quarter of 2008.