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.
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%.