Gold’s Recent Price Action: Separating
the Men from the Boys

The latecomers to the gold bull market have been feeling the heat the last couple of days. But it’s not the price of gold bullion that has investors and speculators worried. After all, the price of bullion is up $252.70 an ounce, or 20.5%, over the past 12 months. The fear and concern lies with the price action of the gold stocks.The latecomers to the gold bull market have been feeling the heat the last couple of days.

After reaching a record high of $1,540 an ounce only seven business days ago (on May 3), the price of gold bullion has fallen $55.00 to $1,485.

But it’s not the price of gold bullion that has investors and speculators worried. After all, the price of bullion is up $252.70 an ounce, or 20.5%, over the past 12 months. The fear and concern lies with the price action of the gold stocks.

As a reader e-mailed us yesterday, “Michael, I enjoy reading PROFIT CONFIDENTIAL each day and appreciate your wise advice. I have been invested in gold stocks for the past four years and have done reasonably well…but am perplexed at the recent performance of stocks in relation to the metal price. (Gold) stocks are standing pat when gold is rising and selling off when gold declines.”

I’m sure the majority of my readers invested in gold are noticing the same thing as the above reader.

But, in a bull market, this is what separates the men from the boys. The latecomers to the gold bull market (the “boys”) are dumping their gold stocks as fear sets in over weakness in the yellow metal. The seasoned gold investors (the “men”) see gold stocks forming a solid base here. The men are buying the gold stocks on dips, not selling them.

The gold bull market is 10 years old. It’s not a market for trading. It is a market for seizing the trend and staying with it. During this bull market, there have been times when gold stocks have led the advance higher before gold bullion and there have been times when gold bullion has led gold stocks higher (which is where we are now).

Nothing has changed in the world to change my view on gold. The Fed hasn’t stopped the printing press. The government hasn’t reined in its reckless spending. Long-term interest rates haven’t come down; neither has inflation.

Everyone has an opinion, a belief. Personally, I see the weakness in the price of gold stocks as an opportunity. And that’s why I’m buying more of them today.

Michael’s Personal Notes:

“Gas prices reach all-time high, commuters express need for gas cap locks,” read the headline on the 680news.com web site. But have no fear, our government is telling us that inflation is under control.

I believe that China is telling the truth about its inflation rate. And it’s dealing with it.

Yesterday, China announced inflation for April was running at 5.3%. The Chinese government would like to see the rate at four percent and, in its attempt to reach that goal; China has been raising interest rates and the reserve requirement ratio for its commercial banks.

I’ve been writing for months that the inflation “problem” in North America is much bigger than the government or media acknowledges. I’m still of the opinion that the Federal Reserve will come out with another form of QE1 and QE2 when QE2 ends next month. The greater the Fed’s efforts to expand the money supply, the greater the long-term hyperinflation risks.

Where the Market Stands; Where it’s Headed:

End of the bear market rally? After all, the Dow Jones Industrials was down 130 points yesterday. Not a chance.

You obviously read my column for the reason that I have a different angle and view on what is happening in the marketplace than most economists and analysts. Sure, the bear market rally is tired and close to topping out.

But watching the ticker tape yesterday, I believe that the market downdraft had more to do with a response to the guilty verdict of Galleon Group LLC’s Raj Rajaratnam than anything else. The securities police are tightening the strings on Wall Street players and Wall Street’s response was, “We don’t like it.”

The bear market rally in stocks that started in March of 2009, although very tired and long in the tooth, continues.

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.