The way I look at the market and the way the majority of other analysts and economists look at the market are two different things. Yesterday, any news site you went to was telling the story of how higher than expected GDP growth in China would cause interest rates to rise there, slowing down the economy and pushing commodity prices down.
Rubbish. The prices of commodities are falling, because players are taking some chips off the table, plain and simple.
How easily we forget—gold bullion started 2010 at a price of $1,092 per ounce. It ended 2010 at $1,422 an ounce for a one-year gain of 30%. What other investment returned 30% last year? Gold stocks, of course, did even better, with the Dow Jones Gold Mining Index up 34% in 2010.
Sure, there are two camps on the gold debate: Those who say that gold bullion is in a bubble that is deflating and those who think that the debasing of the U.S. dollar will push gold much higher over the next two to five years. I’m obviously in the second camp.
This morning, gold is at a new two-month low and I’m already hearing the cries that the bull market in gold is over. I heard the same rhetoric when gold bullion fell from $725.00 to $575.00 an ounce in mid-2006 (a 20% correction) and again in 2008, when gold bullion fell in price from $1,000 an ounce in March 2008 to $750.00 an ounce in October of that year (a 25% correction).
My view on gold bullion is simple:
The metal has been rising in price for almost a decade. The year 2010 was a year many novice investors got into gold stocks. They are getting their “Christening” right now.
From its peak of about $1,422 U.S. an ounce, gold is only off about six percent, not much to panic about considering the 2006 correction was 20% and the 2008 correction was 25%.
Seasonally, the worst months for gold bullion prices are the period from January to March.
It is impossible for any forecaster to pinpoint the exact bottom of the current correction in the gold bullion bull market. Those who have faith in the metal, those who believe that foreigners will have trouble continuing to buy U.S. Treasuries as America continues it path to debt of $20.0 trillion by the end of this decade, and the true gold bugs who believe the status of the U.S. dollar as a world reserve currency will be jeopardy should see corrections in the gold bull market as opportunities.
I bought more gold-related investments on Monday and will buy more today, making it twice this week I believe I took advantage of the softness in the gold market. Could I be wrong? Sure, we could all be wrong. But I’ll likely be a buyer of more gold-related investments all the way down to a 20% correction. And, if that big of a correction doesn’t happen, I believe I’ll be happy with the additional investments in the metal I made on its price weakness.
Michael’s Personal Notes:
Solid earnings continue to pile up from large American businesses:
General Electric Company (NYSE/GE) reported this morning that its fourth-quarter profit (from continuing operations) jumped 31% to $3.93 billion, beating analyst expectations. GE hiked its dividend twice in 2010.
Search-engine company Google Inc. (NYSE/GOOG) said last night that net income in its last quarter jumped 29% to $2.54 billion, beating analyst expectations.
And let’s not forget the banks:
The biggest U.S. home lender, Wells Fargo & Company (NYSE/WFC), said that its net income grew 21% to $3.41 billion in the last quarter, beating analyst expectations.
Morgan Stanley (NYSE/MS), which owns the world’s biggest stock brokerage house, reported Thursday that its fourth-quarter profit rose 35% to $836 million, beating analyst expectations as well.
Collectively, these companies added $10.0 billion to the coffers of shareholders in a single quarter—and they are only four companies. But what do all four have in common? All four saw their quarterly profits increase in the range of 20% to 30%. And all four beat analyst expectations.
Who’s not beating analyst expectations this year? It’s almost like the analysts are keeping their earnings estimates low because the market loves when a stock beats earnings expectations. Finally, do we really expect large American companies to continue to post profits 20% to 30% higher in 2011?
Where the Market Stands; Where it’s Headed:
The bear market rally in stocks that started in March 2009 could be getting tired. I’ve been writing about how I’m turning bearish on the stock market for 2011, given the sea of optimism I see developing among investors.
Yes, in the immediate term, more profits can be squeezed out of this bear market rally, but it is obvious that the easy money in this market has already been made. Tread with caution.
What He Said:
“The year 2000 was a turning point of consumer confidence in high-tech stocks. The year 2006 will be remembered as the turning point of consumer confidence in the housing market. That means more for-sale signs going up, longer time periods to sell homes, bloated for-sale inventory and eventually lower prices for homes. But this time, the turnaround in consumer confidence will have a bigger impact on the economy. Hold onto your seats, this is going to be a nail biter.” Michael Lombardi in PROFIT CONFIDENTIAL, August 24, 2006. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.