My Three Beliefs on the Gold Bull Market

gold stocksHere’s what I said on these pages almost eight years ago:

“I’ve been pushing gold bullion and gold shares for over a year now. Bank in January 2002, I personally started buying gold shares.” (Michael Lombardi in PROFIT CONFIDENTIAL, December 13, 2002.)

The format of this e-newsletter really hasn’t changed much over the past eight years, and neither has the message: Continued record U.S. deficits, rising American national debt as a percentage of GDP, and too much liquidity in the financial system — will all contribute to a weaker U.S. dollar. Given the fragile state of the euro, gold becomes the “currency” of choice.

In these pages, I have repeatedly expressed the benefits of individual investors acquiring gold-related investments. I “pushed” gold at $300.00 U.S. an ounce, $400.00, $500.00, and each time gold hit a new milestone price (basically each time the metal rose another $100.00 an ounce). As recent as this summer, I was writing in these pages about the benefits of owning gold-related investments. Basically, I have been pushing gold to my readers until I have turned blue in the face.

Yesterday, gold bullion reached a new milestone. Gold for December delivery closed at a new record high of $1,259.30 per ounce. In the days ahead, I expect gold to close above its record intra-day high of $1,264 an ounce.

Here are my three beliefs on what lies ahead for gold-related investments:

With the White House predicting that the official U.S. debt will hit $20.0 trillion by the end of this decade (currently at $12.0 trillion), the pressure to somehow devalue the U.S. dollar will push gold prices much higher. On these pages, I have been predicting a gold bullion price between $2,000 and $3,000 an ounce. It could go even higher.

The great majority of investors have no exposure to gold-related investments. Our company has severed hundreds of thousands of investors, providing them with investment information and guidance. I can tell you that only a very small portion of investors (maybe five percent) have actually bought any gold investments. Eventually, when the herd finally joins the gold bull market, prices will be pushed higher.

Finally, there’s not an investment that moves higher or lower in a straight line. Gold bullion prices are no exception. Yes, gold has recently moved to a new record high, but, historically (at least over the past eight years), gold price run-ups are followed by small contractions, which give investors the opportunity to buy more gold-related investments before the next run-up.

Michael’s Personal Notes:

The Bank of Canada will likely raise interest rates today for the third consecutive time, bringing the benchmark Canadian bank rate to one percent (compared to a Federal Funds Rate of between 0.25% and zero).

Canada is the first of the G7 countries to raise interest rates this year. Given that signs of inflation are starting to pop up globally, I commend Bank of Canada Governor Mark Carney on his bravery in raising interest rates. I see it as a smart move.

Yesterday, the U.K. announced that food prices in that country rose at an annual rate of 3.8% in August, the fastest pace in a year. While there has undoubtedly been deflation in real estate prices since 2005, there continues to be worldwide inflation pressure on food and energy prices. Since the recession started, crude oil prices have risen 48%.

While Canada is raising interest rates, the U.S. maintains policies of keeping interest rates artificially low, easy money, and record debt — all three of which are inflationary in themselves. For the first time since 2007 American investors own more U.S. Treasuries than foreigners. Given that I’m obviously more concerned about the threat of inflation instead of deflation (and I believe the price action of gold is confirming my belief), I do not see the flock (or should I say “herd”) running to U.S. Treasuries faring well in the end.

Where the Market Stands:

The Dow Jones Industrial Average opens this morning down less than one percent for 2010. The basket of 30 stocks that make up the Dow Jones Industrials trades at 14 times earnings and provides a dividend yield of 2.7%. Given that U.S. 90-day U.S. T-bills yield 0.12% and five year U.S. T-bills yield 1.41%, I do not see stocks as being overpriced.

As I have written before, money migrates to the highest return. The great majority of investors have not joined the bull market in gold, and real estate is still taboo, so money has been flowing to the safety of U.S. Treasuries. Stocks, at this level, are an attractive alternative to Treasuries.

While many analysts have turned negative on the stock market, I continue to believe that the bear market rally that started in March 2009, while having stalled over the summer months, remains intact.

What He Said:

“Consumer confidence does not change overnight. In the U.S., 70% of GDP is based on consumer spending. And in my life, all the recessions I have seen or studied have only came to an end when consumers started spending. With consumer sentiment getting worse, and with the U.S. personal savings rate at near record lows, it may take two or three years for consumers to start spending again.” Michael Lombardi in PROFIT CONFIDENTIAL, February 25, 2008. By the end of 2008, the rest of the world was realizing that the recession would be much longer and deeper than most had anticipated.