New Record-Highs Everywhere with Stocks—Gold Almost Ready to Move

Gold Almost Ready to MoveThere are a lot of stocks that are doing well in this market. Because there is no uniformity to business conditions in both the U.S. economy and the rest of the world, I’m making a conscious effort to attribute less weight to the major stock market indices and more to individual companies and their specific business conditions. I hate to say it, but the main stock market indices can be quite misleading, and one company can skew the index (like Apple Inc. [NASDAQ/AAPL] when it was at its high).

The way I look at the stock market and the economy today is with very low expectations. If U.S. gross domestic product (GDP) can grow faster than the rate of inflation, then that’s a good accomplishment. I hope the Federal Reserve is right with its prediction of 2.5% in U.S. GDP growth in 2012 and 3.5% in 2013. Of course, these forecasts change all the time, so it doesn’t mean much.

So, while the S&P 500 index is trading around its five-year high, plenty of stocks are doing much better than the index. (See “Earnings Picture Starts off Bright with Oracle.”) 3M Company (NYSE/MMM) just hit an all-time record high on the stock market. This stock has had a few down years, but it has basically been going straight upward since 1982. Consider Johnson & Johnson (NYSE/JNJ). This position just hit an all-time high on the stock market. It was kind of slow over the last 12 years, only doubling not including dividends. The stock is up seven-fold since 1994, not including dividends.

Then there’s my favorite, Colgate-Palmolive Co. (NYSE/CL). This stock is very close to breaking its all-time stock market high that it set last October. As is usually the case with this stock, it was worth buying when it was down the last few months. The company’s stock chart is below:

Colgate-Palmolive Co Chart

Chart courtesy of www.StockCharts.com

There’s lots of great action in this market; don’t let the main stock market indices fool you.

But now, if you would allow me to change topics, the one thing that’s been on my mind a lot lately is gold. I can’t escape this gut feeling that gold is almost ready to move.

On the stock market, gold stocks have mostly done terribly over the last 12 months, even though the spot price only retreated somewhat. We’ve been in a major gold price consolidation for about a year and a half, which is about the same duration as the last two big price consolidations. Goldman Sachs recently lowered its gold price target for this year and next. But a lot of Wall Street analysts are still talking about $2,000-an-ounce gold sometime this year. I am one of them.

A large part of the poor stock market performance from gold stocks (both large and small) over the last year is because costs have been going up—way up, in fact, and margins are much thinner. It was only a few years ago that anything over $1,000 an ounce was pure gravy for most gold producers. The latest industry-wide cash cost analysis I read suggested that $1,400 was the average breakeven point, so this doesn’t leave a lot of room for exceptional earnings.

And this is just one of the big risks with resource investing. There is just so much beyond your control as a stock market investor. Which is why, right now, in the environment we have for gold, I think investors wanting to play gold should consider trading right off the spot price, rather than individual gold stocks.

The sovereign debt crisis in Europe still exists, demand for gold in India and China is strong, and gold production is about to get squeezed, due to costs. We’re not there yet, but gold prices are almost ready for a major breakout.