The Wal-Mart Sale of the Gold Mining Stocks

“Profit Confidential” Column, by Michael Lombard, CFP, MBA

I didn’t coin, “The Wal-Mart Sale of the Gold Mining Stocks,” our fellow editor Robert Appel recently did. And he’s right.

The price of gold has been weak over the past few weeks, as the U.S. dollar strengthened against other world currencies (partly because of the Greece debt scare) and the “noise” over buying U.S.-denominated debt softened.

Gold bullion prices are down from about $1,150 in mid-January to $1,090 today, a decline of about 5.2%. But if we look at the Dow Jones U.S. Gold Mining Index, it has been “whacked down” by 13% over the same period. And small gold mining companies, well, they’ve down even more.

I’m as positive on gold bullion prices as I have ever been. Sooner, rather than later, the U.S. will need to deal with its debt problem. As monetary and fiscal policy continues to be so generous, inflation becomes a real threat. Finally, there is plenty of money out there that has yet to find gold as an alternative form of investment.

Sure, I’ve heard all the stories about the forces that are manipulating the price of gold bullion and trying to keep the metal’s price down, but let the gold bugs worry about that one. What I do know is that the price of small, junior gold mining companies has fallen quickly, probably too quickly.

If we look at the major gold-producing stocks, they have held up quite nicely with gold bullion’s price contraction. But the junior mining stocks have been hit hard — too hard.

There’s a great buying opportunity developing in the junior gold mining sector. Smart investors are moving in and buying these juniors as their prices have fallen. Some are calling it the Wal-Mart sale of gold mining stocks.

Michael’s Personal Notes:

If there is one Internet company that has truly surprised me, it is Amazon.com, Inc. (NASDAQ/AMZN). In all honesty, years ago, I didn’t know if this company would make it

Yesterday, Amazon.com reported that it had made a profit of 384 million dollars in the last quarter of 2009 on sales of $9.52 billion. Yes, that web site sold close to $10.0 billion in goods in only three months.

Would I personally buy Amazon.com stock? Of course not. I would not buy any stock trading at 61 times earnings unless it had huge prospects going forward.

But my point here is how the Internet has revolutionized the way we buy products and services. The NASDAQ did get a little ahead of itself back in the year 2000, when the popular tech index hit 5,000. But out of the rubbish that came to market, several stars were born, including companies like Amazon.com and Google Inc. (NASDAQ/GOOG).

Where the Market Stands:

Patience, patience, patience. I continue with my belief that it is too early to call the bear market rally that started in March 2009 as over. While my forecast was always for the bear market to eventually test its March 2009 levels, it’s too early for that. The bear market rally did not convince enough people to get back into the stock market — which is the purpose of a bear market rally.

The Dow Jones Industrial Average is off 2.9% so far this year. Corporate earnings have been better than expected, Ben Bernanke is back in for another term, and interest rates remain historically low and fiscal and monetary policy very accommodative — all very positive factors.

What He Said:

‘Home sales down 8.4%, could be the bottom,’ read the headline in last Friday’s USA Today. What do they know that I don’t? They know what realtors and their associations tell them and that’s about it. Unfortunately, the real estate news is predominately written by reporters — not real estate investors with years of experience to share. The hard facts about the real estate market in the U.S. are truly scary. How can the U.S. economy escape the hard landing in U.S. home prices? As we’ll soon find out, it simply can’t!” Michael Lombardi in PROFIT CONFIDENTIAL, January 31, 2007. While the popular media was predicting a bottoming of the real estate market in 2007, Michael was preparing his readers for the worst of times ahead.