Unexpected New Gold Player Set to Help Push Prices Higher

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

Are nerves of steel needed for investors in gold stocks these days?

After holding up over $1,000 U.S. an ounce for days, the price of gold broke slightly below that level on Friday. The gold shorts got happy, the recent gold stock buyers started to worry.

If you own gold stocks or gold-related investments (and I believe all sound investment portfolios should have some exposure to gold), the play here is not for short-term gain. Gold, I believe, is a play for the next few years. Just ask the Chinese government (more on that below).

To get comfortable about gold’s price trend, all an investor needs to do is review a price chart of gold bullion since 2002. That chart will easily show how gold, since then, has always taken the proverbial “two steps forward, one step back.” And we all know that gold is up 233% since 2002 (when gold traded at $300.00). In fact, gold could fall to $750.00 an ounce and still be viewed as being in a bullish trend.

The U.S. dollar, after hitting a 52-week low against the euro, is finally staging a technical rebound. The rising U.S. dollar put pressure against bullion prices last week, and that’s the only story.

If, like me, you believe the ballooning U.S. debt will erode the value of the U.S. dollar over time, then gold bullion and gold-related investments are the best alternative in my opinion. And, for gold investors, unexpected additional demand is slowly entering the picture

Of course I’m taking about China. The more I read about China encouraging its citizens to buy gold, the more I think that China is up to something. We are talking a communist country that would like to go quasi-capitalist promoting gold ownership to its population of over one billion.

What’s up with pushing gold ownership in China? Maybe the Chinese government is worried that the yuan may fall in value and it wants to protect its citizens with other forms of wealth. Or maybe China’s so worried about the U.S. dollar that it finds gold more valuable each passing day.

But how about this: a story in “Business Week” says that China holds over $22.0 trillion in U.S.-dollar-issued debt? If China were to demand that debt be paid, or if China failed to renew that debt, what do you think would happen to the price of gold bullion? All of a sudden, $1,000 gold looks very cheap.

Michael’s Personal Notes:

I don’t understand why the luxury hotels don’t just drop their high room rates. I’m a frequent traveler and I find that the luxury brand hotels, even though they have yet to rebound from the recession, are continuing to operate at 50% to 60% of capacity instead of just lowering their rates. Many of the mid-to-lower range hotels have cut their rates, so why can’t the luxury brands? According to Bloomberg, foreclosure proceedings have begun on one of my favorite American hotels, the Four Seasons Francisco. Protect the brand or face foreclosure? I’d rather cut that room rate.

Where Market Stands:

Market rally stalling? I don’t think so. After a run up in the price of commodities, the U.S. dollar, which hit a 52-week low against the euro, is rebounding. In the past few months, the trend has been rising commodity prices and a declining U.S. dollar, equaling a rising stock market. Right now the U.S. dollar is finally showing some strength and that has the stock market backing off. My veteran readers know my opinion on the U.S. dollar: A slide on a slippery slope that’s only just begun. A few analysts came out last week and said the stock market rally that started in March of this year is over. My opinion is that it is too premature to write an obituary for the market’s rally. The Dow Jones Industrial Average opens this week up 10.1% for the year.

What He Said:

“Over the past few weeks, I’ve written about subprime lenders and how their demise will hurt the U.S. housing market, the economy and the stock market. There’s no escaping the carnage headed our way, because the housing market and subprime business are falling apart. The worst of our problems, because of the easy money made available to borrowers, which fueled the housing boom that peaked in 2005, have yet to arrive.” PROFIT CONFIDENTIAL, March 22, 2007. At the same time, Michael wrote that former Fed Chief Alan Greenspan was quoted as saying that “the worse is over for the U.S. housing market and there will be no economic spillover effects from the poor housing market.”