Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Posts Tagged ‘central banks’

Should You Be Buying More Gold Ahead of the ECB’s Printing Decision?

By for Profit Confidential

The European Central Bank Presents Another Reason to Be Bullish on GoldFrom our recent reader survey, I see our readers are not that concerned about what happens in the eurozone. But there’s a phenomenon occurring there that I believe every investor who is interested in gold bullion should be aware of.

Let me explain…

It’s a known fact that when central banks print more of their paper money, it’s usually bullish for the yellow metal. We saw this after 2009, when the Federal Reserve started to print more paper money; gold bullion prices skyrocketed.

In the eurozone, there continues to be major economic problems in the region. Italy, the third-biggest economic hub in the eurozone, has reported its unemployment rate hit 13% in February—the highest unemployment rate ever recorded in the country. (Source: Reuters, April 1, 2014.)

To help countries like Italy, Greece, Spain, and Portugal with their economic woes, the European Central Bank (ECB) has lowered its benchmark interest rate—but that hasn’t spurred bank lending as bad debts on the books of major eurozone banks keep piling up. Even once-strong eurozone countries like France are under economic scrutiny.

Now, as no surprise, the ECB has started talk about following the same route the Federal Reserve has taken—printing paper money.

At a conference last week, one of the ECB’s Executive Board members, Yves Mersch, said the ECB is ready to turn on its printing presses. The president of the ECB, Mario Draghi, has also said quantitative easing in the region may be needed if inflation in the eurozone continues to remain subdued. (Source: Reuters, April 7, 2014.)

Hence, to the printing presses of the Federal Reserve, the Central Bank … Read More

Why Is the U.S. Dollar Collapsing in Value All of a Sudden?

By for Profit Confidential

Whey the Fed May Need to Reverse its Decision to Cut Back on Money PrintingWhen news first broke from the Federal Reserve that it would slow down the pace of its quantitative easing program, the consensus was that the U.S. dollar would start to rise in value as the Fed would be printing fewer new dollars and actually eliminating all new paper money printing by the end of 2014.

But the opposite has happened.

Below, I present the chart of the U.S. Dollar Index, an index that compares the value of the dollar to other major world currencies.

US Dollar Index - Cash Settle (EOD) Ice ChartChart courtesy of www.StockCharts.com

As the chart clearly shows, the dollar started on a strong downtrend in July of 2013. When I look at the dollar compared to individual currencies like the euro and British pound, the picture looks even worse.

The common belief since the Credit Crisis of 2008: when there’s uncertainty, investors run towards the safety of the U.S. dollar. But something started to happen in mid-2013. Despite China’s economic slowdown, despite the situation with Russia and Ukraine, and with the Federal Reserve cutting back substantially on its money printing program, one would think the U.S. dollar would rally in value—but the opposite is happening.

Two reasons why the greenback is falling in value so fast:

First, world central banks have been slowly selling the U.S. dollars they keep in their reserves, as the percentage of world central banks that use the dollar as their reserve currency has fallen from more than 70% in the year 2000 to just over 60% today.

Secondly, with the Japanese and Chinese reducing the amount of U.S. Treasuries they buy and with the Federal Reserve reducing the paper … Read More

What the Breakout in the Gold-to-Copper Ratio Is Telling Us

By for Profit Confidential

Copper Flashing a Buy Signal for GoldCopper is considered an industrial metal, used in industries across the board. When copper prices fall, it’s usually an indicator of a slowdown in the global economy. On the contrary, gold bullion isn’t much of an industrial metal; rather, it is used as a hedge against uncertainty in the global economy.

When you look at these two metals together, often referred to as the gold-to-copper ratio, they tell us something very important: the ratio of how many pounds of copper it takes to buy one ounce of gold bullion has long been an indicator of sentiment in the global economy.

If the gold-to-copper ratio is in a downtrend, it means investors are betting on the global economy to grow. In contrast, if it is increasing (if the number of pounds of copper it costs to buy an ounce of gold is rising), it tells us investors are concerned about protecting their wealth in a slowing global economy.

Below, you’ll find a chart of the gold-to-copper ratio.

GOLD - Spot (EOD) Copeer ChartChart courtesy of www.StockCharts.com

Looking at the chart above, it is clear something happened at the beginning of 2014. Investors became very worried. Since the beginning of the year, the gold-to-copper ratio has increased more than 28%—the steepest increase in more than two years.

And the weekly chart of copper prices looks terrible too:

Copper - Spot Proce (EOD) CME ChartChart courtesy of www.StockCharts.com

Copper prices have been trending downward since 2011. In 2013, these prices broke below their 200-day moving average and recently, they broke below a very critical support level at $3.00. While all of this was happening, on the chart, there was also a formation of a … Read More

What the “Microsoft Indicator” Says Now

By for Profit Confidential

Microsoft the Best Market Indicator at This TimeEarnings estimates for Microsoft Corporation (MSFT) are going up and the stock, which recently accelerated, finally looks like it has broken out of a 13-year consolidation.

Microsoft has been an income play for quite a while. Currently yielding three percent, the company’s forward price-to-earnings ratio is around 12.5 and is not dissimilar from many other blue chips.

Then there’s Intel Corporation (INTC). This company has been struggling for capital gains, but it’s yielding 3.6% and isn’t expensively priced.

What these technology companies illustrate so well is the business cycle, both in terms of operational growth and also as equity securities. Getting the cycle correct (the right place/stock at the right time) is the toughest thing for any investor or businessperson.

Regarding stocks, both Microsoft and Intel’s long-term charts clearly show how extremely overpriced their share prices were during the bull market of the 90s. Intel’s long-term stock chart is featured below:

INTC Intel Corp. Nasdaq GS Chart

Chart courtesy of www.StockCharts.com

The benefit of the very long term is that it provides a normalized but still decent rate of return with these kinds of stocks. No enterprise or investor can escape the business cycle, whether it is industry-specific, a local reality, or the general economy.

Railroad stocks have been super hot over the last several years, but for long periods of time, they were not. The solid dividend-payers that they are, you’d be hard-pressed to find Union Pacific Corporation (UNP) competing with Apple Inc. (AAPL) or Google Inc. (GOOG) for headlines.

I feel that stocks have broken out of their previous consolidation phase in favor of a new long-term cycle. But while last year’s stunning … Read More

Demand/Supply Equation for This Investment Guarantees Higher Prices Ahead?

By for Profit Confidential

The Perfect Recipe for Higher Gold PricesThe demand and supply situation of gold bullion is clearly going in favor of the bulls, and I continue to believe the precious metal is presenting investors with a buying opportunity of a lifetime. I believe that if I buy now, I will profit later.

Let me explain…

Demand for gold bullion is rising, and it’s not just happening in the typical precious metal-consuming countries like India and China, but in the U.S. and elsewhere in the world as well. Central banks are also buying.

2013 was a very interesting year when it came to demand for the precious metal. We saw a massive amount of sellers come in and bring down the prices for gold bullion. Gold bugs like John Paulson changed their tone towards the yellow metal as prices fell.

But while the sentiment towards gold bullion was turning negative, central banks were buying more of the precious metal. Why were they buying? As I have told my readers over and over again, the currency markets jeopardize their reserves. According to the World Gold Council, in 2013, central banks around the global economy bought 369 tonnes of gold bullion. (Source: World Gold Council, February 18, 2014.)

Central banks have now been net buyers of gold bullion for 12 consecutive quarters, or since 2009. They were net sellers of the precious metal before then.

And central banks aren’t the only ones buying gold bullion; consumers are buying as well. At the global level, the demand for gold bullion bars and coins in 2013 increased to 1,654 tonnes, compared to 1,289 tonnes in 2012. This was the highest amount ever … Read More

Uncertainty in Emerging Markets Creating Certainty in Only One Market

By for Profit Confidential

This Is the Only Play that Will RewardFasten your seatbelt, dear reader. We’re in for a global financial crisis, a currency fiasco, and a stock market collapse all in the same year!

I’m being too bearish? Not after you read this…

In their search for economic growth in 2009, the Federal Reserve and other major central banks in the global economy started lowering interest rates and printing paper money.

While the central banks of the world wanted economic growth, they inadvertently created the “trade” for big investors like financial institutions and banks. I talked about this last Friday. (See “Stock Market: The Great Collapse Back to Reality Begins.”)

The “trade” had investors borrowing money from low interest rate countries and buying bonds in high interest rate countries, pocketing the spread. In the world of finance, this is often referred to as the “carry trade.” It works as long as the currencies of the low interest rate country and the higher interest rate country stay stable.

But now, the “trade” is backfiring as the currencies of emerging markets go into free fall.

China, the biggest economy in the emerging markets and second-biggest in the global economy, got most of the “trade” money. According to the Bank for International Settlements, in 2013, foreign currency loans and borrowing by Chinese companies from other countries was close to a trillion dollars. In 2009, it was only $270 billion. (Source: Telegraph, February 1, 2014.)

European banks have the biggest exposure to emerging markets, having lent them $3.0 trillion. Breaking down this number even further, British banks have loaned $518 billion to the emerging markets; Spanish banks come in second … Read More

Exodus Away from U.S. Dollar On?

By for Profit Confidential

Fundamentals That Once Supported Greenback Damaged“Michael, you don’t know what you are talking about.” That’s pretty much what I was told back in 2005 and 2006 when I was warning extensively that the U.S. housing market would collapse.

When a boom in any form of investment is going on, and millions of people are participating in that boom, it’s hard to convince people the boom is about to bust. At a certain point, we start hearing that old saying “it’s different this time,” which means people simply don’t believe the boom will end. They try to legitimize it.

But like all booms, the bust did happen. The housing market went bust big-time, and we all know what happened after that.

Today, there’s another asset class that is booming, that investors large and small are literally running to. No, I’m not talking about the stock market (it’s already in bust mode). I’m talking about the greenback, the good old U.S. dollar.

In recent days, and despite trillions of dollars in new money created by the Federal Reserve, the U.S. dollar has gained traction as investors search for safety amid the collapsing emerging markets.

Personally, I think investors are wrong to find security in the U.S. dollar. In fact, I see its days as the leading currency of the world being numbered.

But the fundamentals that make the dollar a “safe haven” are damaged. Aside from the fact the Federal Reserve has printed trillions in new money and the government continues to take on never-to-be-repaid debt daily, central banks around the world are reducing the amount of the reserves they keep in U.S. dollars.

Please look … Read More

Massive Shock Coming to the Gold Market Soon?

By for Profit Confidential

Where Is the GoldI have said it many times: central banks will be the major drivers of gold bullion prices going forward. Countries like China and Russia will need more of the yellow metal, because they simply don’t have enough in their reserves compared to the United States, France, Germany, or Italy (the four central banks with the biggest gold bullion reserves).

A news story that ran last week in the Shanghai Daily said the People’s Bank of China is expected to announce it has more than doubled its gold bullion reserves—from 1,054 tons to 2,710 tons. The article explained that China’s central bank bought about the same amount of gold in 2013 that it did during the years from 2009 through to 2011 combined! (Source: Shanghai Daily, January 17, 2014.)

Yes, I hear the stories of how gold prices are being manipulated. But how long can the manipulation—if it really does exist—go on in light of such aggressive gold buying from central banks like China’s?

In 2013, the Bundesbank, the central bank of Germany, said it would like to bring half of its gold bullion stored at the central bank of France and the U.S. Federal Reserve back to Germany. This amounts to 674 tons. But Germany was told it would take seven years to get the gold back to Germany!

In 2013, only 37 tons of the gold bullion came back to the Bundesbank: five tons came from the Federal Reserve and the rest came from France. (Source: Kitco News, January 20, 2014.) So where’s the gold? If the Bundesbank is bringing back only five percent of its gold each … Read More

If Gold’s a Bad Investment, Why Is This Country Buying 150% More of It?

By for Profit Confidential

150114_PC_lombardiI see more negativity towards gold bullion these days than ever before. And the more pessimism I hear and see, the more bullish I get on the precious metal.

After a bull market in gold bullion that lasted 12 straight years, 2013 was the correction year for gold bullion. It was the year that “separated the men from boys,” the investors from the speculators, when it came to gold bullion.

Consumer demand for gold coins continues to accelerate, and central banks around the world continue to be net buyers of the precious metal. Even small countries are getting in on the action. In 2013, Turkey imported 150% more gold bullion than it did in 2012! Turkey imported 302.3 tons of gold bullion in 2013, compared to 120.78 tons in 2012. (Source: Hurriyet Daily, January 3, 2014.)

The mainstream argument against gold bullion is that since there’s economic growth now, you don’t really need the precious metal…there’s no “crisis,” uncertainty, or inflation to send gold bullion prices higher. I don’t buy this argument for a New York minute.

The global economy is in a very fragile state. Major economic hubs are facing issues. China, India, Australia, the eurozone, and the U.S. economy show bleak economic performance. Just look at how bad the U.S. December jobs numbers were. (See “Pathetic December Jobs Numbers Proof 2014 to Be Challenging Year.”)

The third-biggest economy in the world, Japan, after years of money printing, reported an account deficit of 592 billion yen in November 2013—the country’s imports were more than its exports, as imports were up 230% over the same period a … Read More

Investors Borrowing Like Drunkards to Buy Stocks Again?

By for Profit Confidential

silver pricesThis morning we learned sales for this year’s Black Friday weekend declined for the first time since 2009. I have been warning my readers for months that falling consumer confidence would result in a pullback in consumer spending—and that’s exactly what’s happening this holiday shopping season.

According to the National Retail Federation, consumers spent an average of $407.02 from Thursday through Sunday, down about four percent from what they spent last year. (Source: National Retail Federation press release, December 1, 2013.)

The first decline in holiday spending since 2009 does not bode well for the economy, and as far as I’m concerned, it is an early indication of a weakening economy going into 2014.

But there is one place people are spending. In fact, you can say they’re spending so much here, they’re borrowing to buy more!

Investors have borrowed more money to buy stocks than at any other time in history!

The chart below shows the use of margin debt on the New York Stock Exchange (NYSE). It stands at the record-high level.

Margin Debt On New York Stock Exchange Chart

Yes, NYSE margin debt stands above the level it stood at just before the peak in stock prices in 2007 and much higher than it was when the Tech Boom bubble burst in the year 2000. The risk with margin debt is that it can turn a minor stock market sell-off into a major one for key stock indices as investor loans are called.

And while investors are borrowing like drunkards to buy stocks, earnings of companies that trade in key stock indices are anemic. In the third quarter of this year, the “surprise” rate for … Read More

Why This “Other” Metal Looks So Attractive

By for Profit Confidential

As gold bullion prices continue to take a beating because of the belief that the easy money policies of the Fed won’t go away anytime soon, silver prices have fallen into the same rut. Just like gold bullion, the silver market has also become a place where bears prevail.

But in the midst of the negativity towards silver, I see that the fundamentals that ultimately drive silver prices higher are getting stronger.

Demand for silver is robust. Sales of one-ounce silver coins at the U.S. Mint have reached a record for the year, and 2013 still isn’t finished! The table below shows how demand for silver (coins in ounces) has increased at the U.S. Mint since 2007.

Yearly Demand for Silver Coins in Ounces at the U.S. Mint

Year Sales in Ounces % Change
2007 9,887,000
2008 19,583,500 98%
2009 28,766,500 47%
2010 34,662,500 20%
2011 39,868,500 15%
2012 33,742,500 -15%
2013* 41,113,000 22%
Total % change since 2007 316%

* Data as of November 28, 2013
Data Source: U.S. Mint, Sales & Figures, last accessed November 28, 2013.

Notice on the table above how demand for silver coins at the U.S. Mint this year has already surpassed the level seen in 2011—a time when silver prices were at about $50.00 an ounce.

Rising demand for silver is just one reason why I am bullish on silver prices. But I have another reason, too, as to why I expect silver prices to rise ahead.

While there have been some comments among economists that the Federal Reserve will start pulling back on printing paper money in 2014, the Fed has printed … Read More

Warning: Stock Market Margin (Borrowing) Reaches All-Time High

By for Profit Confidential

key stock indicesI’ve been writing in these pages how more and more time-proven stock market indicators are starting to scream “Danger!” for the stock market.

Investors are getting too bullish on stocks (an omen of lower stock prices ahead), as seen in the American Association of Individual Investors (AAII) Investor Sentiment Survey. It shows 48% of investors were bullish towards key stock indices on November 7. Going back to just June of this year, the number of bullish investors stood at 32.97%. (Source: American Association of Individual Investors web site, last accessed November 11, 2013.)

Investors are flocking towards key stock indices, buying stocks in hopes they will go up in value. According to the Investment Company Institute, long-term equity mutual funds have been seeing inflows since the beginning of this year. (Source: Investment Company Institute, November 6, 2013.)

To me, this sounds all too familiar. I don’t have to go very far back to see what happened when the majority of investors turned so bullish. Remember 2007? Or the Tech Boom? In both of those situations, the common notion was that key stock indices would continue to soar and those who talked against it were ridiculed.

The reality is that the risks on key stock indices continue to increase. And the higher this market gets, I question how bad the market sell-off is going to be when it finally hits.

I’d say the “bubble” in the stock market has become the biggest I’ve seen in years, as evidenced by the amount of money investors are borrowing to buy stocks, which is often referred to as margin debt.

Leverage is a double-edged … Read More

Mario Draghi Bullish on Gold?

By for Profit Confidential

It’s “fairly good protection against fluctuation of the Dollar and risk diversification,” said the President of the European Central Bank (ECB), Mario Draghi, about gold bullion recently at Harvard University. He added, “Central banks which had started a program of selling gold a few years ago substantially stopped; by and large they are not selling any longer. Also the experience of some central banks that have liquidated the whole stock about ten years ago was not considered to be terribly successful from a purely money viewpoint.” (Source: “Central banks are unwise to sell their gold: ECB president Mario Draghi,” Mining.com, October 17, 2013.)

At the very core, the President of the ECB reiterated the point I have been trying to make in these pages for some time now: central banks are in dire need of gold bullion because the fiat currency they have created provides them with nothing but uncertainty. Gold bullion, on the other hand, keeps central banks’ reserves in check.

Dear reader, it’s a fact: central banks around the global economy are in a race to devalue their currencies to the bottom. They are printing money and keeping easy monetary policies in place to make sure that their currency value is suppressed. They think this act brings prosperity in the form of export demand. The central banks are wrong.

Our own central bank, the Federal Reserve, is printing $85.0 billion a month to bring economic growth to the U.S. economy. The Federal Reserve has also kept interest rates at artificially low levels for years. But if we take out the strengthening of big banks and the rally in … Read More

Economics 101 Says Gold Prices Are Going Higher

By for Profit Confidential

Even amateur economists will agree with me on this: when supply declines and demand remains the same, prices increase. Well, it wasn’t too long ago when I said that if gold bullion prices remain suppressed for long, we will see the supply decline. This phenomenon has started to happen.

According to the U.S. Geological Survey (USGS), in June of 2013, the total production of gold bullion from mines in the U.S. was 19,400 kilograms (kg)—about four percent lower than the same period a year ago. (Source: U.S. Geological Survey, Mineral Industry Survey, September 2012 and October 2013.)

The table below compares U.S. mine production in the first six months of 2012 to the first six months of 2013.

Month U.S. Mine Production in 2012 (kg) U.S. Mine Production in 2013 (kg) % Difference
January 19,400 18,500 -4.64%
February 18,100 17,200 -4.97%
March 19,000 18,700 -1.58%
April 17,600 17,900 1.70%
May 18,700 18,800 0.53%
June 20,200 19,400 -3.96%
Total 113,000 110,500 -2.21%

But as the supply of gold bullion falls, we see consumer demand for gold bullion increase.

In India (the biggest consumer of the precious metal), demand continues to rise in spite of the efforts of the Indian government and the Indian central bank to curb demand for the yellow metal. The director of the All India Gem and Jewellery Trade Federation, Bachraj Bamalwa, recently noted, “Demand is picking up and supplies have dried up.” (Source: “Gold premiums near record levels on lack of supply,” Reuters, October 22, 2013.)

In China (the second-biggest gold bullion consumer), we are seeing something very similar. According to the Hong Kong Census and Statistics … Read More

New Retirement Trend: One-Third of Americans Need to Work Until 80

By for Profit Confidential

281013_PC_lombardiAccording to the just-released annual Wells Fargo & Company Middle Class Retirement Study, about 60% of middle-class Americans say that getting monthly bills paid is their top concern. This number stood at 52% in the 2012 study. (Source: Wells Fargo & Company, October 23, 2013.)

But there are more depressing results of the survey…

34% of middle-class Americans say that they will work until they are 80 years old, because they will not have enough money saved up for retirement! In 2012, the number of respondents with a similar opinion stood at 30%; and in 2011, this number was at 25%. While the U.S. economy is supposed to be in recovery mode, the trend shows more Americans will need to work after retirement.

Based on the results of the study, the Wells Fargo Institutional Retirement and Trust issued a statement saying, “We do this survey every year and for the past three years, the struggle to pay bills is a growing concern and the prospect of saving for retirement looks dim, particularly for those in their prime saving years.” (Source: Ibid.) No kidding.

While the stock market has more than doubled since 2009, while real estate prices are rising again, while Washington and the mainstream are telling us the U.S. economy is improving, Americans are becoming more “doom-and-gloomish.” According to the results of the CNN/ORC International poll released late last week, only 29% of Americans say that economic conditions are good right now—the lowest level of the year. (Source: CNN Breaking News Text, October 22, 2013.)

The chart below of the University of Michigan Consumer Sentiment Index is very important. … Read More

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