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

Posts Tagged ‘gold prices’

Where I’d Put My Money Now

By for Profit Confidential

Annual Supply of World Gold ShrinkingAs gold bullion prices declined last year, I said supply would contract as gold miners pulled back on exploration and closed mines that were not profitable at $1,200-an-ounce gold.

For the supply of gold bullion to increase, there needs to be more discoveries. Sadly, the opposite is happening. According to SNL Metals & Mining, gold discoveries have been trending downward. In the 1990s, there were 124 new gold discoveries totaling 1.1 billion ounces of gold bullion. But since 2000, only 605 million ounces of gold bullion in total has been discovered at just 93 discoveries. (Source: Kitco News, July 18, 2014.)

For there to be more gold discoveries, mining companies need to spend more on exploration and that just isn’t happening. In 2013, when gold prices plummeted, major mining companies pulled back on their spending. Furthermore, exploration companies that need funding found it very difficult to get money, so they also pulled back on finding gold.

But gold bullion discoveries aren’t just slowing; the time it takes to start production at a mine is increasing as well. Between 1996 and 2005, it took an average of 11 years to bring a discovery to production. Between 2006 and 2013, this has increased to 18 years. (Source: Ibid.)

With all of this (it being harder to find new gold bullion and it taking too long for production to start once gold is discovered), the supply of world gold bullion is shrinking.

And demand for gold bullion, well, it just keeps rising. Aside from investors buying gold coins and jewelry at near record levels (with India now easing its stiff tariffs on gold … Read More

Dying for Gold? This Man Almost Did

By for Profit Confidential

Four Key Arguments for Owning GoldThe most compelling argument for owning gold bullion I have ever heard…

A 63-year-old businessman went to a doctor complaining he had swallowed a bottle cap in anger after he had a fight with his wife. After a three-hour surgery, the doctors found 14 ounces of gold bullion in the man’s stomach. The police and Customs were called, and the gold recovered was confiscated. (Source: “Gold bars removed from Indian man’s stomach,” BBC News, April 18, 2014.)

This is just one of the many ways smugglers are bringing gold bullion into India. In this particular case, this man was willing to die for gold!

You see, the Indian government has imposed rigorous duties on importing gold bullion into the country. As a result, imports of gold bullion between May of 2013 and November fell more than 88%. In May of 2013, 162,000 kilograms (kg) of gold bullion was imported into India, and by November 2013, it had declined to 19,300 kg. (Source: Ibid.) As the government imposed its high duties, smuggling of the precious metal into the country increased. And as I just told you, people are risking their lives to get the yellow metal into the country.

To recap what I have been writing about gold bullion:

  1. More and more central banks have been buying gold bullion to stabilize their reserves. For years, central banks sold their gold; now they are buying it back.
  2. The decline in gold prices has forced gold miners to cut exploration projects for the simple reason that they need to conserve cash. Less exploration means less supply down the road. Also, there has been
  3. Read More

How Past Investment Trends Predicted This Stock Market Action

By for Profit Confidential

Speculative Fervor Declines on Growing RiskIt’s just the same old story with stocks. One day they’re up; the next day they’re not.

If 2013 was a breakout year from the previous long-run recovery cycle, 2014 is a year of choppiness.

Stocks just can’t seem to latch onto any particular trend. A convolution of influences from earnings results to geopolitical events continue to beat down what positive sentiment sprouts from the data.

It’s no surprise to have choppy capital markets after such a strong year of capital gains. And that’s the thing I always try to keep in the back of my mind: stocks are about the future—a future stream of earnings discounted for every potential eventuality at prevailing rates of interest.

With downside leadership in equities provided by the high-valuation large-cap technology stocks, it’s difficult to imagine the main market indices accelerating near-term, especially as the marketplace has already voted on this earnings season.

A familiar mantra coming from a lot of Wall Street analysts is that the pace of U.S. economic activity should accelerate towards the end of the year. Several firms are calling for stronger oil prices and lower gold prices accordingly.

But if the choppy action in stocks so far this year is any guide, things are unlikely to unfold as expected. And the catalyst for downside is unlikely to be due to corporate performance or the Federal Reserve. Companies are expecting to meet existing guidance, and the central bank continues to provide a stable low interest rate environment.

Geopolitical events unfolding between Russia and Ukraine are a growing risk for investors. A “sell in May and go away” type of … Read More

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

Even Iraq’s Central Bank Buying Gold Now?

By for Profit Confidential

As Pressure Mounts on Paper Currencies, World Central Banks Opt for GoldCentral banks are still adding gold bullion to their reserves and the smaller countries are getting into the act big-time.

According to the International Monetary Fund (IMF), in the month of March, Iraq’s central bank added 36 tonnes of gold bullion to its reserves—worth about $1.5 billion. This is the first purchase by the central bank since August of 2012, when it bought 23.9 tonnes of gold. (Source: Reuters, March 25, 2014.)

Sure, you could say, “Michael, 36 tonnes of gold bullion is nothing for a central bank.”

I agree. But looking at the bigger picture, it is very significant for a small country like Iraq—a country whose annual gross domestic product (GDP) is smaller than Amazon.com’s sales for 2013—to be getting into gold bullion in a big way. The official announcement from the central bank of Iraq sent the message that it bought the gold bullion to stabilize the country’s currency and add insurance to their reserves.

Since 2009, central banks around the global economy have become net buyers of gold bullion, and I don’t think they will stop anytime soon. The main reason for this is that the central banks see a significant amount of volatility coming to the world of paper currencies—something they hold in their reserves.

Too many major world currencies are in a downtrend. The U.S. dollar has been on a decline since the beginning of 2014. The Canadian dollar is hitting multiyear lows. The Japanese yen has been plummeting.

Where do we go next with gold bullion?

At present, the amount of negativity towards gold bullion is immense. But the fundamentals paint a different … 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

The Great Social Media Stock Bubble of 2014

By for Profit Confidential

Allan Greenspan Be Bearish on the Stock Market Right NowA few days ago, I woke up to news that reminded me of the “Dot-com Boom” of the late 90s and early 2000. I’m sure you remember those days—the days when any company with “.com” attached to it received a lot of attention….and a high stock price. Investors bought these stocks without any concern for non-existent revenues; forget earnings.

These days, social media stocks are the new “dot-com” wonders. We recently heard that Facebook Inc. (NYSE/FB) bought “WhatsApp,” an instant messaging application for smartphones, for $19.0 billion. The valuation doesn’t make much sense; the company has only 50 employees, 460 million monthly users, and no clear business model.

Last year, we saw Twitter, Inc. (NYSE/TWTR) do an initial public offering (IPO). On its very first day of trading, the stock price increased by more than 70%. This company lost more money in 2013 than it did in 2012. Twitter’s loss per share in 2013 amounted to $3.41 compared to a loss of $0.68 in 2012. (Source: Twitter, Inc., February 5, 2014.) But investors shouldn’t fear; in the last quarter of 2013, hedge funds got into the game and bought Twitter’s stock.

Dear reader, I’m not saying Facebook or Twitter is a sell. What I am saying is that the behavior we see on the key stock indices, especially for social media stocks, is not sustainable. It resonates with what we have seen in the past—investors pouring money into companies with no business model to generate profits.

In Allan Greenspan’s past words, key stock indices are showing signs of “irrational exuberance.”

I’m concerned about the big picture for key stock … 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

If There Ever Was a “Buy Low, Sell High” Play, This Is It

By for Profit Confidential

Only Place I See Value in this Stock Market TodayWhen it comes to investing, history has taught us one very important lesson: ideal buying opportunities are formed when there’s significant pessimism towards an investment. In other words, to make it really big, you need to have the guts to buy an investment when everyone else is selling it…when it’s completely out of favor with the majority of investors.

While the general stock market is up close to 150% since March of 2009, there is only one investment that has been hard hit over the past couple of years. Long-time readers of Profit Confidential know exactly what I’m talking about: the shares of quality gold producers have taken it on the chin.

The contrarian in me couldn’t be talking louder; “buy when there’s blood on the street.” Very few investors like gold producers right now. In fact, the Dow Jones U.S. Gold Mining Index is down 60% since October 2012. Over the same period, the Dow Jones Industrial Average has risen nearly 30%. Gold stocks have fallen at twice the rate industrial stocks have risen. This is a rarity.

But the reasons to own the gold producers are becoming more compelling each day.

After putting on a relatively flat performance in 2012 and then declining in 2013, gold bullion prices now appear to be bottoming out. This can be great news for the gold producers whose stocks really trade on the rise and fall of gold bullion prices. The higher gold bullion prices go, the higher the profits of quality gold producers and the higher their stock prices go.

“Michael, it’s not good enough just to say gold bullion prices … Read More

The Supply Shortage in the Gold Pits No One Is Talking About

By for Profit Confidential

Four Reasons Why Gold Prices Are Headed Higher in 2014Is it just me, or are the banks, who’ve never really cared about the direction of gold bullion, turning outright negative on the precious metal?

• A research paper by Canadian Imperial Bank of Commerce (NYSE/CM), known as CIBC for short, said “Gold has been dented in recent quarters by an absence of inflation, greenback strength and investors’ rotation into stocks to capitalize on an expected pick-up in growth… As implied by our 2014-end target of $1,000 per ounce, we nonetheless continue to feel the metal still has further to fall in the next year or so.” (Source: CIBC, “Commodities: Warmer Growth to Heat Up Resources Next Year,” December 2, 2013.) In other words, CIBC’s opinion is similar to that of analysts at Goldman Sachs Group Inc. (NYSE/GS), who also believe gold bullion prices will fall to near the $1,000 level this year.

• A forecast from Bank of America Merrill Lynch (NYSE/BAC) said, “Gold values will be hurt by Fed tapering, a resurgent U.S. dollar and a lack of investor interest in the metal. We expect gold to drop to $1,100 an ounce at some point in 2014…” (Source: Bank of America Merrill Lynch, “BofA Merrill Lynch Global Research 2014 Year Ahead Outlook,” December 10, 2013.)

• UBS AG (NYSE/UBS) cut its 2014 gold bullion forecast from $1,325 to $1,200 an ounce. The bank said, the “struggle for gold not only rests with the predominant selling, but with limited positive catalysts looking forward, gold is unlikely to regain its former appeal.” (Source: Market Watch, “UBS cuts 2014 forecast for gold and silver,” December 3, 2013.)

I believe these … Read More

The Only Way I’d Invest in Gold in 2014

By for Profit Confidential

Why I’m Not a Gold Bug in 2014Despite all of the talk about China and India buying lots of gold (high demand) and how the precious metal is a limited resource (limited supply), I still do not like the commodity as a buy-and-hold investment at this time.

Yes, China and India love their gold, which is used for jewelry and prestige. But unless the speculators and traders jump aboard, I just don’t see why anyone would want to buy right now.

As I said in previous commentaries (see “Should Investors Hold Out for $1,300-an-Ounce Gold Before Investing?”), gold, in my view, isn’t an attractive buy-and-hold investment at its current levels around $1,235 an ounce; to me, the yellow metal looks interesting as a buy on a decline to the $1,200-an-ounce level or below, when traders can enter and sell on rallies.

The key driver of prices—inflation—is not an issue at this point, so this precious metal becomes a less interesting buy with no real reason to hedge.

Global inflation continues to be benign. In China, inflation is hovering around the three-percent level. India is experiencing inflation above seven percent, but its impact on the global economy is minimal. In the eurozone, inflation came in at 0.8% in December, according to Eurostat, which is well below the two-percent target.

The volatile Middle East is also absent of any major geopolitical risk at this time, which drives down the demand for safe haven assets such as gold.

Until we see a rise in global risk and inflation, I doubt any upside moves in the yellow metal will be sustainable.

Even with the low relative value of the … Read More

Should Investors Hold Out for $1,300-an-Ounce Gold Before Investing?

By for Profit Confidential

U.S. dollarWhen I previously wrote about gold, prices were around $1,316 an ounce and subject to a bearish head and shoulders formation on the charts, as you can see below. (Read “Why Gold Might Only Be Good for Traders Right Now.”) I was bearish on the precious metal then and continue to be so, at least when considering it as a buy-and-hold investment rather than a speculative trading opportunity.

Spot gold has fallen below $1,225 and appears to be set to take a run at the key support level of $1,200, according to my technical analysis. The reality is that even with the 7.5% decline from early October, I would still not be a buyer at the current price, unless I wanted to trade the yellow ore and hope for a possible oversold technical bounce back above $1,250.

Gold - Spot Price Chart

Chart courtesy of www.StockCharts.com

Instead, given the attractive buying opportunities in the stock market, I’d advise more conservative investors to invest their dollars in stocks, rather than gold bullion at this time.

Some of the underlying fundamentals that have traditionally supported the metal are not evident. Yes, China is continuing to accumulate physical gold, but buying by India, which is the world’s largest buyer of the precious metal, has been stalling.

In addition, the yellow metal usually receives a lift from a weaker U.S. dollar. With the greenback showing some recent strength against other world currencies, especially in the emerging markets, the precious metal isn’t seeing any support from a weak dollar.

Inflation, a historically supportive variable for the precious metal, has also been largely benign across the world economies (with … Read More

Inflation Running at 7.7%?

By for Profit Confidential

deflationCan you believe this?

The Bureau of Labor Statistics (BLS) reports the U.S. economy experienced deflation in October. The Consumer Price Index (CPI), a widely followed government measure of inflation, declined 0.1% in October.

The Producer Price Index (PPI), which measures the change in prices that producers pay, also declined in October—by 0.2%, continuing its slide from September when it declined 0.1%. (Source: Bureau of Labor Statistics web site, last accessed December 2, 2013.)

But I don’t buy any of this. The government statistics are heavily skewed and do not present the real picture of what’s going on with inflation in the U.S. economy.

Just look at the annual PNC Wealth Management Christmas Prices Index. Every year, the firm tracks the prices of the items of the “12 Days of Christmas” through its Christmas Price Index. It looks at prices compared to last year.

Surprise! This year, the cost of all those items will be 7.7% higher than last year. With its finding, the Managing Executive of Investments for PNC Wealth Management, Jim Dunigan, said, “We were surprised to see such a large increase from a year ago, given the overall benign inflation rate in the U.S.” (Source: “Cost Of Items In ‘12 Days Of Christmas’ Tops $114,000,” The Associated Press, December 2, 2013.)

As I have been writing since the Fed started its second round of quantitative easing (QE2), inflation in the U.S. economy is going to be a huge problem going forward. There is no way the continued printing of $85.0 billion a month in new paper money won’t create inflation problems.

While my readers are likely … Read More

Weak Gold Prices an Opportunity of a Lifetime for Contrarian Investors?

By for Profit Confidential

gold bullion pricesGiven the recent further weakness in the price of gold bullion, should investors be running for the exit doors?

Some well-known “gold bugs” have recently turned bearish on the precious metal. But I’m on the opposite side of the spectrum; I see the pullback in gold prices as an opportunity of a lifetime for contrarian investors.

The gold bullion price chart below shows the long-term trend in gold bullion is still intact. Since 2001, the precious metal’s price has marched higher. Note there have been many pullbacks along the way, but in all cases, gold bullion prices recovered and moved higher after their pullback. And I believe we will see gold prices recover again from their current price correction.

Gold-Spot Price Chart

Chart courtesy of www.StockCharts.com

From a fundamental point of view, demand for the precious metal remains robust. Many central banks have become net buyers of gold bullion over the last couple of years, and consumer buying in gold is very strong.

So the question is: with so much negativity towards the precious metal, have we reached peak pessimism on gold bullion? My answer is that I believe we are slowly getting there.

Just yesterday, Bloomberg ran a story saying hedge fund manager John Paulson would not be investing more of his own money in his gold fund at this time “because it’s not clear when inflation will accelerate.” (Source: Bloomberg, November 25, 2013.)

While investors seem to have turned very bearish on gold bullion, I see it as a bullish sign. If history has taught us one thing, it’s that when there’s increasing pessimism on any investment, a bottom is usually … Read More

Would Friedrich Nietzsche Be Bullish on Gold?

By for Profit Confidential

Friedrich Nietzsche Be Bullish on GoldIn 2012, the U.S. Mint sold 753,000 ounces of gold bullion in coins. So far this year, until November 6, the Mint has sold 761,000 ounces of gold bullion in coins—and we have two more months to go in 2013. (Source: U.S. Mint web site, last accessed November 6, 2013.)

If we assume U.S. Mint sales of gold bullion coins will be the same for the months of November and December as last year’s (136,500 and 76,000, respectively), the demand at the U.S. Mint will be 28% higher this year than last year.

But it’s not just the U.S. Mint that is experiencing strong demand for gold coins.

The Perth Mint in Australia is one of the biggest mints in the global economy. The Mint’s sales and marketing director, Rob Currie, said, “We’re desperately trying to keep up with production.” (Source: “Perth Mint Mulls Expansion as Gold Coin Sales Rebound,” Wall Street Journal, November 6, 2013.)

And I haven’t even gotten into strong demand from India and China for gold bullion! So gold bullion demand is as strong as ever, but prices are still low?

Let’s move to the supply side of the equation…

As I recently reported in these pages, according to the U.S. Geological Survey, production from U.S. gold mines declined in the first seven months of this year compared to the same period a year ago. Production is declining because, as gold prices dropped, producers cut back on production at mines where producing at a cost of $1,300 to $1,400 per ounce of gold bullion doesn’t make economic sense.

Consider AngloGold Ashanti Limited (NYSE/AU). In its … Read More

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