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

Posts Tagged ‘precious metal’

Why Two-Thousand-Dollar-Ounce Gold Becomes Plausible Scenario

By for Profit Confidential

When Will Gold Hit Two Thousand Dollars an OunceThe rise in gold bullion prices since the beginning of the year has been very hard to digest for those who said the precious metal is useless. To me, this rise in gold bullion prices isn’t surprising at all.

And the small pullback in the price of gold we have experienced this week is very healthy and positive for gold. Gold was up 13% since the beginning of 2014. Like any investment that is going up in price, you want to have small price corrections along the way as investors take some money off the table and new players enter.

I have been writing in these pages how the demand and supply picture of the gold bullion market is getting out-of-whack. The producers don’t have much incentive to produce when precious metal prices are low. But on the other hand, with uncertainty in the global economy and other factors, we are going to see a lot of buying activity.

The main reason for the decline in gold bullion production: gold miners, in order to cut their costs, have reduced their exploration budget. Spending less on exploration and development of mines essentially leads to lower production in the future. This isn’t the case in the U.S. alone; gold companies around the world are pulling back on their exploration budgets.

According to Natural Resources Canada, a department of the Government of Canada, mineral exploration and deposit appraisal expenses in Canada declined by 41% in 2013—from $3.9 billion in 2012 to $2.3 billion in 2013. In 2014, these expenses are expected to drop further. (Source: Natural Resources Canada, March 2014.)

Looking at the … Read More

How Gold Has Caught Me by Surprise

By for Profit Confidential

How Tensions in Crimea Are Changing My Gold Investment StrategyI must admit that I’ve been somewhat caught off guard by the strong rally in gold so far in 2014. The yellow ore has been on a nice upward push towards the $1,400-an-ounce level; it could even take out this level and head towards some tough resistance around $1,425–$1,450.

While the rally appears to be holding, I still only view the yellow precious metal as a trade, and not a buy-and-hold for investors at this time. I would be selling into further weakness if you are holding gold or any related stocks.

What I think is driving the upward move in gold prices is the associated cautious moves in the stock market and the geopolitical tensions triggered by the situation in Crimea. If stocks can regain their enthusiasm, I would expect a retrenchment in the precious metal as money is shifted out. (Read why I feel stocks are heading higher in “Why I Believe the S&P 500 Could Easily Reach 2,000 in the Upcoming Months.”)

My past contention was that gold was a trading opportunity. Back in late 2013, I saw a bearish “head and shoulders” formation on the chart, after which prices fell towards support at $1,200. The oversold nature was supportive of a bounce on the charts, but the gains so far this year have been much more than I would have expected, largely due to the uneasiness in equities so far.

The precious metal could see more buying should the tense situation in Ukraine and Crimea escalate following the vote on Sunday that could lead to Crimea separating and joining Russia. While there has yet … 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 Best Investment You Can Make in 2014?

By for Profit Confidential

What Happened Last Time Gold Had a Bad YearTo say the very least, 2013 was an interesting year for gold bullion. The precious metal’s price surprised gold bugs and declined 24%.

As 2013 progressed, we heard calls for the yellow metal to fall even lower in price. The stocks of gold producers were slammed. Equity research departments at big banks like The Goldman Sachs Group, Inc. (NYSE/GS) called gold bullion a slam-dunk sell (and the last time I checked, their opinion hasn’t changed).

In the midst of all this, a very important phenomenon was forgotten: gold bullion prices are no stranger to price declines. In the table below, I’ve compiled a list of every period since 1974 when gold prices fell more than 20% and what happened after the decline.

Year, % Drop in Gold Prices Year, % Increase After Drop
1974-1976 declined by 45.67% 1976-1980 increased by 705%
1980-1982 declined by 63.84% 1982-1983 increased by 71.8%
1983-1985 declined by 45.17% 1985-1987 increased by 76.7%
1987-2001 declined by 48.88% 2001-2008 increased by 291.38%
Mar. 2008-Nov. 2008 declined by 28.8% Nov. 2008-2011 increased by 169.56%

Data source: www.StockCharts.com, last accessed February 6, 2014.

The table above illustrates that the bigger the decline in gold bullion prices, the greater the ensuing rebound.

Since gold bullion prices fell in 2013, gold miners have pulled back on operations at mines where $1,200-an-ounce gold no longer justifies production. This has resulted in a reduction in the supply of newly mined gold.

And while the supply of gold bullion is under pressure, demand for the precious metal keeps increasing. In China, both consumers and the country’s central bank have become gold hoarders over … 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

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

Opportunity for Gold Today Same as It Was for Stocks in 2009

By for Profit Confidential

gold bullion pricesI turned bullish on gold bullion in 2002. At that point, gold bullion was trading around $300.00 an ounce. Now, it trades above $1,250. Simple math suggests this is an increase of about 260% in 11 years, or an average gain of about 23.6% a year.

Other asset classes, like stocks, haven’t performed this well. In 2002, the Dow Jones Industrial Average was trading near 10,000. Now, it hovers close to 16,000, up 60%, or an average of 5.45% per year, over the last 11 years.

The big question from my readers these days is “If I buy gold here at $1,250 an ounce, will it more than double again?” My answer to this is YES, because I see gold moving to $2,500, even $3,000, by the end of this decade, if not sooner.

You see, over the past few months, we have seen a significant amount of negativity in the gold bullion market. On some days, the precious metal’s price has fallen more than two percent in a matter of minutes (I will let authorities eventually decide if it was a case of manipulation). But when no one wants a particular type of investment, that is often the best time to buy. Go back to 2009, when the stock market was plunging. No one wanted to buy stocks. In the midst of it, in the spring of 2009, we saw one of the best buying opportunities for stocks ever. I believe gold bullion is in a very similar situation today.

At the center of the “gold story,” aside from the fact that central banks are buying gold again for … 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

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

Central Banks Net Buyers of Gold for Eleven Consecutive Months Now

By for Profit Confidential

191113_PC_lombardiAccording to the World Gold Council (WGC), demand for gold bullion in the third quarter was 869 tonnes. (Source: World Gold Council, November 14, 2013.) And in the quarter, central banks purchased 93 of those tonnes.

Central banks have now been buyers of the precious metal for 11 consecutive quarters. Why have central banks been continuously buying more gold? My speculation is that they realize the fiat currency will eventually be problematic, with so much of it being created out of thin air these days.

Consumer demand for gold bullion is also robust. In China, in the third quarter, consumer demand for gold bullion accounted for 210 tonnes—18% higher than the same period a year ago. In India, consumers’ appetite for the precious metal declined 32% in the third quarter from the previous quarter, as the government and central bank worked together to curb consumer demand for gold bullion. But looking at the first nine months of 2013, gold bullion demand in India was 19% higher than the previous year.

In the third quarter, we saw higher demand for gold jewelry in countries like Vietnam, Thailand, and Indonesia. From the same period a year ago, precious metal jewelry demand in these three countries was up by 14%, 57%, and 19%, respectively. In Hong Kong, gold jewelry demand increased by 28%!

Need I say more?

Dear reader, the focus has shifted off gold bullion and onto the stock market these days, as stocks continue to break to new record highs.

With gold bullion prices off significantly from their peak, I stick to my belief that there is great value in the … 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

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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