Forty years ago today, U.S. President Richard Nixon appeared on television to tell the world that the U.S.was severing the relationship between gold bullion and the U.S. dollar.

Back in 1944, in a historic agreement reached in Bretton Woods, New Hampshire, the U.S. government agreed to redeem U.S. dollars for gold bullion at the rate of $35.00 U.S. for one ounce of gold for the central banks of foreign countries.

The relationship established between the U.S. dollar and gold bullion at Bretton Woods was often referred to as the “gold standard.” Based upon the relationship between the greenback and gold, at Bretton Woods, the central bankers of foreign countries agreed to adopt the U.S. dollar as their official reserve currency. In a nut shell, the U.S. backed its fiat money with gold bullion and foreign central banks backed their currency with U.S. dollars. All the currencies had a link to gold.

Thirty-three years after the Bretton Woods agreement, on August 15, 1977, Nixon took to the airways to tell the world and in specific to tell the central banks of the foreign countries that the U.S.was reneging on the gold standard deal established at Bretton Woods.

We all know what happened once the tie between the U.S. dollar and gold was eliminated: The U.S. government was free to print money as needed, as it no longer had to worry if it had enough gold in its vault to back all the money being printed. Since the abandonment of the gold standard, the value of the U.S. dollar has lost considerable ground…a process called “inflation.” It takes a lot more U.S. pennies to buy a cup of coffee today than it did in 1971.

There have been very stark critics of America’s action in abandoning the concept that fiat money should be backed by gold. Some say lack of the gold standard has caused global economic instability since 1977.

But since 2002, another phenomenon has occurred. The price of gold bullion has boomed. Gold has risen in price from $300.00 U.S. per ounce in 2002 to almost $1,800 today—a gain of 500%. And some economists, like me, are calling for gold to hit $3,000 per ounce.

There are many reasons why the price of gold bullion is skyrocketing. (I have written about those reasons in PROFIT CONFIDENTIAL countless times and will continue to write about why I believe the price of gold will rise.) Ultimately, I would not be surprised to one day see the value of the U.S. dollar somehow tied back to gold bullion.

Michael’s Personal Notes:

I love the weekends, as they give me time to catch up on my much-needed reading. All week long, I’m inundated with research reports. Sunday afternoons is my time to open up a bottle of Brunello and spend a solid four to five hours just reading financial reports on everything from the market, the economy, and precious metals, to individual stock sectors and other forms of investment.

What I’m finding quite fascinating is the number of analysts who are deeply bearish on America. I’ve never quite seen anything like this before…so many people calling for the demise of America.

On the one hand, these are smart analysts who bring up very good facts to back up their solidly bearish views. On the other hand, I’m wondering if all this bearishness is getting overblown. After all, when does the market or economy do what is expected of it?

Here are just two reports from the weekend:

Elliot Wave expert Robert Prechter believes that the U.S. is in the early stages of a depression right now.

Well-known investor Jim Rogers, who is highly critical of specific people in Washington, predicts that the U.S. will eventually default on its debt obligations. Rogers believes that the U.S. economy never left the recession that started in 2008 and that we are still in a recession.

Yes, I’ve been very bearish on the economy as well. But, as a contrarian, one really has to wonder: will the stock market and economy really roll over and perform as the majority of analysts predict?

Where the Market Stands; Where it’s Headed:

I continue to hold the belief that a bear market rally that started in March of 2009 presides. According to a report from EPFR Global, a Massachusetts-based research firms, investors pulled more money out from global stock funds last week than any other week since 2008. And we all know what happened after 2008; stocks rallied big time.

I’m going against the popular opinion, as usual, on this one. While many stock advisors are saying that stocks are dead, the rally is over, I’m sticking with my belief that the bear market rally, in spite of it being “long in the tooth,” is still alive and well.

The Dow Jones Industrial Average opens this week down 2.5% for 2011.

What He Said:

“I’ve been pushing gold bullion and gold shares for over a year now. Back in January 2002, I personally started buying gold shares.” Michael Lombardi, PROFIT CONFIDENTIAL, December 13, 2002. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments. Michael has remained steadfastly bullish on gold since 2002.

The bond market dwarfs the size of the stock market. I know what some of my readers are thinking right now, “If I don’t invest in U.S. Treasuries, it doesn’t matter to me if they go up or down.” This is wrong.

The price direction of  U.S. Treasuries is based on interest rate expectations. If bonds are rising or decreasing in price, it means that future interest rates will either rise or fall. The entire economy is based on interest rates. Higher interest rates would be catastrophic for the stock market, real estate market, consumers, and businesses.

Right now, 10-year U.S. Treasuries are near their record low, yielding 2.28% this morning. Why so low? Because, on Tuesday, the Federal Reserve took the unusual step of saying it would keep short-term interest rates near zero into mid-2013.

The Fed cut short-term interest rates to between zero and 0.25% in December of 2008 and short-term rates have remained that low since. Now we are told that the Fed will hold rates at those levels for another two years.

But there is trouble in paradise…

Three of the 10 members of the Fed interest-rate-setting committee dissented from the decision to give specific dates on how long short-term rates would be held close to zero. The last time this many of the committee members dissented was almost 20 years ago.

There are two schools of thought on how this story will end.

One camp believes that the U.S. is entering the same type of phase Japan went through in the 1990s: a period of deflation, where interest rates remained low for more than a decade.

The second camp believes that the U.S. will need to raise interest rates, as its debt load increases and foreign countries balk at buying more U.S. Treasuries.

China—the biggest holder of U.S. Treasuries—and Russia have been blasting the U.S. for failing to rein in spending. We also have two other problems: the U.S. dollar has been falling like a stone against other world currencies and the Fed has been a major buyer of U.S. Treasuries. Some look at this as the government buying its own debt. How confusing is that?

I’m in the camp that believes a bubble is brewing in U.S. Treasuries. Just like a bubble happened in hi-tech in the late 1990s, just like the housing bubble that peaked in 2005, just like the stock market bubble that peaked in 2007.

Whenever the U.S. government auctions off U.S. Treasuries, the offering is oversubscribed. Investors are lining up to buy securities paying 2.28% that are issued by a country that is technically bankrupt. That story can’t have a good ending.

Michael’s Personal Notes:

There’s a tremendous amount of fear in the marketplace today. I’ve never really seen anything quite like it before. One would believe that it’s 2008 all over again. Hence my belief that the stock market will not just roll over and collapse at this point. The market rarely does what is expected of it.

A recent CNN/Opinion Research Corporation poll reported that 48% of Americans believe that another Great Depression is likely to start within the next 12 months. This is unheard of. If you asked people in 1930 if a depression was headed their way, they would not know what you were talking about. If history has taught us one thing, it’s that events happen when the great majority of people do not expect them to happen.

We even have France, the second largest economy in Europe, now under attack by the bond vigilantes. Rumors have it that France will lose its Triple-A credit rating, just like the U.S. recently did. Yes, things are very difficult in Europe. Unemployment is high; jobs are hard to come by. But I’m starting to get the feeling that the pessimists are painting the situation as worse than it really is.

Where the Market Stands: Where It’s Headed:

The Dow Jones Industrial Average opens this last trading day of the week down 3.8% for the year. Personally, I’m not letting the multi-100-point up and down days on the Dow Jones bother me. I recognize that a lot of it has to do with automated computer buying and selling.

I’m focusing on my long-term beliefs about the market. And those views have not changed. The first phase of the bear market brought stocks down to a 12-year low on March 9, 2009. From there, the second phase of the bear market took hold. And that’s where we have been for months.

The third phase of the bear market will have stocks fall below their March 9, 2009 low. It will present a once-in-a-generation buying opportunity for investors. However, I don’t believe the third phase of the bear market is ready to start quite yet. The bear hasn’t finished its job of luring more investors back in before it takes prices down again.

What He Said:

“A Stock Market’s Obituary: It is with great sadness that we announce the passing of the Dow Jones Industrial Average. After a strong and courageous battle, the Dow Jones fell victim to a credit crisis and finally succumbed on Friday, October 3, 2008, when it fell decisively below the mid-point between its 2002 low and its 2007 high.” Michael Lombardi, in PROFIT CONFIDENTIAL, October 6, 2008. From October 6, 2008, to November 27, 2008, the Dow Jones Industrial Average experienced one of its biggest two-month losses in history.

~ reporting from Venice, Italy

I often write about gold bullion in my commentaries, but not much about silver. And my readers are writing asking me what I think about silver. As usual, I’m happy to present my ideas and forecasts.

Right up front, I want to say I’m more biased towards gold than silver as an investment. I’ve been pushing gold since 2002. At that time, I started getting concerned about spiraling U.S. debt and the increase in the money supply.

My thought has always been: if the validity of the U.S. dollar ever comes into play, gold will be the currency of choice. Not silver. I can see the government eventually forced into a situation where U.S. dollars again will be partially backed by gold bullion. I can’t see U.S. dollars backed by silver.

On the other hand, silver is used in many different industries, whereas gold is still primarily used in jewelry and as an investment-related commodity. And, as the economy in China continues to boom, as we believe it will, demand for silver for industrial use will continue to rise, pushing up silver prices.

Gold prices are up about 13% this year compared to a 29% increase in the price of silver so far in 2011. Silver is actually outpacing gold in terms of price appreciation this year.

The gold-to-silver ratio works like this: we take the current price of gold and divide it by the current price of silver. Historically, over two centuries, the gold-to-silver ratio has been 37-to-1. Today, it sits at 40-to-1.

What does this tell me? It tells me that silver is not cheap in respect to gold, but it is not overvalued compared to gold either. It also tells me something else.

Investing in gold—my gold advice: my prediction, as expressed in these pages over recent years, is for gold bullion to reach $3,000 per ounce before the bull market in the metal is over. If I apply the historic 37-to-1 gold-to-silver ratio, silver should be trading at $81.00 an ounce if gold reaches $3,000 an ounce. Hence, we are looking at a doubling of the price of silver before the bull run in commodities is over.

In short, silver is a good investment, not because of the increased demand for the metal in China, but because the metal has been riding gold’s bull market of the past 10 years. I expect it to continue doing so.

There are several major silver producers traded on various stock exchanges. On silver price dips, I’d be a buyer of the major silver producer stocks, especially those listed on the TSX, Canada’s major stock exchange.

Gold and silver will both rise on the back of a weaker U.S. dollar. American investors can enjoy the rise in the price of major silver-producing stocks in non-U.S. denominated dollars, providing Americans with a double whammy of stock price appreciation and profits on a currency play.

What He Said:

“Prepare for the worst economic period ahead that we have seen in years, my dear reader, as that is what I see coming. I’ve written over the past three years how, in the late 1920s, real estate prices fell first before the stock market and how I felt the same would happen this time. Home prices in the U.S. peaked in 2005 and started falling in 2006. The stock market is following suit here in 2008. Is a depression coming? No. How about a severe deflationary recession? Yes!” Michael Lombardi in PROFIT CONFIDENTIAL, January 21, 2008. Michael started talking about and predicting the economic catastrophe we began experiencing in 2008 long before anyone else.

I still feel that the most important news investors should be listening to is from corporations themselves. They are the enterprises, not government, and therefore they are the drivers of earnings growth. The fact of the matter is that we are in the age of austerity, and we deserve to be. All the excesses of the past have created the slow economic environment of the present. Investors’ concern about government cuts to spending is a worry that’s misplaced. The economy shouldn’t be based on government spending and stimulus; that’s up to individuals and entrepreneurs.

Just like last year, big corporations are saying that earnings are solid, and the expectation is for further improvement in the bottom half of this year. Many Wall Street analysts are increasing their earnings expectations for S&P 500 companies this year and next, and, based on those expectations, the stock market is looking very reasonably priced at this time.

No doubt, the sovereign debt issue in Europe and the debt-ceiling negotiations in theU.S.were confidence killers. Add in some weaker economic news and you can easily see why the stock market retreated. But I think this market has a real resiliency to it and there’s a good chance that it won’t break down. If this were to happen, it would go against what corporations are saying about their businesses.

There is one important factor that investors need to keep in the back of their minds. What matters most in capital markets is the numbers. Unfortunately, people don’t particularly count. What I’m getting at is that the stock market can tolerate persistently weak employment numbers if corporate earnings are growing. If employment was improving and so was the housing market, then I have no doubt we would be in a full-blown bull market right now. As this is not the case, I think the market will hold together and tick higher modestly as long as the earnings growth is there. All that really matters in the equity market are earnings and this news so far is promising.

There is one big reason why I think corporate earnings can keep growing even if growth in the domestic economy grinds to a halt. It’s the dollar—a weaker dollar that should persist for several years to come. A weaker dollar is the biggest gift to domestic exporters and large-cap multinationals, because the earnings abroad translate into bigger earnings at home as the dollar falls relative to foreign currencies. The U.S. Dollar Index, which measures the value of the U.S. dollar compared to a basket of the world’s main currencies, has bounced around quite a bit over the last three years. However, since the beginning of 2010, it has been in a significant decline. The near-term trend for this index looks intact and this is good news for corporations.

As I say, there are plenty of potential shocks out there and investor confidence is already low. With a little bit of stability on the confidence front, I see corporate earnings swaying investor sentiment going into the fourth quarter. Stocks should be able to advance based on earnings news alone.

— reporting from Rome, Italy

Does America want members of the 17 eurozone countries to go bankrupt one by one? If only a few went under, the American currency would win the currency wars and reaffirm itself as the reserve currency of the world.

If you were someone living outside the U.S., wouldn’t this sound like a “secret” strategy that could work? After all, are not all the major credit reporting agencies (that grant credit ratings to European countries) subsidiaries of major American corporations?

These are the suspicions I’m hearing from people here in Rome.

Let’s give the theory some further attention and you’ll be surprised at what we find…

When we look at the rising national debt of America, by the end of this decade, the debt-to-GDP ratio of the United States will surpass that of a number of European countries. Why, despite a never-ending rise in our total debt, are U.S. bonds not referred to as “junk” when so many other European countries, with better debt-to-GDP ratios than America, have their bonds considered junk?

On July 25, 2011, Moody’s Investors Services downgraded Greece’s sovereign credit rating by three notches to what is referred to as “Ca,” very risky.

In an ideal situation, here is what happens…

The American dollar is devalued over the next three to five years, so the U.S. is paying back its trillions of debt owed to foreigners with cheaper money.

The euro totally collapses over the next three to five years. With no euro, the greenback, although devalued, survives, as Europeans want American dollars, not Japanese yen or Chinese yuan.

Great idea, if you can pull off.

Under the scenario above, the snowball job of convincing two-thirds of world central banks that the U.S. dollar should be the reserve currency of those central banks continues.

But two problems arise…

Firstly, about 21% of the revenue generated by S&P 500 companies comes from Europe (according to Bloomberg). If the euro currency is devastated, the earnings of the major American companies will be as well, pushing stock prices lower.

Secondly, the rise in the price of gold bullion from $300.00 an ounce in 2002 to approximately $1,600 today is telling us a different story. There could be a new currency in town. Or, at the very least, there could be a new currency permanently tied to the price of gold.

Euro or no euro, American dollars partially backed by gold again…I easily see this in the cards. That’s the best advice on investing in gold or gold advice I can give.

What He Said:

“Any way you look at it; the U.S. housing market is in for a real beating. As I have written before, in the late 1920s, the real estate market crashed first, the stock market second and the economy third. This is the exact sequence of events I believe we are witnessing 80 years later.” Michael Lombardi in PROFIT CONFIDENTIAL, August 27, 2007. “As for the stock market, it continues along its merry way oblivious to what is happening to homebuyers’ wealth. (Since 2005 I have been writing about how the real estate bust would be bigger than the boom.) In 1927, the real estate market crashed and the stock market, even back then, carried along its merry way for two more years until it eventually crashed. History has a way of repeating itself.” Michael Lombardi in PROFIT CONFIDENTIAL, November 21, 2007. Dire predictions that came true.

Today’s commentary is directed to: (1) my readers who have not invested in gold; and (2) my readers who have invested in gold—yes, all my readers.

First, to my gold bug followers…

The price of gold bullion continues to hit new highs. But the price of gold-mining stocks continues to lag the market. Why?

When we look at the major gold mining companies, which are coincidently the ones our analysts follow, we see that Barrick Gold Corporation (NYSE/ABX) is down 17% from its 52-week high. Goldcorp Inc. (NYSE/GG) is down 12% from its high. And Newmont Mining Corporation (NYSE/NEM) is down 13% from its 52-week high. Why?

My answer lies in the fact that investors and market do not believe the price of gold will sustain itself at these high levels. There is plenty of suspicion over record-high gold prices, as evidenced in news stories like, “In a Gold Lovefest, Shades of 1980” (New York Times, 07/24/11).

Now to my readers who have not dipped into the major gold-mining stocks yet…

It’s my belief that the stocks of major gold producers offer the best value in the market today. These stocks are down an average of 14% to 15% despite record gold bullion prices. We could have “catch-up” time for the major gold producer stocks at any time. And I believe that, by the time the bull market in gold is over, it will be the gold stocks leading the rally, not bullion.

My opinion is simple, even basic. After years of excess money printing, the greenback is declining against other major world currencies. In fact, the U.S. dollar has been spiraling down in value since late 2008, early 2009.

But it’s not just too much of a currency in the system that causes its value to decline. The country behind the greenback is awash in debt. Its economy is hurting, leaning more toward another recession than toward growth. And all that money printing could lead to unexpected inflation.

If you have the same fears I have, dear reader, the best stock market advice I can give is to take a serious look at the stocks of the major gold producers. They are where I see the best value in the market today.

Where the Market Stands; Where it’s Headed:

Sure, there’s a lot of volatility in the market. The media and analysts are making a mountain out of a mole hill with debt-ceiling nonsense. The stock market seems to lack direction. But my opinion hasn’t changed.

We are in a bear market rally that was born on March 9, 2009. That bear market rally, while “tired in the tooth,” as they say, still has more room to move on the upside. Yes, the risks outweigh the possible rewards, but stocks will have a final blow-off to higher prices before the bear market retires.

What He Said:

“When I look around today, I see falling stock prices…I see falling house prices…and prices for retail goods declining. The media has it all wrong blaming (worrying about) inflation. In my opinion, the single biggest threat to the U.S.economy and to the Fed in 2008 is deflation. You can bet the Fed will expand the money supply and drop interest rates aggressively as deflation starts to rear its ugly head.” Michael Lombardi in PROFIT CONFIDENTIAL, December 17, 2007. Michael was one of the first to warn of deflation. By late 2008, world economies were embedded in their worst state of deflation since the Great Depression.

As I read the financial newspapers and the popular Internet sites this morning, I realize that if there is one thing I hope I achieve in my own daily writings, it is to make my readers wary, almost suspicious of what the media is telling them.

Here’s what got me thinking like this…

Yesterday, the U.S. dollar hit a fresh, new three-year low against a basket of six other major world currencies. The media was quick to point to the bickering amongst the Democrats and the Republicans (over raising the U.S.debt ceiling) as the reason the dollar was falling to a new record low. Wherever I looked this morning, the news sites were basically saying, “Washington can’t agree on increasing the debt ceiling, the deadline is closing in, and the dollar is falling because of all this concern.”

But that’s where reporters have it very wrong, as far as I’m concerned.

Let’s take the debt ceiling issue off the table for a moment and let’s assume Washington passed a new debt ceiling limit of $16.0 trillion or $17.0 trillion. Would the greenback still be falling off the cliff in value? Of course it would.

We are passing a law that says the government can borrow even more money. The greater the debt of a nation, the weaker its currency. We are actually better off if the government doesn’t pass a new debt ceiling and it starts spending within its means.

I don’t want my readers to buy the propaganda the media spits out. At the very least, I want my readers to be aware of the fact that most people reporting the financial news today know very little about finances or economic analysis.

The following are my five core beliefs. I hope my PROFIT CONFIDENTIAL family of readers will benefit from them.

The devaluation of the U.S. dollar that started in late 2008, early 2009, will continue as: (1) the U.S.economy deteriorates further; (2) the national debt level continues to rise; and (3) the Fed prints more money.

Inflation will become a real problem in America thanks to years of monetary policy that promoted artificially low short-term interest rates and the hyper-printing of U.S. dollars.

Gold prices will rise on the back of a weak greenback and too many dollars in the system and as inflation comes back.

The euro is as done as the dollar. Either Germanywill eventually kick the weaker countries out of the euro or it will adopt its own currency.

The stock market will eventually test its March 9, 2009, lows, as Phase III of the bear market sets in.

Where the Market Stands; Where it’s Headed:

The next couple of days will bring the close of July 2011. And with another month behind us, the bear market rally in stocks that started in March of 2009 will have lasted 29 months. A tremendous feat? Not really. As I have written before, the 1934 to 1937 bear market rally lasted 35 months.

I remain steadfast in my opinion. We are in phase II of a bear market. During this phase, the bear brings stocks higher in an effort to lure investors back into them. The easy money in this bear market rally has been made. But there still is upside potential for stocks, albeit it’s limited.

While the media is obsessed with theU.S.debt ceiling limit, the Dow Jones could easily continue to ride the “wall of worry” higher.

What He Said:

“The Dow Jones Industrial Average, the S&P 500 and the other major stock market indices finished yesterday with the best two-day showing since 2002. I’m looking at the market rally of the past two days as a classic stock market bear trap. As the economy gets closer to contraction, 2008 will likely be a most challenging economic year for Americans.” Michael Lombardi in PROFIT CONFIDENTIAL, November 29, 2007. The Dow Jones Industrial peaked at 14,279 in October 2007. A “sucker’s rally” developed in November 2007, which Michael quickly classified as a bear trap for his readers. By mid-November 2008, the Dow Jones Industrial Average was at 8,726.

Throw bad news at this stock market…it doesn’t matter…the assault on Dow Jones 13,000 continues its move ahead.

Yesterday was another big upside day for stocks despite a series of what I believe were negative economic news reports.

Bloomberg ran a story saying that a deficit-reduction plan gaining acceptance amongst members of the U.S. Senate would result in the end of preferred tax treatment of capital gains and dividends. This type of news would usually rattle stocks.

The Conference Board reported that its U.S. leading indicators rose in June at a pace of 60% below May. The Labor Department said that initial jobless claims rose by 10,000 in its latest reading. All negative economic news—that’s becoming the usual backdrop to rising stock prices.

Finally, the Atlantis ended the U.S. space shuttle’s 30-year history Wednesday. Where will the 9,000 people who worked for NASA get jobs now? House prices in Titusville, the closest town to Kennedy Space Centre, have already fallen 47% in five years (Source: Federal Housing Finance Agency).

In spite of how poor the economic news was yesterday, the stock market had only one mandate and that was to move higher. And this is exactly how bear market rallies work: bring stock prices higher, lure investors back into the stock market, and give them the false hope that all is well with the economy.

My prediction is that, by the time this bear market is over, a great number of investors will have been lured back into the stock market. As quickly as the bear brought stock prices up, it will bring them back down.

Sure, it’s very enjoyable to see the Dow Jones jumping 100 or 200 points in a day to the upside. But when we see drops of 100 to 200 on the downside, it gets very painful, as most investors play the upside of stocks, not the downside (short selling).

As I have been saying, enjoy the rally while it lasts, as this bear market rally’s life span is limited.

Where the Market Stands; Where it’s Headed:

There’s not much I can say that I haven’t said above. We are in a bear market rally in stocks that started in March of 2009. The rally, although long and tired now, will likely take stocks past Dow Jones 13,000.

In the immediate term, the dual forces of a government willing to go further in debt to spur the economy and a Federal Reserve ready to expand the money supply are overwhelming strong forces for the stock market. 

The ramifications of a devaluation of the U.S. dollar, spiraling U.S.national debt, rising long-term interest rates, rapid inflation—the bear market will have us dealing with them on a date soon to be announced.

What He Said:

“Starting two years ago, I was writing how the housing boom would go bust and cause the U.S. economy to suffer sharply. That’s exactly what is happening today. From what I see happening in the U.S. economy, I’m keeping with the prediction I made earlier this year: By late 2007/early 2008, the U.S. will be in a homemade recession. Hence, I expect housing prices to continue declining, soft auto sales, soft consumer spending and a lower stock market.” Michael Lombardi in PROFIT CONFIDENTIAL, August 15, 2007. You would have been hard-pressed to find another analyst predicting a U.S. recession in the summer of 2007. At the time, the stock market was roaring, with the Dow Jones Industrial Average hitting its all-time high of 14,164 in October of 2007.

With the price of gold bullion hitting a new record high this morning, as Moody’s Investor Services says it’s placing the U.S. credit rating under review for downgrade, my mind wandered to my core beliefs about gold.

What I realized is that my opinion on gold and the reasons I believe the metal will continue to rise in price have not changed.

What has changed: the financial events of the past 10 months have created an even stronger argument for investors to have exposure to gold-related investments.

Below, please find a repeat of one of the most read articles I published in 2010. It’s from PROFIT CONFIDENTIAL on September 8, 2010:

“‘I’ve been pushing gold bullion and gold shares for over a year now. Bank in January 2002, I personally started buying gold shares.’ (Michael Lombardi in PROFIT CONFIDENTIAL, December 13, 2002.)

The format of this e-newsletter really hasn’t changed much over the past eight years, and neither has the message: Continued record U.S. deficits, rising American national debt as a percentage of GDP, and too much liquidity in the financial system—will all contribute to a weaker U.S. dollar. Given the fragile state of the euro, gold becomes the ‘currency’ of choice.

In these pages, I have repeatedly expressed the benefits of individual investors acquiring gold-related investments. I ‘pushed’ gold at $300.00 U.S. an ounce, $400.00, $500.00, and each time gold hit a new milestone price (basically each time the metal rose another $100.00 an ounce).

As recent as this summer [2010], I was writing in these pages about the benefits of owning gold-related investments. Basically, I have been pushing gold to my readers until I have turned blue in the face.

Yesterday, gold bullion reached a new milestone. Gold for December delivery closed at a new record high of $1,259.30 per ounce. In the days ahead, I expect gold to close above its record intra-day high.

Here are my three beliefs on what lies ahead for gold-related investments:

With the White House predicting that the official U.S. debt will hit $20.0 trillion by the end of this decade, the pressure to somehow devalue the U.S. dollar will push gold prices much higher.

On these pages, I have been predicting a gold bullion price between $2,000 and $3,000 an ounce. It could go even higher.

The great majority of investors have no exposure to gold-related investments. Our company has severed hundreds of thousands of investors, providing them with investment information and guidance.

I can tell you that only a very small portion of investors (maybe five percent) have actually bought any gold investments. Eventually, when the herd finally joins the gold bull market, prices will be pushed higher.

Finally, there’s not an investment that moves higher or lower in a straight line. Gold bullion prices are no exception.

Yes, gold has recently moved to a new record high, but, historically (at least over the past eight years), gold price run-ups are followed by small contractions, which give investors the opportunity to buy more gold-related investments before the next run-up.”

One of the next most-read stories of 2010 had to do with gold and, of all things, coffee. Here’s how the lead article from October 28, 2010, started…

“Do You Have My Wallet?

It’s 5:00 A.M. and I’m at work writing this morning’s PROFIT CONFIDENTIAL. The Starbucks down the street opens at 6:00 A.M. and, all of a sudden, I realize I don’t have my wallet.

My mind starts to wander. What happens if I went into Starbucks this morning and tried to pay for my chocolate banana ‘Vivanno’ with gold coins? I don’t think it would work.

Starbucks is a modern, hip place offering the ultimate “it’s all about me” customer statement. It’s obviously more fashionable to have a Starbucks cup in your hand than a Dunkin’ Donuts cup.

And, at Starbucks, it’s pretty much consistent. You know what you are going to get. And the concept works—millions of customers go through Starbucks’ 16,000 locations every single day. At most stores, you’ll find line-ups at peak hours.

But would a modern place like Starbucks take payment in gold coins? After all, it was only a couple of hundred years ago when they were readily accepted by merchants.

Of course, Starbucks would not take gold coins. Hence, I’ll have to wait until someone comes into work so I can bum $5.00 off them for my drink.

What’s my real message here?

The price of a beverage at Starbucks will rise over time, because we will need more dollars to pay for it. Think $5.00 is a lot to pay for my morning drink? I can see a day in the future when the same drink will be selling for $10.00, because the value of our fiat currency will diminish as inflation takes hold.

Even in Rome, when the empire was all but finished, it was lire that merchants were accepting, not gold coins. In 1927, it took 19 lire to buy one U.S. dollar. By 1970, it took 625 lire to buy one U.S. dollar—the after-effect of too much currency in circulation backed by a bankrupt country. Much like the direction we are headed in here in America.

Why does inflation grip currencies? Usually because there is too much of the currency in the financial system…again, very similar to what’s happening now. More dollars printed, more debt issued. One needs to wonder how far the greenback will erode in value. But, as investors, we know the greater the devaluation of the U.S. dollar, the more debt America takes on, the higher gold prices will rise.”

Coming back to today, July 14, 2011, not much has changed since September and October of 2010, except that our dollar has fallen further against other word currencies and the U.S. government has hit its debt ceiling. How can gold not continue its march higher?

I’ve been writing in PROFIT CONFIDENTIAL about how the easy monetary policies of the U.S.—specifically a historically prolonged period of low-interest rates and an expanding money supply, as evidenced by the Fed buying U.S. Treasuries—would ultimately lead to inflation.

Governments in Europe, including non-euro currency members such as the U.K., have been experiencing rising inflation. Yesterday, we learned that our neighbour to the north, Canada, a G7 country, has reported sharply higher inflation.

In May, the inflation rate in Canada rose to 3.7%, its highest level in eight years. Significantly, consumer prices in Canada rose by 0.7% in one month, from April to May. The unexpected sharp rise in Canada’s May inflation numbers will put pressure on the Bank of Canada to raise interest rates again.

So, how about here in the U.S.; when will inflation become a problem here? I look at two items to gauge inflation risk, and both are flashing red right now.

I look at the price of gold bullion, and it’s continuing to rise, telling me that inflation lies ahead (the rise in gold prices also tells a tale of a lower-priced U.S. dollar ahead). Secondly, I look at the yield of long-term government bonds.

Yesterday, 10-year U.S. Treasuries completed their biggest three-day drop since November of 2010—ending at a yield of 3.12%. Sure, the popular media will tell us that the yield on long-term U.S. Treasuries is rising, as Greece has succeeded in its austerity measures and will not be going bankrupt, hence investors are no longer flocking to the security of U.S. long-term bonds. Personally, I don’t buy that reasoning. I see the recent sharp rise in the yield of the 10-year U.S. Treasury as a leading indicator of a devaluing greenback, concern over rising U.S. debt and of course, inflation.

Michael’s Personal Notes:

How to lose $545 million in six years…

News Corporation (NASDAQ/NWSA) bought web site MySpace for $580 million in 2005. Yesterday, it announced that it was selling MySpace for $35.0 million—mostly in stock.

What happened? MySpace customers have left the web site for other social networks, like Facebook.

While News Corporation is losing half a billion on MySpace, LivingSocial, the second largest coupon web site, is getting ready to raise $1.0 billion in its initial public offering.

Groupon, eBay, Amazon, Google, LinkedIn, and maybe one day Facebook are stock market darlings, as all these companies brought something to the Internet that was different than anyone else. All of these had revenue; all but LinkedIn had real profits.

And this is something we have been preaching to our subscribers in our paid investment newsletters. When looking at an Internet-related stock, look for a company that has a service that no other company offers; look for the leader in its space. Focus on companies with real revenues and real profits. Stay away from companies that just have ideas. News Corporation paid hard cash to learn this lesson.

Where the Market Stands; Where it’s Headed:

Yesterday, the S&P 500 capped off its biggest three-day gain since March. I’ve been telling my readers that the market sell-off was overdone, that stocks would come back, and they have.

The S&P 500 has gained 3.1% so far this week. The Dow Jones Industrial Average is up 5.9% for 2011.

A bear market rally in stocks that started in March of 2009 continues to preside.

What He Said:

“The Real Threat to the Economy: U.S. retail sales are falling, the producer price index is crashing, house prices, car prices are all falling—and no one is talking about deflation but me. Fed governors are still talking about inflation—they’ve got it wrong. There’s no need for me to get into the dangers of deflation, as I’ve written about them (many times) before. Let’s just put it this way: Deflation is about the worst economic state a country will experience. The risks to the U.S. economy in 2007 are greater than I’ve seen in years.” Michael Lombardi in PROFIT CONFIDENTIAL, November 15, 2006. Michael was one of the first to warn of deflation. By late 2008, world economies were embedded in their worst state of deflation since the Great Depression.

There’s only one way to say it: investment risk in this market is high. The sovereign debt issue keeps rearing its head every other week or so and the developments in Europe are having a material effect on the domestic equity market. This entire issue is related to the mortgage financial crisis in that it illustrates that even countries can’t go on forever with spiraling amounts of debt. Eventually, you are going to get called out—even as a country.

No one quite knows where this issue will lead global financial markets, but you can bet that large, institutional investors are making plans for how to deal with it if investor confidence in the European bond market begins to unravel. There’s no greater risk to your investment portfolio than the sovereign debt issue. It will be with us for the rest of this decade and it must be addressed by policy makers.

This is why the spot price of gold hasn’t corrected nearly as much as other precious metals and other commodities. It’s the store of value and risk-haven trade keeping the price of gold solid. If the status quo remains with these two realities and we add in a declining U.S. dollar relative to other global currencies, $2,000 gold seems like an easy price target.

Financial markets are currently experiencing a well-deserved consolidation/correction. Most assets have been due for this and it’s no big surprise. A new trend in commodities is waiting to develop and all that remains is the catalyst required for investors to jump on board. As I’ve mentioned, debt defaults and/or country rating downgrades could be the next big thing.

So, with investment risk high and economic data showing lackluster numbers, all the market has to trade on over the near term are corporate earnings and visibility. If what companies report doesn’t make the grade, then we should be in for more downside in stocks.

Things are the way they are because of a lack of austerity, both at the individual and country level. The fact of the matter is that austerity hurts, but it’s exactly what’s required over the next few years to get things back on an even keel. What goes around comes around. For far too long, governments have been borrowing on the future of their own citizens in order to get elected. It’s happened in all Western countries and now all that debt is starting to bubble over.

As I’ve been writing for quite some time, I wouldn’t be in any rush to jump into the marketplace with any new bold vision or investment theme. There’s too much uncertainty out there to be making any big plays. I’d be a buyer of gold assets and select large-caps with solid dividends after we get a look at second-quarter numbers. Right now, it’s a waiting game, with the hope that things don’t actually fall apart.

In my daily writings, my goal is not to continuously be the bearer of bad news. When it comes to the economy, my goal is to educate my readers as to the severe structural economic problems the U.S. faces in the hope that more awareness of the issues will help my readers prepare their portfolios for the inevitable hardships that lie ahead.

Most Americans go along their merry way, oblivious to the mounting economic challenges facing America. I assume that, since you and hundreds of thousands of others read this column daily, you do not want to be in the “merry oblivious group.” You want to know what’s really going on with different aspects of the economy and how they will ultimately play out for or against you.

The following are seven major problems facing the U.S.:

1. Foreign Ownership of America

Ten years ago, foreigners owned 20% of U.S. Treasuries. Today, they own between 40% and 50%. If we go back through history, when we see past countries exposed to such dependence on foreign investment, the debtor nation (in this case the U.S.) has eventually faced sovereign debt problems and high inflation.

2. Price Action of Gold

The price of gold has risen 413% in less than 10 years and, during that 10-year period, it has failed to face a major correction in its price advance. The spectacular but steady rise in the price of gold bullion is a leading indicator of either a collapse in the value of the U.S. dollar or rapid inflation or both.

3. The Fed

As blunt as I can be, and in a nutshell, here’s my opinion: The Federal Reserve’s printing press has been supporting the economy since March of 2009. At the end of this month, the Fed says it will stop its QE2 program—basically a fancy name for printing money, taking that money and buying U.S. Treasuries. I have read various reports issued by analysts and economists. Depending on which report I choose to believe, the Fed has been buying about 50% of the Treasuries issued by the government under QE2. Who will buy these Treasuries if the Fed stops buying them? Scary thought.

4. Debt

The U.S.’s budget deficit this year will be in the $1.5-trillion to $1.6-trillion range. Our debt ceiling (the amount the U.S. can legally borrow) is here and it’s $14.3 trillion. Only nine years ago, the national debt was $6.0 trillion. In less than a decade, our national debt has gone up 140%. But the official national debt numbers we hear do not include entitlements to U.S. citizens and unfunded liabilities. Include these and our total debt is in the $70.0-trillion to $100-trillion range, again depending on which analyst report you believe. The official national debt is expected to increase another $6.0 trillion by the end of this decade.

5. Government Gone Too Big

Under the Obama Administration, the government has only gotten bigger. Between 40% and 45% of households in the U.S. receive some form of government support. Over 30 million Americans use food stamps. And, of course, the government is the biggest employer in the country. Social Security and Medicare—those expenses are huge for the government. But conveniently, they are not included in the government’s total debt, as they are both unfunded expenses. The government took over Freddie Mac and Fannie Mae during the credit crisis. Since these two entities owned or guaranteed half the residential mortgages in the U.S., does this mean the U.S. government now owns or guarantees half of all residential mortgages in the U.S.?

6. U.S. Dollar

Since June of 2010, less than 12 months ago, the U.S. dollar has declined 16% against a basket of six major world currencies. The devaluation has been steady and slow. Frankly, considering all the debt the U.S. has piled on, I’m surprised that the U.S. dollar hasn’t simply collapsed. Maybe it’s being supported. I don’t know; I’m just a writer. But I have studied history. And I can tell you that no superpower has thrived as its currency has devalued. In the case of the U.S., the situation is dire—the U.S. dollar is the reserve currency for 70% of world central banks. If they all dump the dollar, the repercussions to the U.S. economy will be insurmountable.

7. House Prices

The average price of a home in the U.S. has declined 33% in 20 major cities from their 2006 price peak, according to the S&P/Case-Shiller Index. It will be years before the housing market recovers…a major impediment to the U.S. economic recovery.

Yesterday, at a conference in New York hosted by Standard & Poor’s, Robert Shiller, co-founder of the S&P/Case-Shiller House Price Index, was quoted as saying that he would not be surprised to see U.S. house prices decline another 10% to 25% over the next five years. Shiller noted that, in Japan, housing prices fell for 15 years after Japan’s property bubble burst in 1990.

For eight consecutive weeks now, the bellwether U.S. 30-year fixed mortgage has dropped, and consumers are still not interested in buying houses.

A 30-year fixed U.S. mortgage today costs 4.49%. Last year at this time, it was 4.72%. The record low was 4.17% in November of 2010 (Source: Freddie Mac).

If the 30-year mortgage rate in the U.S. fell to three percent, would buyers surface? I doubt it. Consumers have no faith in the housing market and the inventory overhang is unprecedented. Just when you think the housing market can’t get any worse, it will get worse.

Based on the above, I’m sure you can see why I’m so concerned about America’s future and my kids’ future. American is no longer the industrialized leader it was following World War II. We face severe economic problems in the years ahead; hence you see why I’m long-term bearish on the stock market.

Next week, I’ll tighten the time frame and give you my more immediate reasons as to why I believe the U.S. economy will soon fall back into recession. Today’s U.S. economy…it’s looking very similar to me to the Japan economy of the 1990s.

Where the Market Stands; Where it’s Headed:

Stocks broke through their longest losing streak since 2009 yesterday. Although I was disappointed the market didn’t end on its high for the day, the market is putting in a base here.

I’d be worried if the Dow Jones Industrial Average fell decisively below the 12,000 level (12,124 was the opening this morning), but until then, the “tired” and “long-in-the-tooth” bear market rally presides.

What He Said:

“Despite all my ‘yelling’ and ‘screaming’ about gold, I believe that only a few of my readers and a small fraction of the general public have taken a position in gold. Why? Because gold’s not trendy…buying condominiums for investment is! If you are an investor, you need to seriously look at investing in gold stocks because gold bullion prices will likely continue to rise.” Michael Lombardi in PROFIT CONFIDENTIAL, September, 21, 2005. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments.

I know this sounds crazy. But I believe the low-interest-rate environment that has prevailed for months is actually killing the economy.

Hear me out…

In response to the credit crisis (which was caused by a low-interest-rate policy in the first place), the Federal Reserve dropped the Federal Funds Rate to between 0.25% and zero in December of 2008—where it has stayed for 30 months now. Treasury bills pay about zero today. The three-year, five-year and 10-year U.S. Treasuries; they all yield below the inflation rate.

Think about all the seniors (million of them) that were planning to receive interest income during their retirement years on money they worked hard to save. Those dreams are lost. Take a senior who has $1.0 million in the bank. The senior wants to avoid risk and thus opts for a 10-year U.S. Treasury paying three percent interest. That’s $30,000 a year. Take away personal income taxes and the senior realizes he/she can’t live off the interest $1.0 million in cash generates. Low interest rates are killing the retirement plans of millions of seniors.

Prolonged low interest rates in a country ultimately lead to money flowing out of the country to places where money can yield a higher return. Low interest rates are doing just that. By keeping interest rates artificially low, money is flowing out of the U.S. to other countries where cash can return a higher yield.

I’m all for a lower valued U.S. dollar. And today’s low-interest-rate environment is a perfect catalyst for the greenback devaluation. But long-term, this will come back to haunt us. Throughout history, no country has maintained its status as a world power when its currency has been devalued.

The widely recognized U.S. dollar, which 70% of world central banks have adopted as their reserve currency, was the backbone of the industrial revolution that followed World War II. The rapidly rising price of gold over the past 10 years is telling us that the U.S. dollar’s status as the world’s supreme currency is being unwound.

Have low interest rates helped the housing market? Of course not! If there is no confidence in the housing market (and how can there be with such a huge foreclosure inventory hanging over the market?), low interest rates will do little to spur the housing market (especially since banks are so tight at lending these days, even to qualified applicants).

As we lapse back into recession as I expect, with interest rates at zero, the Fed will be limited in its maneuverability for expansive monetary policy unless it continues to buy securities and expand its own balance sheet.

Finally, let’s not forget that artificially low interest rates have given the stock market a boom again. After all, with T-bills paying less than inflation, what alternative did investors have except equities? And when the bear market rally in stocks finally ends, and the market deflates again, what will happen to consumer and business confidence? It will collapse again with stock prices, making this next recession worse than the previous one.

Low interest rates for such a long-time…not sure it was such a good idea.

Michael’s Personal Notes:

Do you believe him?

While the market was up most of Wednesday, stocks fell later in the day when Fed Chief Ben Bernanke failed to indicate that any new stimulus plan was underway to help the economy. At a conference in Atlanta, Bernanke basically said that the Fed should maintain its monetary policy (record-low interest rates) but gave no indication that Quantitative Easing 3 was in the works.

Mark my words: if the U.S. falls back into recession, which I expect it will, the Fed will pull out all the stops to get the economy going again. That’s what the Japanese did in their “lost decade” after Japan exited its original 1990s recession and then fell back into it. The U.S. central bankers will do the same. They will flood the system with money. This will further depress the greenback, spark inflation and give rise to the price of gold—long-term trends my readers should continue profiting from.

Where the Market Stands; Where it’s Headed:

I’ve been thinking a lot about the stock market, and here are my short conclusions:

The credit crisis took the stock market much lower than most investors, stock advisors and economists predicted, bringing the Dow Jones Industrial Average to 6,440 on March 9, 2009. This was a decline of 55% from its high of 14,174 reached in October of 2007.

From the March 2009 market low, a bear market rally developed that brought stocks much higher than the same group could have ever thought possible. Many stock market indices were up 100% by the spring of 2011 from their March 2009 low.

As usual, most retail investors did not participate in the market rally that started in March 2009—they were too scared, too negative to jump into stocks. Retail investors started getting back into stocks in the fall of 2010.

By late 2010, early 2011, it became widely acknowledged that the Great Recession was over and we escaped the Great Depression Part II. Investors started jumping back into stocks. Stock advisors, as a group, turned decisively bullish back in November of 2010.

The stock market doesn’t reward latecomers. By that, I mean that the investors who got into the bear market rally late are paying the price today. Some blame the poor economic news for the market’s recent setback (Dow Jones Industrials down six percent from the April high). I simply say it’s the stock market doing its thing; a healthy correction in an extended rally.

I don’t believe that the bear market rally will simply give in to poor economic news and dissipate into the wilderness. People are very worried about the economy, stock advisors are now at their most negative position in seven months—all while I sit with a 30-year eye-witness belief that the stock market never does what is expected of it.

My timing has been uncanny, and I won’t get too cocky about it. Go back to my PROFIT CONFIDENTIAL issues of February and March of 2011. Back then, I was running an ad for one of our stock market services saying that the market would start to crash about May 2, 2011. Since that date, the Dow Jones Industrial Average is down 806 points and I’m sure there are some short sellers out there who have made a fortune from the recent market pullback.

But too many investors, stock advisors and analysts have turned bearish for me as of late. Unlike them, and while I’m bearish for the short and long term, I don’t think we should give up on the bear market rally just yet.

What He Said:

“Many of today’s consumers have purchased properties with very little down payment. They’ve been enticed by nothing-down, interest-only, second and third mortgages. Bottom line: The lower-interest-rate environment sucked consumers into the housing market big-time. And that will eventually cause us all problems.” Michael Lombardi in PROFIT CONFIDENTIAL, June 22, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.

Stock picking at this particular point in time is more difficult than it was at the beginning of the year. The tone of the marketplace is different and expectations have mostly been met. As companies reported first-quarter earnings that met or slightly exceeded consensus, the stocks sold off. This is representative of a market that wanted to complete the trade. Now investors are looking for a new trade, but nothing big stands out. A new catalyst has yet to be discovered.

Large-caps are holding up particularly well as the broader market churns. I still think that large-cap companies will be the biggest beneficiaries of the choppy economic recovery we’re currently experiencing. If it wasn’t for global operations, then the performance of many big companies would be a lot more reserved.

I don’t see the need for taking on new positions at this particular point in time. There are always stock trades around and the broader market could keep ticking higher, but I think we’ll be in a consolidation period for a quite a while longer. I don’t expect oil prices to stay below $100.00 a barrel and I’d like to see the price of gold pull back further so as to create a more attractive new entry point. While recent consumer price data showed that headline inflation shouldn’t be a problem for the Federal Reserve, the bigger driver of gold prices is the action in the U.S. dollar. That’s what gold is basically trading on.

While investing in gold is a core part of my investing philosophy during these times, I would say that silver is beginning to stand out as a better trade for a new entrant. Silver pulled back in price much more so than gold and, really, not that much has changed fundamentally for the story. The only thing that has changed is that some speculative fervor has been taken out of the market for silver prices. Demand for the commodity is still on the rise.

I’ve actually been hoping for a correction in commodity prices and I think we should let the trading action within the sector play out a little while longer. It’s probably a bit too early for new positions in silver or gold, but they are definitely worth following.

In non-resource sectors like technology, for example, both top- and bottom-line growth in many companies haven’t been very robust. This makes the trading action in these stocks much less opportune. Recently, I came across a very well valued semiconductor company that reported great financial results in the first quarter…and the market just yawned. This reflects a marketplace that was so enthralled with commodity-related assets that it ignored all others. Over the very near term, equity trading action is likely to be mediocre.

Terrible day for the markets yesterday…

It all started with June crude oil futures down about $9.00 a barrel, the U.S. dollar up sharply and the precious metals down. June gold futures were down about $34.00 an ounce, bringing the metal back below the $1,500 level. There was more pressure on silver prices, too (I explained why yesterday in my editorial, Why Silver Prices Are Falling So Quickly).

So, what are we to make of this and what action should investors take?

In times of volatile markets, I go back to the basics: No investment or commodity rises straight up during a bull market or falls straight down during a bear market.

Aside from its dip during the Great Recession of 2008/2009, crude oil has been in bull market since September of 2001. Common sense dictates: in the U.S., there are approximately 80 cars for every 100 people. In the world’s fastest growing economy, China, there are only 13 cars for every 100 people.

Oil is limited in supply. Electric and solar cars have not been successful. Oil is not only used for powering our vehicles and heating our homes, but also can be found as an ingredient in many of the items we use daily, including plastics, paint, synthetic fibers, make-up, and even medicine.

The law of economics says that when you have limited supply (as we do with oil) and increasing demand (from evolving countries like China and India), prices will rise in the long term. About 60% of the U.S.’s oil needs are satisfied by foreign countries, the top four being Canada, Mexico, Saudi Arabia, and Venezuela. Only 10 years ago, the U.S. was the main oil customer of these countries. Today, the U.S. competes with China for oil from these four countries.

Bottom line: demand for oil is rising, not declining. However, supply is limited.

Moving to gold bullion…

The greatest financial story of the past decade has been the quiet bull market in gold bullion. The metal has moved from $300.00 an ounce to $1,500 an ounce in about 10 years’ time. If we look at a 10-year chart of the U.S. dollar against other world currencies and a 10-year chart of the price of gold bullion, there is an almost perfect inverse relationship. The U.S. dollar falls in value, gold rises in price.

If you believe that the Fed will stop printing money, if you believe that the U.S. government will get its budget under control, if you believe that inflation will not be an after-effect of too many dollars in the system, and if you believe that the national debt will not hit $20.0 trillion by 2020, then you shouldn’t be in gold bullion.

For me, I’m staying the course. I realize every time the price of crude oil or gold falls that investors are taking some profits off the table…and that’s exactly what they are doing. There has been a tremendous amount of money made trading oil and gold in their bull markets. It is normal for investors and traders to put some of those profits in their bank account. Remember, no bull market goes up in a straight line. Corrections are not only normal; they are healthy, especially for the bull market in gold.

When I look at the price charts right now, I see that gold could easily correct to $1,400 per ounce. With each correction in the price of gold, I’m adding to my holdings, not selling them. I’m staying the course.

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average has shed 229 points in the last two trading days. Big deal, I say. We are dealing with a bear market rally that has brought the Dow Jones Industrials up nine percent alone this year and up 95% since March of 2009. A couple of down days does not put an end to the “tiring” bear market.

My opinion: the bear market rally is still alive. Upside is limited, but there is more upside potential in this market.

What He Said:

“Any way you look at it; the U.S. housing market is in for a real beating. As I have written before, in the late 1920s, the real estate market crashed first, the stock market second and the economy third. This is the exact sequence of events I believe we are witnessing 80 years later.” Michael Lombardi in PROFIT CONFIDENTIAL, August 27, 2007. “As for the stock market, it continues along its merry way, oblivious to what is happening to homebuyers’ wealth. (Since 2005, I have been writing about how the real estate bust would be bigger than the boom.) In 1927, the real estate market crashed and the stock market, even back then, carried along its merry way for two more years until it eventually crashed. History has a way of repeating itself.” Michael Lombardi in PROFIT CONFIDENTIAL, November 21, 2007. Dire predictions that came true.

Loyal readers of this column are aware of the fact I usually write about gold, rarely about silver. Yes, they are both precious metals, but that have two very different roles in society and the economy.

I’ve always looked at gold as a safe haven against inflation and eroding fiat paper, especially the U.S. dollar. Silver is a metal used in industry, everything from photographic film to jewelry. My point has always been (and it may be severe) that, if the U.S. dollar in no longer the world’s reserve currency, what will replace it? I can’t see central banks buying silver as their reserve currency. We know central banks have always bought or sold gold as they have adjusted their reserves.

Some of the stock advisories we publish have made excellent picks in the silver mining sector—we have some silver stocks that quickly doubled in price. But the boom in silver prices was bringing in too many speculators. The COMEX, where silver futures trade, quickly put that to an end, which I compliment them for.

One year ago, an investor or speculator would only need to put up $4,250 of margin to control a single futures contract of 5,000 of silver. Effective this morning, it will now take $16,200 to control that same contract. The COMEX has increased the amount of money which investors and speculators must put up to control one silver futures contract by 281% in less than a year (actually, most of that increase came in the past couple of months).

Hence, the “weak hands” (as I call them) are selling out their contracts. In the first three trading days of this week, we witnessed the biggest drop in silver prices since 1983. Silver is down 19% in price since the end of April.

I celebrate what the COMEX is doing by increasing the margin requirements for silver futures traders. Long-term this will be a positive for the silver market. We can only wish the banks and government showed the same restraint in 2005 instead of allowing speculators into the U.S. housing market with no real limit on their speculation.

Is the bull market in silver over? I don’t believe so. Given the continued economic expansion (or should I say explosion) in China, demand for silver is increasing yearly. Those who control the futures market for silver are simply tightening the rules, forcing speculators out—a move that we will be a huge benefit for silver prices in the long term.

Michael’s Personal Notes:

Two international notes this morning…

Spain, which has introduced several unexpected deficit-cutting measures, saw demand at its government five-year bond auction fall yesterday. The yield on these bonds jumped to 4.6%.

Portugal reported earlier today that it expects its GDP to contract two percent in 2011 and another two percent next year. The country will be announcing further austerity measures.

Other countries like Greece and Italy are on very shaky economic ground. Germany is the only economy in Europe undergoing any real type of recovery.

My point with all this? Europe is economically fragile and could lapse back into recession. This will place added pressure on an already weak euro.

The U.S. dollar…the euro…which is the worst of both evils and which currency will the oil producers eventually demand for their oil? Stay tuned.

Where the Market Stands; Where it’s Headed:

The chart of the Dow Jones Industrial Average has been similar to a straight line up since March of 2009. I’m not going to fight that trend or the Fed’s desire to create a sea of liquidity for the economy.

Yes, upside is limited. But I continue to believe that we are still in a bear market rally.

What He Said:

“I personally expect the next couple of years to be terrible for U.S. housing sales, foreclosures and the construction market. These events will dampen the U.S economic picture significantly in the months ahead, leading to the recession I am predicting for the U.S. economy later this year.” Michael Lombardi in PROFIT CONFIDENTIAL, August 23, 2007. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.

It will take a bit of good fortune, but I think the S&P 500 Index can achieve 1,500 this year. We’ll likely get a correction or some sort of prolonged consolidation in the not-too-distant future and, barring any unforeseen shocks to the system, the stock market should reaccelerate due to continued growth in corporate earnings.

We are seeing the market somewhat topping out at this time. Investors are greeting good earnings from brand-name companies with a little apathy. Of course, stock prices did already go up in anticipation for solid first-quarter numbers, so this is no surprise. The numbers from Merck & Co. Inc. (NYSE/MRK) and Caterpillar Inc. (NYSE/CAT) were excellent.

There are some headwinds that stocks will have to face this year, and the big one is inflation, which is happening all over the world. A little price inflation is good. A lot of price inflation is bad. Most definitely, the devaluation of the U.S. dollar to prop up the economy is a double-edged sword. While this does have direct stimulus benefits, it also contributes to inflation, as most global commodities like oil and gold are priced in U.S. dollars, thereby aiding the inflation contagion. While there’s no prospect for interest-rate hikes at this time, they are inevitable.

The current economic situation seems destined to produce a period of low, but steady growth over the next several years. While this isn’t what the market is used to, low and steady actually makes it easier for monetary policy to change in a manner that’s more helpful. When we get strong periods of growth, the Federal Reserve wants to ramp up interest rates. What we don’t need now is anything drastic that could kill off the current economic recovery.

The housing market continues to be a drag on the economy and investing in real estate isn’t likely to pay off anytime soon. There remains too much inventory for housing prices to accelerate in a meaningful way. The real estate market is still trying to balance itself out after its bubble burst.

The month of May has a tendency to be kind of slow for equity prices. With most companies reporting their first-quarter numbers in April, it isn’t surprising that stock market trading action may be lackluster this month.

I want to repeat a market view that I’ve had for a while. I do see the stock market able to tick higher later this year. I think it’s reasonable to expect a correction, perhaps soon. I also don’t think this is a market where investors need to be doing much that’s new. There’s no big rush to be investing in gold for example, even though the spot price of gold keeps hitting new records. The stock market has already done extremely well over the last eight months. Everything is due for a break.

In my lifetime, I believe I will wake up one morning to the news headline, “Gold up $100 Today as U.S. Dollar Crashes.”

The popular media is slowly starting to pick up the gold bull market story. Investors are getting interested in it, and the smart money is buying in, but gold is still only in the second phase of its bull market. Once the third and most speculative stage sets in, we will see big single-day price rallies in the metal. That’s why I believe it’s still not too late for my readers to get into gold.

So far in the gold bull market, the majority of the rise in the price of gold can be related to the decline in the price of the greenback compared to a basket of the world’s other most popular currencies: the euro; yen; pound; Canadian dollar; Swedish krona; and Swiss franc. If you’ve looked at a chart of the U.S. dollar lately (against the currencies listed above), it reads like a straight line down.

I’m often asked, “Michael, why did you see gold as a buy in 2002?” Back then, two of our analysts wrote a report on how then Fed Chairman Greenspan had a secret plan to reduce interest rates to bring the value of the U.S. dollar down to help our exporters.

My realization was that, as the U.S. dollar fell in value, the 70% of the countries around the world that used it as their reserve currency would get squeezed and would look to abandon the U.S. dollar as a reserve currency. Their only alternative: gold.

By pushing interest rates so low in the summer of 2004, Greenspan not only succeeded in starting the devaluation of the U.S. dollar, but he also unwittingly set the stage for the greatest real estate bubble in American history—a bubble that eventually burst, causing the worst recession since the Great Recession.

To fight the recession, the U.S. government increased debt to record levels, putting more strain on the U.S. dollar. Gold has many “thirsts” that fuel its rise. One being a falling U.S. dollar. The second being increasing U.S. national debt, because a currency backed by a lot of debt is a currency in trouble. Both thirsts are being fed to gold right now.

(The above “classic” Michael gold article appeared in PROFIT CONFIDENTIAL on October 6, 2010. Gold bullion traded at $1,346.50 an ounce on October 6, 2010. Today, it trades in the $1,500-an-ounce area, a gain of 11% in six months. The reason we reprinted the article: there’s been no change in Michael’s feeling about gold bullion continuing to rise in price. In fact, what Michael wrote about six months ago is still fueling gold’s price rise today. And, yes, he’s still expecting to wake one morning to, “gold up $100 today as U.S. dollar crashes.”)

Michael’s Personal Notes:

The inflation rate in Canada surged in March to its highest level since September 2008—to an annualized rate of 3.3%. The Canadian dollar has been surging vs. the U.S. dollar for months now. Years ago, it took $1.50 Canadian to buy $1.00 U.S. Today, it takes $1.03 American to buy $1.00 Canadian! A total about-face.

I’ve been screaming for at least five years now: Americans, buy your stocks denominated in Canadian dollars on the main Canadian stock exchange, so you can get the additional whammy of a currency gain! I continue with that opinion today.

The worst-kept secret: the Bank of Canada is not far from raising its benchmark interest rates again.

Where the Market Stands; Where it’s Headed:

As we enter the final trading week of April, a bear market rally still presides. The risks for the economy are increasing each passing day, but this bear has not finished its job yet of convincing investors to get back into stocks.

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.” Michael Lombardi in PROFIT CONFIDENTIAL, March 22, 2007. At the same time Michael wrote this, former Fed Chief Alan Greenspan was quoted as saying, “the worst is over for the U.S. housing market and there will be no economic spillover effects from the poor housing market.”

In coming up with a headline for today’s editorial, I was contemplating just using the word “denial.”

Simply put, the investors and markets are in denial…much the same as an alcoholic who thinks that if he skips drinks at breakfast and lunch, he’s okay to drink at night.

As reported here Monday, credit-reporting agency Standard & Poor’s downgraded the U.S. “AAA” credit rating from “stable” to “negative.” It was one big, loud message: if the U.S doesn’t get spending under control, its credit rating will be jeopardized further.

So how did the markets react? They gave us the opposite of what is expected. Instead of the U.S. dollar falling in value, it rallied. Bond prices, instead of declining, rallied. And gold stock prices declined with crude oil prices.

Why would U.S.-dollar denominated assets rally on the news of a U.S. credit rating cut (aside from trying to confuse the heck out of investors)? The reality of the situation is that investors still foolishly flock to U.S. dollars in times of uncertainty—even when the debt rating of the country issuing the dollars, the U.S., has been downgraded.

Back in 2005 I said there would come a time when “real estate” would become a dirty word in America. Few believed me then. Today I’m saying that, as difficult as it may be for us to see, there will come a time in this very generation when U.S. dollars will not be in vogue. A time when any economic uncertainty will see investors running to precious metals, when inflation will run rampant and U.S. dollars will become worth less and less.

Do you really think the politicians in Washington can put a cap on their spending binge? Of course not. In this day and age, spending only what one takes in is a foreign concept to our politicians. It’s utterly ridiculous. Just the interest on the national debt alone costs Washington more than $1.0 billion every day, seven days a week!

Investors are not just in denial; they simply can’t see what’s happening in the economic environment. A government debt ceiling of $20.0 trillion for 2016 may not be enough. QE, Act 3, or a version of it, looks more and more like a certainty to me this summer. What will happen when we get to the point where there are so many U.S. dollars in the financial system that no one wants them? A sobering, but real thought.

The Standard & Poor’s downgrading of the U.S. triple “A” credit rating from “stable” to “negative” is just the tip of the iceberg. Moody’s Investor Service could follow soon with its own rating cut. And the inflation that I’m predicting will take hold over America in the months and years ahead could cause the credit rating agencies to further downgrade the U.S.’s credit rating.

Michael’s Personal Notes:

While the “American Empire” continues to erode rapidly, the new superpower-in-waiting, China, booms.

For the fourth time this year, China has increased the amount of reserves the country’s large banks must maintain. Chinese banks are now required to main 20.5% of deposits in reserve. In other words, big China banks can only lend 79.5% of the money they have on deposit from depositors. Comparatively, during the real estate boom days of 2003 to 2006, it was common for American banks to lend 95% of their deposits out, keeping a reserve of only five percent.

The annual inflation rate in China hit a 32-month high of 5.4% in March. With the U.S. borrowing money like drunkards, China exporting inflation to America, QE3 just around the corner, and the Fed’s printing press running double shifts, how can inflation not become a serious problem in the U.S.?

Where the Market Stands: Where it’s Headed:

The bear market rally in stocks that started in March of 2009 is still presiding. Despite the rally, upside profits from stocks are limited. Rising inflation and rising interest rates are around the corner. We simply await the bear’s final market blow off—the final big rally to suck investors back into stocks.

What He Said:

“There is no mixed signal about this: foreclosures in the U.S. will continue to rise, the real estate market will get weaker, and the U.S. economy will get weaker. Smart investors should seriously consider unloading their stocks of consumer-products companies that produce nonessential goods.” Michael Lombardi in PROFIT CONFIDENTIAL, March 12, 2007. According to the Dow Jones Retail Index, retail stocks fell 42% from the spring of 2007 through November 2008.

You own a company and you have one customer that accounts for 25% of your sales. Your customer is in another country and pays you in currency from his country. Unfortunately, you have a few other customers who also pay in that currency.

As the years go by, you start to accumulate more and more of the currency of your customer’s country. You take some of that money and buy assets in that customer’s country, like stocks, bonds, real estate, and anything you feel has value. You even buy some bonds issued by the government of your client’s country.

But after 30 years of taking in your customer’s money, even though you are investing it back in your customer’s homeland, you are still left with too much of a currency you really don’ t want.

That’s where China sits right now. Yesterday, China’s central bank said its foreign-exchange reserves have hit $3.0 trillion for the first time in its history. China is awash in dollars.

Aside from China, the U.S. itself has too many dollars floating in its financial system. Is it any wonder the U.S. dollar is collapsing in value against a basket of currencies made up of other major currencies?

The chart below is worth a thousand words. It is an iconic chart showing the collapse in the value of the U.S. dollar against the six major currencies: the euro; yen; pound; Canadian dollar; Swedish krona; and Swiss franc.

Chart courtesy of www.StockCharts.com

The U.S. dollar is only five percent away from falling below its record low set in early 2008. Will it happen? Sure it will. What will happen then? Interest rates will rise to support the dollar. But, by then, it will be too late. Inflation will already have taken hold in America. Forget about supporting the plummeting dollar, we’ll need high interest rates just to fight off all the inflation created by years of printing dollars.

Michael’s Personal Notes:

A reader wrote yesterday with a question that I believe is on the minds of much of our audience:

“Mr. Lombardi, if interest rates are higher because of inflation, the dollar will be stronger. Then it will make gold and silver less attractive. Is my understanding correct?

Unfortunately, dear reader, you have it wrong. Higher inflation will result in items requiring more dollars to purchase them. The more dollars required to buy an item, the less the dollars are worth. Precious metal prices rise rapidly during periods of rising inflation and interest rates.

The best way to see this is to look back to the early 1980s. The price of gold bullion hit $850.00 per ounce in January of 1980. In 1980, U.S. inflation averaged about 13% for the year. Coincidently, the Federal Funds Rate, our bank rate, hovered around 13% for most of 1980.

Bottom line: higher interest rates and higher inflation lead to rising precious metal prices.

Gold bullion prices have yet to surpass their 1980 inflation adjusted high of $850.00 an ounce. Adjusted for inflation, gold would have to be trading at approximately $2,500 per ounce today to be equal to its 1980 price.

Where the Market Stands; Where it’s Headed:

A tired, but still living, bear market rally has the Dow Jones Industrial Average opening this morning up 6.1% for 2011. I’ve been waiting for the final blow off for this bear market rally and I have yet to see it materialize.

To see the rally that started in March of 2009 fade away at this point, to see the market just slowly moving lower without a big bang…that’s not how bear markets end. And that’s why I still see some more life in this rally before the bear takes the chips away from investors again. However, any way you look at it; we are getting very close to a top for the bear market rally.

What He Said:

“Partying Like a Drunken Sailor: The party continues. Stocks are making new highs and people are spending like there is no tomorrow. Why? I really don’t know. Big (cap) stocks, they just continue going up. Wall Street bonuses are at record levels. Popular consumer goods are flying off the shelves. Designer clothes, fast and expensive cars, restaurants with one-hour waits…people are spending in America today at an unbelievable clip. 1932, 1933…who remembers those years? The depression of the 1930s was the biggest bust of modern history. 2005, 2006, 2007…welcome to the biggest boom of the same period. When will it all end? Soon, my dear reader. Soon.” Michael Lombardi in PROFIT CONFIDENTIAL, February 7, 2007. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.