Why It’s Different This Time

by Michael Lombardi, CFP, MBA

Okay, so we all know that gold bullion closed above $1,000 an ounce on Friday for the first time since March 2008. The media didn’t make a big deal of the event this weekend, nor did most investors. After all, didn’t gold try two other times this year to get above $1,000 only to see the metal’s price fail miserably?

While most news stories in the business newspapers were accounts of how the government made a big mistake in not bailing out Lehman Brothers one year ago, the really big news, in my opinion, is gold’s new $1,000 price level.

There are many theories I have read about how “unknown” forces are trying to keep the price of gold below $1,000 so as not to cause a run out of dollars and into gold (and I’m not sure I believe these theories), but the fact is that gold has quietly passed the triple-digit price level again. I continue to believe that gold bullion prices have much further to rise.

The following comments about gold prices and China, from Bob Appel, one of our top market analysts, tell the story very well:

“We are living in historic times. Beyond 9/11, beyond the stock market’s biggest crash since 1929, we have what this advisory (and others) likes to call the “gold wars.” In the 1970s, Nixon removed the greenback from its former gold backing and, by so doing, signaled to the other Western nations that it was OK and fine to run your own currency, backed solely by your own good name, much the same way that the credit card companies run their “air miles” dollars. (And we think the comparison is especially apt because, in the last 24 months, several cards have reneged on those same air miles dollars.)

Since the 1970s, gold has increased by thousands of percentage points and the greenback has dropped like a stone. But, for the Western central banks, this is a game they simply cannot withdraw from. They have literally bet the farm on their ability to subdue gold to make their own currencies shinier. And it is a game they appear to be losing.

As this is written, spot gold is back above $1,000, trying again to make a clean break above the critical $1,007 technical level. You are watching the gold wars unfold in real time.”

Bob goes on to talk about how China is able to control the gold price in 2009. Specifically, now that China is encouraging its citizens to buy gold bullion, should China decide to increase its own gold purchases in an effort to replace part of its U.S. dollar reserves, the dollar will de-stabilize.

Dear reader, there have already been three big economic stories this fast-moving decade. Early in the decade, we saw the tech bubble burst. Then, mid-decade the air came out of the biggest real estate bubble in history. Then we experienced a credit crisis and economic collapse not seen since the Great Depression. Get ready for Act Four: The coming boom in gold bullion prices. Make sure you take part in this final scene.

Michael’s Personal Notes:

Business activity at giant FedEx Corp. is very important, as FedEx is a leading indicator of business activity. If FedEx’s business volume is active or rising — an indication that companies are getting busier with shipping goods — that is good for the economy. Hence, I found it very encouraging the other day when FedEx decided to boost its quarterly earnings guidance, as the company said that it is experiencing unexpected increased business for international shipments of goods.

Where the Market Stands:

The Dow Jones Industrial Average: up a big 9.5% since the beginning of the year and only 394 points away from my prediction of Dow Jones 10,000.

What He Said:

“‘Home sales down 8.4%, could be the bottom,’ read the headline in last Friday’s USA Today. What do they know that I don’t? They know what realtors and their associations tell them and that’s about it. Unfortunately, the real estate news is predominately written by reporters — not real estate investors with years of experience to share. The hard facts about the real estate market in the U.S. are truly scary. How can the U.S. economy escape the hard landing in U.S. home prices? As we’ll soon find out, it simply can’t!” Michael Lombardi in PROFIT CONFIDENTIAL, January 31, 2007. While the popular media was predicting a bottoming of the real estate market in 2007, Michael was preparing his readers for the worst of times ahead.