Where I See Great Value in This Market

Michael's interpretation of the gold action: the “dead-cat bounce” of the U.S. dollar will be short lived—this is what the action in the gold pits is telling us.Here’s the story…

Gold prices usually travel in the opposite direction of the U.S. dollar trend. If the greenback is rising in value against a basket of other major world currencies, the price of gold has historically declined. The opposite is also true: If the U.S. dollar heads down in value, price for gold bullion rises.

Since the beginning of 2011, the U.S. Dollar Index (type “$USD” into any stock charting service) has been in free fall. It started the year at 81 and fell to below 73 by the beginning of this month. With the dollar so oversold, one would expect a “bounce,” and that’s exactly what happened.

The remainder of May has seen the U.S. dollar rallying. Under such circumstance, gold prices would normally be falling. They are not. In fact, the price of gold bullion is just $20.00 per ounce away from its recent record high in the $1,540 per ounce range.

My interpretation of the gold action: the “dead-cat bounce” of the U.S. dollar will be short lived—this is what the action in the gold pits is telling us.

While gold prices continue to inch higher, the gold-stock sector has remained flat. And this is where I see great value right now. Once this bounce in the oversold U.S. dollar is complete, gold bullion will make its move to $1,600 per ounce. And this time, the gold stocks will not be left behind.

Michael’s Personal Notes:

In the first quarter of this year, the Chinese overtook Indians as the biggest buyers of physical gold (bars and coins) for investment purposes.

According to the World Gold Council, China accounts for 25% of all gold investment demand at about 91 metric tons in the first quarter of 2011.

While I believe Chinese investors are jumping on the gold-investment bandwagon as protection against rapid inflation in China, jewelry demand is also rising. The numbers are mindboggling…

China is still the world’s largest gold producer, having produced 350 tons of gold in the first quarter of 2010. When you add gold purchased for investment purposes to gold bought as jewelry and used in industry, total gold demand in China in the first quarter was 700 tons.

Demand for gold is outstripping supply by almost two to one in China. Is it any wonder gold prices continue to rise?

Where the Market Stands; Where it’s Headed:

Only two more trading days for the month and we will have completed 27 months since the bear-market rally in stocks began in March of 2009. It’s been one heck of a ride, and the bear-market rally is “long in the tooth,” as technical stock analysts say.

The bear-market rally continues, but upside is limited to about 10%. Individual investors will need to assess whether the risk is worth the possible reward.

What He Said:

“Investors have been put into an unfair corner. Those that invested in stocks because they got caught in the tech boom (1999) have seen their investments gone. Now, those that have leveraged heavily to play the real estate game, because it is the place to be (2005), could see the same fate as the stock market investors. Thanks again, Mr. Greenspan.” Michael Lombardi, in PROFIT CONFIDENTIAL, May 27, 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.