Why I Bought More Gold This Morning

gold stocksOn a recent trip to Manhattan, on Fifth Avenue near Central Park, I saw a retail window with the following written in huge yellow letters, “Smart Has the Brains, But Stupid Has the Guts.” My daughter took a picture of this store front window and I’ve kept it in my cell phone picture memory since.

Why am I telling you this?

Over the past 10-year bull market in gold bullion prices, each time the market corrects, the naysayers come out and say, “The bull market in gold is over.” And each time they are wrong.

Have you noticed all the articles in the business pages of the newspapers and the Internet the past month on how deflation could become a big problem? Well, the gold naysayers love this type of media. The economy is improving as well and the U.S. dollar looks like a haven every time another world currency comes under pressure.


So, who would be stupid enough to jump more deeply into gold given the above points? Me.

As I’ve watched and participated in the gold bullion rally since late 2002, each time I see gold prices move lower, I see a buying opportunity. We all know that the summer months (based on seasonality price charts) are the worst time for gold bullion prices.

Gold bullion prices peaked at about $1,260 an ounce in late June of this year. Since then, the metal has fallen back about $100.00 an ounce to the $1,160-an-ounce level. Looking at a price chart, the metal could fall even further to $1,100 an ounce, but why take the chance and wait for even lower prices that may never even materialize? I’m not.

Gold has risen steadily in price from $300.00 an ounce in late 2002 to $1,260 last month, a gain of 320% in eight years. Just as higher than the previous December 31 for nine straight years now. This gold bull market is very strong.

The rise in gold prices could foreshadow a time down the road (could be a year, could be five years) when inflationary pressure will rise substantially and/or the debt of the U.S. will become a huge obstacle for the value of the U.S. dollar, undermining its status as a
world reserve currency.

This past Friday, the White House raised it forecast for the fiscal 2011 budget deficit to $1.4 trillion. Over the next 10 years, Washington is projecting additional debt of $8.5 trillion. We already have $12.0 trillion in debt, so we are headed for $20.0 trillion in
national debt. How can any currency, backed by such debt, sustain itself?

That’s why the “guts” buy more gold.

Michael’s Personal Notes:

The Obama Administration is finally doing something for small business, but I believe the program is ill conceived…that the money will not flow through to the small businesses that are the backbone of this economy.

Under a bill that is awaiting Senate approval, the government will move $30.0 billion to small community banks. The hope is that the banks will leverage that money and offer $300 billion in loans to small businesses, which the government hopes will lead to new jobs. While the intent is good, I do not see this program working.

Talk to any small business banker today and they will tell you the same story: “There is a lack of demand from creditworthy customers” and “The biggest demand for small business loans is from the least creditworthy customers.”

Putting money in small banks to make loans is a great idea — but the government cannot force banks to make loans it believes are risky. In the first half of 2010, Bank of America, the biggest bank in the U.S., wrote off a staggering 14% of small business loans…10 times the rate of other commercial loans.

After the recession, banks are looking for more equity and profitability from small businesses before lending them money, and that is the real reason small businesses cannot get loans. Small business loans that would have qualified for some form of government guarantees (reducing the risk at the banks so they make more loans) would have been a more viable plan.

Where the Market Stands:

As I predicted in a mid-July editorial, “Stock Markets Getting Reading to Turn Positive for 2010,” the market abided and turned positive earlier this week. For 2010, the Dow Jones Industrial Average is up 1.1%.

It has been difficult for a market student and commentator like me to remain positive on the bear market rally in the face of the large head-and-shoulders pattern the Dow Jones formed in the first half of this year and in light of continued poor economic news. Each time the market moves lower, more stock market advisors come out and call the rally over.

But I’m sticking with my gut feeling that the bear market rally that started in March 2009 is not over…that the bear will continue its rally in an effort to suck more investors into the market before taking that big second leg down.

According to a recent survey from the American Association of Individual Investors, the number of individual investors who are bearish on the stock market has hit the highest level since July 2009…and we all know what has happened to stock prices since then.

The stock market does not decline when investors expect it to…and that’s why I believe the bear market rally will continue in the immediate term.

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.”