The Stock Market and Gold, What Michael Thinks Now

“Profit Confidential” Column, by Michael Lombardi, CFP, MBA

I’ve received a few e-mails from readers asking for clarification on my views on stocks and gold bullion. So here we go:

First question: “Michael talks about exposure to gold-related investments as being a MUST with his prediction that the third phase of the gold bull market will take gold to two to three times its current level. Yet, in his newsletters, he says he would not enter new positions in gold at this time until there is a healthy correction.

“What does this mean for someone with no gold positions at this time?”

In our newsletters, I have been reluctant to make many new gold stock recommendations, because I felt gold bullion prices had run up too quickly. I’ve been an advocate of gold for years (late 2002, early 2003) and have seen how gold prices can rally quite high, then pull

Hence, I have been waiting for a correction in the price of gold. And that correction is happening right now. The million-dollar question: will gold break down below $1,000 U.S. an ounce?

Our technical expert on gold, Bob Appel, seems to think not. I believe that, if gold does break below $1,000, it will hover in that area. Thanks to the correction in gold prices, many gold stocks are now becoming bargains again. Goldcorp Inc. (NYSE/GG) is finally below $40.00 a share, while Barrick Gold Corporation (NYSE/ABX) is getting close to it.

Second question: “Michael says the stock market will continue to ride the wall of worry. Yet, Michael says the market will retest the March 2009 lows.”

In our lifetime, we have never seen monetary and fiscal policy so accommodative. During the credit crisis, the government actually bailed out companies. Have you ever seen this before? Now, many of those companies are paying back the money the government lent them.

The jobs numbers are getting better. Companies are making money again. And it doesn’t look like consumers will hold back on spending this holiday season. Darn it, if it wasn’t for the pathetic housing market, the Dow Jones Industrial Average would be at 15,000!

But all good things come to an end.

At some point ahead, interest rates in the U.S. will need to rise for two reasons: to curb inflation and to save the ailing U.S. dollar. There is nothing the stock market hates more than rising interest rates.

When the stock market hit a 12-year low on March 9, 2009, stocks did not become overvalued. Bull markets end in euphoria at extreme levels of speculative. Bear markets end in exhaustion, when stocks are at great values. By great values, I mean price/earnings ratios of below 10 and dividend yields above five percent. We never got to those levels on March 9, 2009; hence my belief that, once this bear market rally is over, the March 2009 lows will be tested again.

Michael’s Personal Notes:

I’ve never had so many of my friends call and ask what they should do with their new gold-related investments. Whether it’s stocks, ETFs or the bullion itself, newcomers to the gold bull market were quite rattled late last week and so far this week, as the metal trimmed close to eight percent of its value.

Remember the old adage: “Time is friend of the investor, foe of the speculator.” Long-term readers…we have been here before. Remember 2006, when gold rallied from $500.00 to $700.00 an ounce, before falling back to $575.00? Or 2008, when gold went from $800.00 to $1,000 an ounce before falling back to $800.00?

Patience, my dear friends, patience.

If we look at a chart of gold bullion, we see an almost a straight line up from $950.00 to $1,225 an ounce. Nothing moves in a straight line, either up or down. Price corrections of any investment either rising too sharply or falling to too quickly in price are very healthy over the long term.

Where the Market Stands:

Looks like stock market investors are getting as rattled as the gold bullion investors. Stocks have been soft the past few days and, all of a sudden, everyone is throwing in the towel and calling the rally from the March 2009 low as over.

Rubbish, I say. A few bad days and it is over? No wonder the divorce rate is so high in America.

After getting close to the 10,500 level, the Dow Jones Industrial Average has backed off the last few sessions. I’m not ready to call the rally in stocks over. But, at the same time, I would not be surprised to see a test of the Dow Jones 10,000 level. And if 10,000 holds, this baby has more strength than we previously thought. The Dow Jones Industrial Average is up 17% for 2009.

What He Said:

“The U.S. reduced interest rates in 2004 to their lowest level in 46 years. And what did Americans do with their access to easy money? They borrowed and borrowed some more, investing the borrowed money into real estate. Looking ahead, perhaps the Fed’s actions (of bringing interest rates so low as to entice consumers to borrow more than they can afford) will one day be regarded as one of the most costly errors committed by it or any other banking system in the last 75 years.” Michael Lombardi in PROFIT CONFIDENTIA , July 21, 2005. Long before anyone was thinking of a banking crisis, Michael was warning that the coming real estate bust would cause havoc with the banking system.