After months of patient waiting, the gold stocks came to life yesterday. Right across the board, whether it was junior or senior gold producers, the stock prices of gold companies were up sharply Wednesday.
Hopefully, my readers have been following my guidance and seeking refuge in the gold-mining companies. Since the spring of this year, gold bullion prices have been rising sharply, while gold stocks stood pat. I have been writing that the leaders of the gold bull market would shift from the actual bullion to the gold stocks, and that's what started happening Wednesday.
Since the middle of June, the Dow Jones U.S. Gold Mining Index (an index comprised of the largest U.S. gold-mining companies) is up 12%, while the general stock market has gone down 11% in the same time period!
But, like all good things, as the price of gold bullion hits $1,800, there are forces that want to put a wrench in the 10-year gold bull market, as many believe gold has become too speculative. Hence, this morning, we learn that CME Group Inc. (CME), the world's largest futures market, changed the rules without advance warning and increased the minimum amount of cash speculators and investors must deposit to trade a futures contract of gold.
In summary, margin requirements, with a flick-of-a-switch, have increased by 22% this morning. You may remember, the CME did the same thing to silver (increased the margin requirements for trading silver a few months ago) and silver fell sharply in price.
Well, I have news for the market, and better news for my readers. The bull market in gold is too strong to have the metal fall in value by 30% as silver did after the CME increased the margin requirement for trading silver futures.
For my readers, any pullback on the price of gold bullion caused by the CME's newly imposed margin requirements would present a perfect buying opportunity for the junior and senior gold-producing stocks, once again. This is how to invest in gold now.
Michael's Personal Notes:
On Tuesday of this week, the Federal Reserve made the unprecedented action of specifically saying how long it would keep short-term interest rates low. I'm sure you have heard. The Fed will keep rates low through mid-2013.
On the news of a prolonged period of interest rates that are low, U.S. Treasuries rallied. It doesn't matter if Standard & Poor's has cut the credit rating of the U.S. It doesn't matter if Congress has just given the Obama Administration another $2.1 trillion to spend. Investors want U.S. Treasuries.
Yesterday's auction of $24.0 billion in 10-year U.S. Treasuries was the first offering of U.S. debt since Standard & Poor's cut the U.S.'s credit rating. There was a line up to buy these bonds--and the buyers walked away with the lowest yields on record--2.14%.
At 2.14%, the dividend yield of the Dow Jones Industrial Average stocks of 2.8% sure does look competitive.
Where the Market Stands; Where it's Headed:
It's up and down, down and up for the markets. My readers need to understand that, when we have huge multi-100 point up and down days on the market, most of that trading is computer-driven. Very little of it has to do with individual investors buying or selling. Since the advent of index-traded funds, computer/automatic trading has become a big part of Wall Street.
What am I doing? I'm sitting back and waiting. The current situation could go one of two ways. The market could move from here to test its March 2009 lows or the first real correction of 2011 could be close to ending, at which point the bear market rally would resume its upward trend.
I'm in the camp that believes it is too early to test the March 2009 lows for a variety of reasons I have written about over the past two weeks. Some of those reasons: stocks are a better investment alternative today to 10-year U.S. Treasuries; monetary policy remains accommodative; the great majority of investors are pessimistic; corporate profits are still strong; and corporate insiders are buying stock at a pace not seen since the spring of 2009.
What He Said:
"Consumer confidence does not change overnight. In the U.S., 70% of GDP is based on consumer spending. And, in my life, all the recessions I have seen or studied have only come to an end when consumers started spending. With consumer sentiment getting worse, and with the U.S. personal savings rate near record lows, it may take years for consumers to start spending again." Michael Lombardi in PROFIT CONFIDENTIAL, February 25, 2008. By the end of 2008, the rest of the world was realizing that the recession would be much longer and deeper than most had imagined.
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