Resource Stock Update - V14 #8.10 - Markets, shorting, intervention - Sept., 3, 2008

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Yesterday was the first day back to work after a brutal summer in the markets especially August and
it wasn't pretty.

I am sure it was triggered by more intervention that got started on holiday Monday in very thin
markets that seen gold knocked down about $17. Remember, it is thin markets that give CB
intervention  the best bang for the buck. The gold correction gained speed yesterday along with oil
selling off on subsided hurricane concerns and most other commodities joining the correction.
Toronto was down over 400 points.

But I take note that the bull market in commodities is not over, because too many think so.
Bloomberg’s and other websites are just full of discussion as to whether the commodity boom is over
or not. At market tops, everyone talks about buying the dips or corrections, not worrying if it is
over. In fact bull markets climb a wall of worry and we have a lot of worry in the commodity sector
of late. It is the same old pundits that are saying buy that have been right all along and the same
group saying its over that have been wrong all the way up.

              Rally, Naked shorting, Intervention and Manipulation

A very different title and a lot to cover, so lets get started

                                                          Rally

We have more confirmation that the bottom is in with the precious metals and resource stocks. We
have seen good bounces off the bottom in precious metals, oil and other commodities. At this point,
yesterday's action can be seen as a retest of those bottoms, and even with the brutality of
yesterday's sell off, we are still above the August bottom.

Many precious metal and energy stocks have also bounced off their bottoms. The HUI, XAU, Energy
index and even the junior TSXV index have all bounced up higher, but gave back about 80% of those
recent gains yesterday. There is still a long way to go and we need to see these indexes etc. go
higher to confirm a new rally, but I am confident that will happen, just like the last 3 years

This is from Maison Placements Canada, their August 27th monthly update - Josef Schachter -
Schachter Asset Management and pretty well sums up the recent action and current situation

""The Latest Corrective Phase from the S&P/TSX Energy Index High of 470 is Over: Load Up the Truck.
New All Time Highs Expected 1H/09.

The corrective forces in the commodities markets over the last 2 months, has moved the hot money
funds (hedge funds, commodities funds and speculators) from a large net long position to recent
large net short positions. In addition, the investment press and “talking heads” are rejoicing over
the presumed end of the commodity cycle. Sorry, but we do not concur!

The recent down-leg or correction was just that – a correction in an ongoing bull market. When
energy stocks rose sharply in April/May we noted in the Maison Monthly that the sector was
overbought and a correction was likely............. We believe that the corrective forces have done
their job and with the extreme pessimism now seen towards the commodity board, the technical and
fundamental factors are now in a wonderful buying position. In fact, we would use the colloquial –
Table Pounding Buying Opportunity.

Part of the correction was due to a bear market rally in the U.S. Dollar as talk of the Fed moving
to a rising interest rate environment to fight inflation occurred. In addition, some weaker economic
data in Europe highlighted their need to lower interest rates which helped the U.S. Dollar and
weakened commodities (priced in U.S.$). As the hot money ran from commodities, it went from net long
to net short, pounding gold, platinum, the energy board and the grains. Now that the hot money is
net short, the long term bullish fundamentals for the commodity board are now being ignored.""

                                         Naked Shorting

Anyone who does not believe there is an issue in our stock markets today with naked shorting has
their head buried in the sand. So what if it is illegal and corrupt, that is the nature of todays
financial markets.

While else would the SEC issue a special order against naked short selling on 19 financial stocks if
it was not a problem?

Why would these 19 stocks see a big rally in price (short covering rally) if naked short selling was
not a real issue.

It is very sad the SEC has to issue a special order to stop what is illegal activity in the first
place. They only need to enforce the rules that are out there. You can also see how corrupt the
markets are when the SEC will act, only to defend their own - the financial system.

Sure there is talk that they will extend this order to cover all stocks, but if and when they do,
what good is it when short interests know it will not be enforced anyway and on the outside chance
it does - there will only be a fine levied that dwarfs the amount of illegal profits that were
appropriated in the first place.

Why would the SEC eliminate the down tic rule for shorting stocks about a year ago. This just allows short interest to pound a stock lower, full filling their profit goal. Could it be that the powers
to be - knew the financial markets were about to crumble so they made it easier for certain
interested parties to profit on the downside?

At some point they will reverse the down tic rule that was implemented in the great bear market of
the 1930s, but this bear market has a lot further to go before that happens.

Regardless of naked shorting, I had a look at the reported short interests in the precious metals
stocks as it is still a good indication of trends. The reports I looked at reflect about mid August
time frame. As expected most gold stocks, the producers have seen a dramatic decrease in short
positions in the past few weeks. In other words, the shorts have been covering and making their
profits. So a large part to the start of this rally is short covering.

I also noticed some other trends, It looks like  any junior stock that was doing well this summer
seen an increase in short interest, like Exeter - XRC on a July rally and Eastmain ER when it
rallied in June/July. Exeter's short interest has been covered a fair amount but not Eastmain.

Paramount - PZG acts like it is manipulated or naked shorted but the reported short interest never
changes either direction.

Silver stocks have not seen much short covering yet, maybe it will show in the weeks to come as
short interest is reported with a time lag.

Short interest in silver stocks like First Majestic - FR, Pan American- PAA and Orko - OK increased
in July.

Silver Wheaton has remained pretty stable and some short covering in Silver Standard, but smaller
silver stocks have not seen much of any short covering either.

The stock price of Apex Silver has been slaughtered and heavily shorted with almost 25% of the float
shorted. No doubt the high level of zinc in their deposit accounts for a lot of the damage.

And as for zinc, the price is too low, below mining costs to stay down for too long. Breakwater -
BWR I think that stock has bottomed, there was some short covering but the short interest has
increased again since July. BWR might bounce around the recent trading range, high 0.20s to low
0.30s a while longer before going higher.

To sum up, I see the short covering as a positive sign for a bottom with still lots of potential
short covering to help fuel a rally.

                                              Intervention

I have talked about the recent intervention in the currency, gold markets in previous updates- but
it sure has many fooled or talking

The dollar bulls point to the strong rally in recent weeks – the US$ Index went from 70.70 to 77.41
as the beginning of a new trend. It it has been a strong rally but a look at the long term US$ chart
and the rally has only gone back to the downtrend line of the ongoing bear market and the current
leg down that started in early 2006. It has also only approached it's first resistance level at the
76 to 78 range and has not breached it.

http://www.tfc-charts.w2d.com/chart/US/W

                                              US$ Index Weekly Chart

Yesterday the dollar index closed above $78 at $78.14 so that might be a sign of a breakout that
would take us to the next resistance around 80 to 81 that is a much stronger resistance area. But it
is a weak breakout at this point and we may simply retreat from here and go back down.

We have seen short term dollar rallies before in this ongoing bear market that started in early
2002. In 2005, the dollar rallied from 80.39 to 93.63 and then started the next down-leg that we are
currently in.

I would be watching below, not above, look for a break below 72 that would set up a decline to the
mid-60’s. And it will happen The U.S. budget deficit is rising sharply – by over $100B to >$500B
this year due to the wars in Afghanistan and Iraq, lower revenues due to the weaker economy and the
bail out of the financial system (Fannie and Freddie Mac) and many other banks and the FDIC all to
come in due course, plus  the tax cuts to re-stimulate the economy. The Fed and government might be
able to manipulate the stats so it shows no recession, but they will not be able to prevent lower
tax revenues that will look like they are falling off a cliff, because the reality is a recession.
Corporate and individual profits and taxes will be way down. So will small business and capital
gains taxes. And at all levels of governments, which by the way will eventually cause the implosion
of the bond market.

And then there is the trade deficit that is heading beyond $700B. With these twin deficits the only
way  out is an increase of exports - which means further debasing of the dollar. However, doing so
hurts the owners of U.S. dollar denominated paper. So, the U.S. talks a strong dollar policy to keep
foreigners buying U.S. paper but at the same time slowly debases it. Quite the tight rope walk and
is why I refer to the US government and Fed as "the managers of economic data". And we can add to
that "market interveners or manipulators'.

I emailed you an article on silver and evidence is quite obvious that two banks heavily shorted
silver to drive the price down

http://www.resourceinvestor.com/pebble.asp?relid=45097

Back in late April I was investigating rumors of a silver shortage in the physical market. So these
remarks are from back in April, a report I started but never finished and sent ourt, but are still
relevant and now also reflect on the gold market.

In April I was hearing about shortages of silver coins and small silver bars so I did some
investigating. I first visited the web site of a coin dealer I use and they had no silver for sale,
only listed that they were buying these items. So I then  called the dealer and asked about
purchasing some silver and the dealer told me that he was going to tell me the same thing every
other coin/silver dealer is going to say "we don't have any". He told me there is nothing around and
he has an order in for Canadian one ounce silver maple leafs and was told it would not be filled
towards the end of April. The dealer also told me that he had just shipped the last of his bagged
scrap silver (pre 1966 silver coins) but had 100 pre 1966 silver dollars left.

It is now September and they still do not have any silver and now no gold.

Since I was in Ottawa in April, I thought I would go right to the source, the Royal Canadian Mint
that produces the silver maple leaf and many other bullion coins and bars. I asked what they had for
silver bullion and was told they had some proof like silver maple leafs, each coin comes in a fancy
case, has a frosted finish and do trade a quite a large premium to spot because they are a premium
collector type item. Since there was nothing else to buy, I figured I would pick up a few and asked
for five coins. They only had two at the counter, so the clerk checked the computer and said they
would have to go downstairs to get the others. I then asked the clerk how many they had, I was told
33. So there you have it, just 28 silver maple leafs at the mint as of late April.

At the time I am starting to think, there is really no silver left out there? I next contacted
Scotia Bank which is known as probably the biggest bullion dealer among the Canadian Banks. I
indicated that I wanted to buy two or three thousand ounces of silver, they said they would call
back. About an hour or so later, they called back and said they could come up with one thousand
ounces but I would have to buy it right now. Scotia said the silver was flying off the shelf and
they expected it could be gone in an hour.

Wow!

We now know the same conditions exist in the U.S., no coins and bars left,  large bars are still
available and may still be kicking around. The same thing is now happening in the gold market.

I make these points from back in April to confirm that the physical shortage in silver and now gold
is real.

So we see gold and silver prices plunge in the midst of a physical shortage. Now is that not
strange?

This is the most blatant case of intervention by the central banks since the 1970s. Their plan to
cool off the demand for precious metals failed miserably and forcing the price down actually had the
opposite effect and caused a big surge in demand.

In a recent update I mentioned the 1970s correction in gold in the midst of a major bull market.

In August 1976, just weeks before the Democratic convention confirmed Jimmy Carter as that party's
presidential candidate. Gold slid down to $100 per ounce even as the inflation and economic outlooks
were worsening. Like now, Gold looked like a real buy back then even though its price was up about
300% from just a few years before. By the end of 1976, gold had climbed 32.3 percent from its August
low. By the end of Carter's presidency four years later, gold climbed more than eight-fold.

I wonder how high gold will go before the next election in four years?

This past August was probably the last window of opportunity for the CBs to use thin markets to
influence the price. I am sure they are in the midst of a desperate attempt to keep the markets
glued together until the November U.S. elections.

This recent intervention has really hit the precious metals and commodity markets hard, but has not
done that much for the stock markets or bond markets, other than postponing a further melt down.

I will have more on the economy, general markets and bond markets in another update this week or
next.

I want to get some news out on some of our stocks, because September is typically a busy time for
activity and news among the junior resource stocks

(c) Copyright 2008, Struther's Resource Stock Report

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