Resource Stock Update - V14 #8.12 - Markets, Commodities - Sept., 7, 2008

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Of course the big news this weekend was the government bail out news of Freddie and Fannie. Perhaps
it was a knee jerk reaction from a the market scare last week and comments from Bill Gross that took
the markets to their knees, that caused the government to act this weekend.

This will not fix the problems we face but is just another Band-Aid and we will see if it can
reverse the recent market plunge. I expect it will because the manipulators of the U.S. financial
system will be in the markets Monday morning to boost the US$ base assets and probably bashing gold
and precious metals, if they can. There time is soon running out with gold as they are being over
run by market forces.

I found a new web site that reports the SEC data on naked short selling and it is very evident that
there has been naked short selling in gold stocks, including the juniors to cap prices and drive
prices down. I will have a complete report on this after a do more analysis.

What shook the markets last week is someone that is well known and respected in the main stream
financial circles said it as it is.

A lot of these comments came from David Pescod of Canaccord in his daily market letter

""The bad news was highlighted from Bill Gross, who runs the enormous Pimco Funds in California with
almost $850 billion in assets wrote a commentary that shook up the markets worldwide. In that
commentary (if you would like to read the whole piece yourself, go to www.pimco.com) he wrote; “This
rarely observed systematic debt liquidation is what confronts the U.S. and perhaps even the global
financial system at the current time. Unchecked, it can turn a campfire into a forest fire, a mild
asset bear market into a destructive financial tsunami. Central bankers, of course, adopting the
cloak and demeanor of firefighters or perhaps lifeguards, have been hard at work over the past 12
months to contain the damage….if we are to prevent a continuing asset and debt liquidation of near
historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury –
not only to Freddie and Fannie but to Mom and Pop on Main Street U.S.A., via subsidized home loans
issued by the FHA and other government institutions.” He painted a rather scary scenario and because
of that article, the financial and banking stocks in the United States fell almost 5%, an enormous
drop from already depressed levels and took markets around the world to new lows.

One of the things we are hoping is true is the statistical averages that show September is not a
good month and we’ve already lost more than 1200 points in just four days on Toronto. And October is
historically a very good month...except that if there is going to be a crash, it’s usually in
October. On the other hand, if you are in the resource sector, statistically the best months for the
resource sector are November to March/April.

Bob Hoye suggests he hasn’t seen a market this bad until he goes back to 1969. Yes folks, it is that
bad and the good news is that we will probably live through it to fight another day.

A chart will show you how gold has suffered like all other commodities over the last few months, but
the Indian wedding season can make that much of a difference. “Over the past decade” Brendan James
writes, “gold has risen by an average of 10.1% from September through to December, according to a
study by the broker. India, the world’s bigger buyer of bullion, increased gold imports 56% last
month, the first monthly gain in 11 as price declines boosted jewelry sales….” “Indian demand
typically rises in the wedding season, which runs from late September to December. Jewelers also buy
the metal from the Hindu festival of Diwali, or the Festival of Light.""

There is not much good news out there

The  Labor Department announcing that non-farm payrolls dropped by 84,000 during the latest month,
more than the expected decline of 75,000. As a result of this move, the national unemployment rate
spiked, jumping to 6.1% in August, the highest level in roughly 5 years. The Mortgage Bankers
Association joined the news parade, announcing that the rate of mortgages in foreclosure hit another
record high during the second quarter.

Both GM and Ford reported sales declines of around 20% in August and there is talk now of the U.S.
government baling out the auto industry.

Real consumer spending fell 0.4% in July, the Commerce Department reported a week ago Thursday. This
is the biggest drop since June 2004. Personal income fell 0.7% in July, the biggest drop since
August 2005. Real disposable incomes fell 1.7% in July. This is the second straight large monthly
drop in the wake of the government stimulus payments.

                                Commodities and Correction

All the talk of late has been about the commodity correction and the end of the commodity bull
market. The daily market commentary is blaming the commodity correction for taking the whole market
down. Their logic is that commodities are plunging because the U.S. and other world economies are slowing and/or going into recession so commodity demand will weaken. A recession?? it must be true because commodities are falling, so that is a sure sign that other stocks and sectors will feel the brunt of a recession so most stock sectors have been selling off.

Bull markets climb a wall of worry and there is a lot of worry in the commodity market these days.

                                                    S&P 500 chart

In the general equity market you can see that we have seen a retest of the July low, news this
weekend of the Freddie/Fannie bailout could be just what is needed to bounce back up from this
retest.

There is plenty of evidence that economies are slowing and going into recession, but I have been
warning about this for over a year now, since the U.S. housing credit crisis got underway

If you remember, in the past year or so I have talked numerous times how a US recession caused a
commodity correction in the 1970s, (74 to76) and everyone thought the bull run was over then. I
speculated that it might be different this time because Asia was the driving force for commodities,
not the U.S. This appeared to be true, because it was obvious, at least to me and many others that
the U.S. economy was slowing and going into recession. yet commodity prices were not correcting, but
in fact many were still rising.

V14 #1.3, - Markets,  -  Jan., 21, 2008
V14 #3.1, Markets,     - Mar., 11, 2008

It certainly looks now, that it is not any different this time, but looks like a close repeat of the
mid 1970s again. It either took the investment world this long to figure out the U.S. was going into
recession or it was news that economies in Europe and Asia were also slowing.

In the 1970s, there was a deep recession in 1974/75 and commodities as measured by the old CRB index
corrected from a new high of around 225 to a low of about 180 which was around a 20% correction.

The current situation is showing a correction from the recent new high of about 19%. The index hit a
high of 618 to the current level of 498. More than likely we have already seen the bulk of the
correction in commodity prices. It has been steep and volatile and has only taken 2 months to take
most of this years gains.

The correction in 1974 was also steep and violent

This is easy to explain because like I have stated many times in the past, all major bull markets in
commodities are driven by "Investment Demand."

It is very easy for this investment money to flow in and back out of commodities and that is what we
have seen. A mass exodus of investment dollars rushing out of commodity funds, ETFs and many
commodity hedge funds going short instead of long and in fact one or more funds going under and
liquidating.

However, the bullish fundamentals underlying this bull market have not changed. Although a recession
will slow demand, it will not slow it very much. Asia is the biggest consumer of commodities and we
might be talking of growth slowing from 10% to 3% but growth none the less.

The other point is the supply side. Despite higher commodity prices, it has not yet translated to an
increase in supply, in fact in most commodities supply is still falling. This is because of decades
of under investment, lack of qualified people in the sector, environmental issues that either stall
new projects for many years or prevent them all together. Most of the easy to find and mine mineral
and oil/gas projects are gone and depleting. Power shortages are causing mines to shut and/or
curtail production. The world population is exploding putting a strain on agricultural commodities
and a recession will not stop people from eating.

And most important, the investment dollars will come back into commodities and more so because the
driving forces behind these investment decisions has not changed and in fact will become more
powerful as other investment choices continue to generate poor returns.

I doubt whether the stock market is going to be very attractive for many more years as the bear
market continues. And the next shoe to drop will be the implosion of the bond market. The U.S.
cannot bail out the whole economy, but what they do bail out will results in a massive explosion in
the U.S. deficit and at the same time all levels of governments and corporations will be trying to
issue more debt to stay afloat. The bond market is going to cave under all this supply of debt. The
signs are already there as credit spreads are going berserk

Credit spreads are now much higher than even in the worst of the last recession of 2001/02

The cost for a typical US financial firm has gone from 70 bps to 390 bps! That is over a 500% move -
a big hit to margins and profitability. For some new trivia, Iraq's bonds are now considered safer
than those of many US banks.

And no wonder the market is ignoring the rating agencies which give the banks an 'A' rating. Their
debt is priced at the junk level. Your basic investment-grade corporate bond has risen threefold,
from just over 90 bps to almost 280 bps. More squeeze on profits.

The end result will be an increase in U.S. long interest rates and a steep devaluation in the US $.

Next what we are going to see is a race to the bottom by the world's major currencies as each tries
to devalue against others in a beggar-thy-neighbour policy to shore up exports, or indeed simply
because they have to cut short term rates frantically to stave off the consequences of
debt-deleveraging and the risk of an outright Slump.

Next -- if it is not already happening -- it will become clear that the both pillars of the global
monetary system are unstable, infested with the dry rot of excess debt.

The Fed has already invoked Article 13 (3) -- the "unusual and exigent circumstances" clause last
used in the Great Depression -- to rescue Bear Stearns. The US Treasury has since come to the rescue
of Fannie and Freddie, the world's two biggest financial institutions.

Europe's turn will come next. But the shock here is that Europe cannot conduct such rescues. There
is no lender of last resort in the system. The ECB is prohibited by the Maastricht Treaty from
carrying out direct bail-outs. There is no EU treasury. So the answer will be drift and paralysis.

Commodities and especially precious metals will be the only place to hide. Investment dollars will
take to tangible assets that have a real value, not some paper asset that is backed by promises of
failing corporations and governments.

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

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