Resource Stock Update - V14 #8.14 - Markets, Commodities, Gold, Gold stocks - Sept., 9, 2008

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You may have noticed, that this is my 14th update since I last picked a new stock for the newsletter
in late June. There is simply no sense to add or buy new stocks in this market. It is best to wait
and be more certain of a bottom.

                                                       Markets

I have never seen a market like this and I have been trying to make sense of it, and I can only
think of one way to try and explain this. We need to get out from under the trees and this messy
jungle and have a good look at the forest from the 10 mile high level.

In a nutshell we are in the midst of the greatest financial battle of all time between paper and
hard assets. The U.S. financial system is crumbling and will come crashing down within the next few
years or sooner. The current crisis situation is already more serious, than the Tech wreck of 2000,
the Savings and Loan crisis of the 1980s, the stagflation of the 1970s and even the great depression
of the 1930s. The U.S. financial system is on its knees like a wounded soldier and firing every
weapon it has left for one last ditch effort to survive.

This wounded soldier is really doing some damage in this last ditch effort to survive. Damage to
hard assets like gold, commodities and especially their related paper assets the resource stocks.
The U.S. and Fed is trying to make the biggest financial rescue of all time with Freddie and Fannie
Mae. The Plunge Protection Team is working over time trying to shore up the market indexes and U.S.
dollar. A large selloff in commodities was engineered or resulted. Gold stocks and other resource
stocks have probably seen massive naked short selling, legitimate short selling and panic.

Meanwhile, a lot of smart and big money is hunkered down and just hanging tough in hard assets,
because in the end they know this will always have real value of some amount. Oil, copper, wheat,
gold, you name it will always have a value and use, not like these paper assets, in particular
stocks and bonds of debt ridden corporations and governments. All this 10s of trillions in
derivative mess that nobody knows if it has any value at all, what it is, what backs it or who.
Remember I call it the BCBS (Bull Crap Backed Securities) It could be called BSBS, but regardless of
the name, we have only scratched the surface of this mess that has to unwind over the next few
years.

So lets see where this latest battle has gone and where it might logically end up.

First off, I want to show some charts on basic commodities that are the value behind the resource
stocks.

What we have happening now is a liquidity crunch and intervention in the stocks (part of the paper
assets), not the commodities, although commodities have seen a sell off, they are real assets that
have intrinsic value, they have a use and need.

The CRB Index plunged 13 points to 479 today, but this is the long term monthly chart

You can see that sure this has been a very significant correction, but it is only come down to it's
secondary trend line. It also bottomed on this trend line in 2006 and 2007. Still today, we are a
long way from where this bull market began in 2003

The next chart is copper. It is important because copper is one of the most widely used metals, in
housing, autos, electronics, you name it. The copper price has always been a good representation of
economic activity and demand. Copper is said to have a Ph.D. in economics.

Copper did not fall much today, a penny to $3.09, here is the long term chart

Copper Chart

You can see that the correction has not been much at all, in fact it still looks like copper is in
an uptrend of higher lows and higher highs. Copper is telling us that it still expects plenty of
economic activity and demand to keep the price up.

Now lets look at oil, it is very important as the main driver in the energy sector. Energy is a very
important piece of the economic world puzzle

Today oil dropped about $3 to just above $103. I have heard many experts suggest it could eventually
bottom out between $92 and $100 with some as low as $85. Imagine this further weakness in this long
term chart

Monthly Oil chart

Sure oil has seen quite a correction but has not even come down to it's second trend line. A price
around $92 would do that, but oil would still be a long way from it's 2003 level when the bull
market began

You can look at foods, corn, wheat, soybeans - same thing

Now gold, it was hit again today, with the futures down $10 to $787 and a retest of the mid August
low. A retest on this low is quite normal market activity. Worst case could see gold fall further to
the $680 to $700 area. But look at this long term chart

Gold chart

Again, gold has just come down to it's trend line and even a drop to $700 would still mean gold is
way above the 2003 level when the bull market began.

We can look at more commodity charts, but they are all basically the same story. Sure there has been a steep and significant correction and maybe it still has further to go, but most charts already show a correction down to rising trend lines, where you normally see bottoms. Yes, maybe it will get worst and commodity prices may correct a bit more, but in all cases they are way above 2003 levels
where the bull market began.

The correction looks normal - The sky is not falling in commodity and precious metal markets

Volatility - try to ride the Bull

The nature of the beats is to become more wild and volatile as it advances further, It gets meaner
and meaner. The volatility and price swings will only pick up as we move into the next bull phase of this cycle.

And yes there will be another bull phase, probably the final blow off in commodity and gold prices
in 2009 and 2010. This is where we will see the final implosion of the financial markets and
economies and see the U.S. and other economic slide into a deep recession. It is this final blow off
phase where we will sell out of most commodities and probably hide in gold, cash and bonds.

All the experts I follow and the ones who have had it right are all saying there is more to this
commodity bull market yet. The only difference is in their timing and prices.

Now I am going to show you where the sky has been falling, and probably already has hit the ground. I have never seen this happen before, but many commodity related stocks have given back most of
their bull market gains, especially the precious metal stocks.

This next chart is the HUI - Gold Bugs Index, I had to show a 10 year chart to get the right
picture. Big Charts only gives you a choice of 5 or 10 years and 7 is what I really needed. Anyway
you can still see the steep decline or free fall of the last 2 months. The HUI plunged 26 points
today to 260.

This is down about 50% from it's high and you can see it is at a level that it has bounced higher
from a number of times in 2006 and 2007. It makes no sense that gold stocks have given up so much.
The worst case could see gold stocks fall through this support level to strong support at 200 to
220. We are only about 40 points from this worst case scenario and to fall much farther, if the HUI
could drop below 200 to 150 and give back its entire gain of the bull market since 2003. That would
make no sense what so ever. And to be just 40 points from 2004 and 2005 levels is a sure measure of
way over sold.

The only argument that makes sense is we are at the bottom some where close looking up

XAU Chart

The XAU is the same story, at 112 today and it's worst case even though unbelievable is another 15 or 20 points. It is just 30 points above the 80 level, where the bull market started in 2003.

There is no real good reason for gold stocks to be this over sold. We can only be at a bottom or very close

                               TSX Gold Index

The Toronto Gold Index even looks worse. Today it dropped to 213 and is at levels seen in 2005 and
is only 20 points above the levels seen in 2003 when the bull market began

I have shown you charts before of the Venture index, a good indicator of the junior mining market.
It has given back the entire gains of the bull market

               TSXV Index

The index plunged 150 points today and at 1620 is all the way back to where it was in 2003.

        Only Gold stocks and Junior Golds are beat up So Bad

Not what is really revealing is it is only the precious metal stocks that are beaten up so bad.

Following is a chart of the TSX Energy stocks and one of the TSX Base metal Mining stocks. We can
see that these stocks are behaving more like their related commodities. Sure they have given up some
gains and seen big corrections, but they are way above their 2003 levels where the bull market began

TSX Energy Chart

TSX metals and Mining Chart

Now a chart of Canada's TSX. Yes it was another bad day and we went down almost 500 points to
12,150. You can see that the TSX has bounced off this 12,000 level several times back in 2007 and
earlier in 2008. There is very strong support in the 12,000 area and looks like a good place for a
rebound to me. And it is a long way from the 2003 levels where the bull market began.

Again, this looks like a normal correction, just coming off a new high this year in June

So why is that gold stocks have been hurt so badly. Why have gold stocks given up almost all their
gains, yet other commodities related stocks have not been hit near as hard

Now lets look at the wounded soldier and you will understand why he is so desperate and give you a
clue on gold.

First a look at the S&P 500 chart, it is not too bad

S&P 500 Chart

You can see the long term double top in the market and the bear market that just got started this
year. A much different chart that the Toronto index above that is just coming off new highs. The S&P
index is headed for the 2002 and 2003 lows and will be there within the next 2 years. Probably when
the final commodity blow off damages the economies further with high costs and profit squeezes

Now this chart will show the rot

The S&P financial index is shows the root of the cancer or should I say the rot of decay, it is even
far worse than the gold stock indexes

S&P Financial chart

You can see in this 10 year chart that the U.S. financial stocks were heading straight down this
summer. From May to July the index started to plunge from 26 and right through 20 and all time lows.
The financials were heading to 15 on the index and into the abyss. This was July and it was shear
panic of a complete collapse of the U.S. financial system and the US$. Remember this is when the
Euro was hitting $1.60 on the dollar and Gold threatening $1,000 again.

In reality, this index will go a lot lower, but what will really happen is stocks in the index that
go bankrupt will be replaced with other financial stocks that are in better shape. This is an
inherent problem with indexes when doing long term charting. They are always far more biased to the
upside then the return an individual would get in a portfolio. Because the portfolio would include
the bankrupt stocks that went too zero. You just can't magically replace one of these with a better
one for no cost.

This is the point the desperate soldier fired the last hurrah, the Fed and CBs started a massive
intervention in the currency markets, Gold, bonds and probably major stock indexes as well.

I am also now quite certain this intervention has also included gold stocks, including the junior
gold stocks.

I showed you the amount of naked shorting that has taken place with gold stocks on top of legit
shorting. In most cases this naked shorting takes place on price declines.

Why else would just the gold stocks get hit so hard since this intervention began?

Why have gold stocks went straight down since July, when gold and other commodities and sectors have not?.

The only saving grace we have is  government or Fed interventions can only have short term effects.
But we cannot ignore the damage done. The best thing any of us can do now is to try and educate the
market as to what happened. Knowledge is power. When big money that is already holding refuge in
gold and other commodities learns that gold stocks were artificially pushed down and oversold by CB
and Fed intervention, that money is going to come into gold stocks big time.

I have no doubt that gold stocks will out perform gold in the next rally, if it is only because the
gold stocks are beaten down so bad and will be coming back from very depressed lows.

The damage done will take time to repair, but we will probably see a quick 30% to 50% jump off the
bottom and then a consolidation before bigger gains in 2009 to 2010.

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

All forecasts and recommendations are based on opinion. Markets change direction with consensus
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