Resource Stock Update - V14 #8.6 - Gold, Oil, Markets, Junior Golds - July, 30, 2008

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This week the summer rally in gold officially came to an end. As I mentioned in my last update, we
did not want to see gold drop to $918 or lower. Yesterday gold fell through that level, sliding
about $12.5 to $917 on the spot market. The chart below is the gold future price that closed at $916.5

That does NOT mean we are not going back over $1,000 to my $1,225 target, it is just going to take a
while longer, most likely on the next rally that will probably get started in August.

Gold has much stronger support in the $880 to $900 area and we are already down to $896 as I write
this so we most likely will start basing here and heading back up before long.

The problems in the U.S. economy that is driving inflation, leading to further weakness in the US$
and ultimately driving the gold price higher than most can imagine is not getting better. Things
continue to go down the tubes and more and more money is flocking into precious metals.

IMF sees no end to credit crisis

http://www.ft.com/cms/s/0/a3deb7da-5caf-11dd-8d38-000077b07658.html?ncli...

Global financial markets are "fragile" and indicators of systemic risk remain "elevated" almost a
year into the credit crisis, the International Monetary Fund said on Monday.

The fund warned credit growth in the US could fall further as a result of ongoing financial system
stress and warned that emerging markets would be tested as global financing conditions tighten and
policymakers grapple with rising inflation.

I will comment further on the credit problem, but first a few comments on oil.

Oil chart

I am now certain that the recent peak to $145 will be a near or medium term peak in the price of
oil, we may not see higher oil prices for many months or until next year. Of course if we get major
hurricane damage or new conflicts arise in the middle east, than we could see new highs, but barring
those events, it appears to me that the world record loss in crude oil trading, taken by SemGroup,
of Tulsa, Oklahoma, an unknown oil pipeline, storage and trading company, caused the recent spike in
oil prices.

They reported  a $3.2 billion loss, the second largest commodity loss ever and more than enough to
put them under.

I thought the CFTC would be all over this major market event, especially with all the attention and
hype about speculators driving up the oil price. The problem is, I don't think it fit their fairy
tale the way they wanted, because SemGroup went under by shorting oil.

Kind of funny that about the same time, the Interagency Task Force on Commodity Markets, after
spending much scrutiny and no doubt taxpayers money, has concluded that speculators and other
factors such as price fixing had no real bearing in the recent sharp rises in energy prices and that
“Supply-and-demand factors best explain the recent surge in crude oil prices.”

SemGroup had an enormous number of contracts on the wrong side of a rising market on the short side.
Probably more than 100,000 short futures and options contracts, representing over 100 million
barrels of oil

It looks like SemGroup must have held short positions on more than $15 billion worth of crude oil
and perhaps much more, because it would take a position of that size going against them in order to
generate a loss of $3 billion. Why did the NYMEX and the CFTC allow SemGroup to amass such a large
position that it, obviously, couldn’t stand behind?

Maybe because they were on what was perceived as the good side, selling short to hold the price
down??

As the end came for SemGroup’s large, increasing short position, that position was forcibly bought
back and could easily account for the last $15 to $20 increase in the price of oil, up to the $147
price high. When the forced buyback of the short position was concluded, a buying void was suddenly
created and prices then fell.

You can read more detail on this from Ted Butler at

http://news.silverseek.com/TedButler/1217265595.php

                                          Junior Gold stocks

The short squeeze on SemGroup is the same fate that awaits a number of hedge funds shorting junior
gold stocks.

I have received numerous messages on some of our junior mining stocks that have been hammered
further as the gold price corrected. There is no point on commenting on individual stocks because
the story is the same for all of them.

Basically you have thin markets with no buyers as everyone remains timid and fearful. It only takes
a little selling usually by those who are panicking, face margin calls or fund redemptions, plus the
naked short issue to push the stocks lower. Most are dropping on low volume.

This is what bottoms are made of

The big difference is the precious metal stocks have strong fundamentals under pinned by the strong metal prices. This is unlike most other sectors in the market that face a cost squeeze on top of
falling revenues and earnings caused by the recession that the U.S. and central Canada is falling
into.

The gold stocks and junior mining stocks will see a strong rebound from this bottom when the gold
price breaks above $1,000 again, and it will.

If you sell now, most likely you are only selling at or near a bottom and get a lousy price for your
stock. This scenario has played out about 5 times now since the bull market began in 2001, and each
time the gold stocks recovered.

Ron Meisels is one of the best technical analysts out there

Technical analysts Olaf Sztaba & Ron Meisels - “One of the biggest disappointments for investors in
the past few years was the mediocre behavior of gold stocks in relation to gold itself. This is most
likely to change….Technically and cyclically, gold stocks are ready to take a leading role.”

In my late May update I provided a chart of the TSXV and speculated that we could be at the start of
a rally, but needed to break through the 2820 level to confirm it. As you can see below, this did
not happen. We were doing fine until the end of June, and then in July we started to head straight
down, but there is some positive signs in this chart

                                                                      TSXV  Chart

To point out how ugly this is, we have now gone substantially below the 2006 and 2007 lows, where
there was strong support in the 2300 area. The next level of strong support is the 2000 area that
previously acted as strong resistance to the upside. We are only about 5% from this price area so
the downside from here is probably small. Whenever this index seems to see a steep sell off we get a
'V' shape correction and see a strong move to the upside.

September is typically a good time when the juniors seem to rally as everyone is back to work and
news flow increases.

We seen strong rallies in Sept. 2007,  Sept. 2006, and Sept. 2005 but usually they actually start in
August from the low made in that time frame.

So in a nut shell we are very close to a bottom and will soon see a rally.

This pertains to pretty much all the stocks on our list that are seeing more price weakness.

And if what I expect happens, gold goes through $1,000 and higher, this could be the biggest rally
of the past 3 years.

I might also point out that this sell off is on low volume, back to what I said early, a thin market
with a lack of buyers so just a little selling pushes the stocks lower. This is why they typically
see the 'V' shaped corrections because a little buying bounces them back up.

I am going to end this update from comments from a leading economist and it clearly points out that
the U.S. economy has a lot of hard time ahead. And bullish conditions for gold will persist

David Rosenberg, the North American Economist at Merrill Lynch. He is a mainstream economist who is
most definitely not a cheerleader. He can be quite bullish as times, and when he thinks the times
call for it, he can be rather bearish. As we will see below, he is quite bearish of late. I am going
to quote from his opening remarks in a commentary dated July 25, where he is changing his forecast.

"Forecast addendum: Adjusting to the new reality

"Just like consumers, who are insulating their windows and making fewer trips to the malls, we are
adjusting our economic forecast to the new high-oil price reality not to mention the latest round of
trauma in the mortgage markets. Though fiscal stimulus [rebate checks] will provide a lingering
boost to 3Q we expect GDP to plummet 2.5% in 4Q and see a similar decline in 1Q. In all, we have
shaved our 2009 GDP forecast to -0.5%, a full percentage point lower that where it was previously,
while 2008 is broadly unchanged at 1.5%.

"Less consumer, more unemployment, profit squeeze ahead

"The scenario we ran last May, when we shocked the model with higher oil prices, now appears to be
playing out as predicted. With rebate check delivery winding down, there is now little shielding the
consumer from the full force of $4+ gasoline, deflating real estate and equity markets and rising
unemployment. The new reality means a deeper downturn for consumers, higher headline inflation, more
belt-tightening from businesses and a mammoth profit squeeze. It also keeps the odds squarely in
favor of more rate cuts from the Fed, in our view.

"Back to the 1970s

"Once the last of the rebate money is spent, in either July or August, consumer spending is expected
to roll over, and hard. The oil shock we're experiencing is on par with the spike in the mid-1970s
and consumer spending will see a similar downturn, in our view. The unemployment rate will probably
crest at about 7.0% in mid-2009, a half percentage point higher than our previous outlook. We're
expecting a 3.0% decline in PCE in 4Q 2008 and 1Q 2009 does not promise to be much better. We look
for savings to rise, as consumers adjust to the tighter credit environment by building their savings
rate up to 2-3/4% by the end of 2009.

"2008 stimulus - round two?

"The deeply disappointing retail sales report this week only serves to underscore how far behind the
curve consumer is financially and a grim foreshadow of what lies ahead once the rebate checks are
all spent. Flat spending was all consumers could muster in July with three quarters of the $106
billion total rebate checks in their bank accounts. We take consolation from the notion that the
folks in the Beltway are doing the same math we are and thus the drumbeat of another round of
stimulus is getting louder all the time.

"Housing still in the weeds

"The good news is that we're probably more than half way through the real estate correction. The bad
news is that we've likely still got at least another 15% down on home prices to go before we reach
bottom. Moreover, housing starts still need to breach the 700,000 mark to deal with the mountain of
new and existing homes with for-sale signs on them. The supply situation will not be helped by the
latest fractures in the mortgage securitization market, which will only slow the pace that homes can
be sold and inventories can be cleared."

You can read the whole report at
http://www.realclearmarkets.com/The%2520Market%2520Economist%252007%25 2018%252008.pdf .

                    ****************************************

In a separate report, the Census Bureau said about 6.1 million housing units are vacant and
available either to rent or buy. About 10% of the homes built for sale in this decade are vacant,
while more than 25% of rental units built in this decade are vacant, the report said.

"We are faced with a considerable excess of housing units that is only likely to worsen over coming
quarters, and for which there is no quick solution," wrote Richard Moody, chief economist for
Mission Residential.

Credit Suisse points out that even though crude oil has corrected down to below US $129 a barrel,
the price of black gold is still some 30% higher than its previous peak.

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

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