The impact is likely to go beyond most bearish assessments in both scope and time. The very fact that most financial institutions and mainstream media don’t share such a view is actually supportive, as history has demonstrated most of civilization was caught unprepared at key points of history. The next 5 to 10 years is going to be one of those key points.

With regard to the financial markets, there’s a gigantic monster whose actions are about to rock the financial world like never before. Move over boogeyman and say hello to Mr. Hedgefunds. No matter at what area of the markets you look, the footprint of the behemoth is evident.

For now, most aren’t complaining as their slash-and-burn way of investing has been overall beneficial to the “Don’t Worry, Be Happy” crowd’s way of thinking. But I believe we’re about to see the monster exposed and what we’ll find is widespread misdeeds and over-leveraging unlike anything ever seen or imaginable on Wall Street. Stay Tuned.

Gold
Back in the early to mid 90s when I was a legend in my own mind, I actually thought I could predict market movements on a regular basis. And when a market went against my prediction, it was the market that got it wrong and not I. Therefore, while my flesh would like to gloat about another good call on gold, I’m going to move on after a very short pause… Ah, that felt good-lol.

Seriously, it was very fortunate to sidestep yet another of the sharp, but short, corrections gold has gone through since I returned to the bullish camp in 2003. While it’s not my intention to be portrayed as a market timer (because it’s a losing proposition, IMHO), avoiding these corrections for the most part and getting back on board as the renewed uptrend took hold, has given both a financial and mental comfort zone from which to operate.

The corrections so far have been classical secular bull market corrections and are a necessary evil on the march to a new, all-time high for gold above $875 (adjusted for inflation, we’ll need to hit $2,200).

It’s very important for you to have a plan of action for all possibilities and not be left to make decisions during the emotionally-torn moments when markets are cratering. For me, I know when we’re at extremes by what people write and call about, especially after I have made a commentary.

When I dare suggested we’re at the most overbought level ever, numerous people voiced opinions otherwise, and some in a manner that leads you to end up asking yourself, “What happen to these folks when they were growing up?”

The last correction went a long way in setting the stage for us to not only get back above the recent highs around $735, but gave us a better base from which to challenge the all-time highs. Just before the correction began (and we stepped aside), there were people literally knocking each other over to exclaim their new or updated bullishness for the precious yellow.

And the media, especially the ones who don’t normally even give gold a quote, were issuing one glowing article after another. Sure enough, the correction takes hold and before you can say, “Oh my God”, tirades about how the end-of-the-gold-bull-market-world are everywhere.

I’m not going to publish the quotes or the names of these folks who went from bulls to bears literally overnight because I’ve made enough erroneous forecasts to last a lifetime myself. But it is critical to recognize how fast we went from severely overbought to oversold, yet gold didn’t violate any long-term uptrends or see any significant changes in the bullish fundamentals that remain intact.

The good news is (for those of us on the long side), that most of these folks now bearish will not have the intestinal fortitude to reverse their positions again or anytime soon. This can help prevent us getting frothy again too soon.

Silver
It’s usually more volatile than gold and recent history has been no exception. But thanks to its “kissing-cousins” relationship with gold, one can’t see new all-time highs for gold and not think that silver will at least track gold up percentage-wise. (In fact, it can lead at times).

Base Metals

It’s critical for you to separate precious metals from base metals. It may seem like poor advice at the moment, but I believe hindsight will end up showing us that as inflation hedges, those investors who chose to lump base metals with precious metals don’t understand the cyclical nature of commodities in general. (And to those who say this time its different- good luck).

 

Many of the bullish base metal forecasters are also predicting a stagflation type overall world economy – a slowing down while inflation rises. Unfortunately, there’s no economic history to support such a stance. Base metals benefit from sustained non or low inflationary economic growth which gives them pricing power because their products aren’t collectively major components of overall consumer price inflation like oil and gas.

The bullish argument (and it’s a good one) is that China and India devour all base metals production and therefore prices can only go higher. The bearish argument contends that the combination of a slowing U.S. and world economy as a whole more than offset the strength from China and India.

The other part of the bearish argument is not one being discussed at any great length and is often hard for the novice investor to grasp, but it’s the core of my bearish stance. I mentioned earlier that hedgefunds have been moving in and out of markets in a slash and burn style.

They have become the absolute single biggest force ever in the history of world financial markets. They’re not dumb, and I believe as a group have correctly recognized and taken advantage of the three bubbles we’ve had since the 1990s.

The first was in their infancy as the new King – the general stock market of the 1990s. But like all bubbles, that one burst. They then saw real estate as a path to riches and it, too, became a bubble that’s now bursting as we speak. Last year, they grasped the bullish argument for commodities and have now caused a metal like copper to reach bubble status. (Remember, bubbles usually last longer and go higher than most first imagined.)

The problem is that most speculators come on board when the bubble is evident and don’t get out before it blows up. The very fact that it is harder to find a needle in a haystack than find a base metals bear among our industry and investors that play it, worries me to near-death. (The numerous emails that this commentary will generate is also an indication).

I believe 2006 should signal the cyclical highs for metals like copper, zinc, nickle and the like. It doesn’t mean they collapse, but their upside is limited if not already fulfilled while precious metals and uranium have clear sailing ahead (outside of the secular bull market corrections we’ve endured so far).

Mining Shares

Let’s first remember to separate actual producers (and emerging producers) from exploration companies (“Hopes and Dreams, Inc.”). The good news is that despite several factors that have hindered mining companies as a whole (more in a moment), producers as a group have benefited from the boon in commodities and investors’ quest to be a part of the action.

The market value of the global mining sector rose more than 70 percent in 2005. This has helped lead to a marked increase in mergers and acquisitions (I wrote about this happening this time last year). This has occurred not only because of the key factor that most mining companies can’t replenish reserves fast enough but also due to the fact that profits rose sharply while debt levels tumbled.

Before anyone breaks out the caviar and champagne for the good old boys, just look at some of the factors facing them going forward.

·         You wouldn’t know it after you walk the floor of a typical metals and mining show, but there still are not enough big discoveries to make up for the fall in mine supply while demand grows.

 

·         Miners are facing increased desires for more of the pie from stakeholders such as governments, contractors and employees. The government angle is especially scary. I believe only Canada and the U.S. states of Nevada and Alaska offer mining companies real peace.

 

·         Equipment and labor shortages still affect the mining industry. While mining trucks are coming off the production line as fast as they can be built, shortages still linger. I’ve seen mine production impacted by a shortage of truck tires. Be careful when a company says they plan on drilling because getting an actual drill is no easy task nor having skilled labor to drill, develop and produce ore.

 

·         While the mining sector has started talks with social and environmental activists on a “green” code for the industry, make no mistake about it, the two sides fiercely oppose each other. I would sooner cheer for the opposing team at a Philadelphia Eagles game and believe no arguments or fighter would break out, than count on the environmentalists to be warm and fuzzy to miners.

 

·         Hedgefunds have also impacted the mining industry and could make my bearish argument for base metals a poor one. Phelps Dodge is an example: they use what is called “risk minimizing hedges” at prices of $1.20 or less.

 

Hedgefunds used this as a free shot to bid up copper prices without fear of being swamped by producers selling aggressively into the market because they had enough production to back up their forward sales.

 

This overwhelmed all speculators who stood in their way. Phelps Dodge took a $250 million hit by mark-to-market Rule 133. At a recent meeting of the Society of Economic Geologists, the mining industry was outspoken about their fears of what hedgefunds may be doing to their financial operations.

Don’t assume that a metal price going up automatically translates into a mining company stock doing better. There are many factors influencing the miners that weren’t around (or weren’t acute) in the past bull markets.

It’s been my feeling that the junior resource market is likely to have a good run in the second half of 2006. I think the next 30-60 days is a period of accumulation and a good run up in the juniors should unfold as Fall arrives. But as always, selectivity will be key.

Courtesy of: http://www.grandich.com/