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August 11, 2009

Pivotal Events
by Bob Hoye

The following is part of Pivotal Events that was published for our subscribers Thursday, August 6, 2009.

SIGNS OF THE TIMES:

Last Year:

"The sub-prime disaster is mostly priced into the market."

- Business News Network, July 31, 2008

"I'm trying to save the planet; I'm trying to save the planet!"

- Nancy Pelosi, House Speaker, Politico, July 19. 2008

"Suddenly, being green is not cool anymore."
"As the credit crunch bites, environmental policies are being ditched."

- Timesonline, August 7, 2008

* * * * *

This Year:

"The Economy Has Hit Bottom"

- Alan Blinder, Wall Street Journal, July 27, 2009

As late as 1989, Blinder was flogging his economics textbook extolling the virtues of central planning in Soviet Russia. As he asked: "The real question is not whether we want elements of socialism or planning to abridge personal freedoms, but by how much?"

Notwithstanding the collapse of authoritarian compulsions in 1989 with the Berlin Wall, Democrats are in hot pursuit of the old Soviet nightmares.

In his WSJ comment, Blinder continued with "Fortunately, Ben Bernanke, one of the nation's outstanding scholars of the 1930s Depression, will not repeat the mistakes made then."

And, as we enjoy noting the Fed in the early 1930s made no mistakes. They met the crisis in the traditional manner by discounting liberally. It has been expedient for the establishment to overlook the heroic efforts actually made by the Fed and to falsely conclude that the only way the perfect instrument could fail was because the guys in 1929 made a series of the blunders.

"I Don't Care!"

- Nancy Pelosi on her very unpopular opinion polls, Politico, July 27, 2009
Lower than those for Dick Cheney.

* * * * *

Gold Sector: The ChartWorks piece on gold in dollar terms was sent out earlier today. Timing and price targets were essentially met and a correction is possible.

This presents an irony. Goldbugs have been excited about dollar-weakening and a stronger gold price. In the real world - the place where miners operate - gold's real price has declined, which reflects lower operating margins and disappointing results.

Our Gold/Commodities Index soared from 143 in May 2007 to 519 in February as the initial crash ended. Then it was likely to decline into late spring as orthodox spirits revived. That low, which seemed reasonable, was 316 on June 12. Then it recovered to 355 on July 13, which we took as signaling some troubles.

But, Mother Nature said that the real price needed a test of the low and this we have. Our index has slumped to 312, which with a massive change in the credit markets pending seems to be enough. The next rise will be interesting as it sets the uptrend.

So, these are the ironies that the goldbugs don't get. When not in the severe pressures of a post-bubble contraction, the dollar will weaken and commodities will outperform gold such that the real price declines. This, as we have seen, is not good for gold mining operations as costs rise faster than the price of bullion.

On the other hand, in the acute troubles of a bust the dollar goes up, as does the real price. This was the case until February and we consider that the huge gain even to today's level is a foundation of improving profitability that is not yet fully reflected in share prices. This is due to the tendency of gold shares to get trashed in a crash.

Let's apply the goldbug story to shares. With the weakening dollar and stronger gold prices expected after the crash, commodities and base metal miners were likely to outperform gold miners. The late in the year crash low for the HUI was 150 and the recent high is 404 for a 169% gain. On the same move, the SPTMN soared 333% from 178 to 823. It takes nothing more to make the point.

However, the dollar and gold's nominal price have likely accomplished their moves and gold shares will sell off, with the big stock markets, into late in the year. The recent rally in the HUI provided an opportunity to, as we advised two weeks ago, to lighten up on the seniors - in order to then accumulate some juniors on weakness.

Our main theme has been that the party across the gold sector may not begin until early in 2010 and that the last quarter of this year could provide some general opportunities. Within this there could be some exceptional discoveries that could drive individual exploration stocks.

As usual, when going into credit distress it is appropriate to short some big silver stocks.

Our July 9 edition noted that the rise in the gold/silver ratio had reached an RSI of 70, which could limit the move. Thus, our advice to cover silver shorts. A couple of days later it topped at RSI 74 and that ended the move.

The ratio then declined from 71.8 to 64.8, with enough of a drop in the RSI to limit the decline and to anticipate the reversal to rising. Getting above 70 would be one indication of credit troubles.

Link to August 7, 2009 "Bob and Phil Show" on Howestreet.com: http://www.howestreet.com/index.php?pl=/goldradio/index.php/mediaplayer/1326

Bob Hoye
Institutional Advisors

The opinions in this report are solely those of the author. The information herein was obtained from various sources; however we do not guarantee its accuracy or completeness. This research report is prepared for general circulation and is circulated for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each securitys price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance.

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