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September 24, 2008

GMR Blog Entry
by Randolph Buss

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Reminder: this little blog is simply my tool to remind myself and any readers of my thoughts and anything else I deem important - more extensive charts and/or analysis takes place in the GMR Newsletter. This blog is periodic but usually updated once or twice a week.

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My Market Notes:

Hard assets accumulate; mix of juniors, seniors, and physical
UK Bank of England now looks to lower rates; Euroland likely to follow
Reflation in US likely
How for the US to handle $700 billion bailout + $600 billion Iraq War + $40 billion War on Drugs ??????
US Housing - what floor ?
In this market, single fundamentals have no importance; macro global considerations are more important
Commodities equities remain oversold; when does the penny drop that hard assets will be the place to be ?
Impossible to save with negative rates in most Western countries as inflation is raging ... but off the radar screen
Oil creeping higher now... Winter approaches
BEAR Market: in force; DAX 5.700 , DOW 10.500 next stops; longer term DOW 8.000 based on T/A
Accumulate: Swiss Franc, physical silver, gold; longer term Brazilian Real
The Central Bank give-aways are still in force; BoJ put in 1 trillion Yen today; now the CBs have started SWAP pools
Current Outlook: weakness into 2009; commodity prices likely to be suppressed from equity outlook but may be trumped by stampede of FEAR into oil, gold, etc. Not knowable.
Flight to Safety: short term I see no credible asset class for protection ; cash hold; accumulate hard assets on all pullbacks

Things Look Bad - Do Something

Unfortunately, the amount of work on my desk is piling up incessantly and the amount of research ongoing for "best buys" in the resource sectors I follow (precious, base metals, energy, agro and water) is also bursting ... I remind readers that when opportunities present themselves, we must be ready to act. Needless to say, I have not been getting a lot of sleep these last weeks...

Almost, as if I had written the below article myself, it points out the exact issues I talked about in the last entry "Minding the Shop". As credit markets contract and junior companies struggle with financing issues, this will crimp / inhibit the ability for new resources to be found and exploited - thus driving supply down as demand either is maintained, or, as I suppose, increases. This due to the lag times associated with surveying, exploration drilling, , environmental issues, in-country legislation, mine setup, etc. A myriad of hindrances to increasing supply.

Commodity Supply May Be Curbed by Crisis, Goldman JBWere Says

By Jae Hur | Sept. 24 (Bloomberg) -- Commodity prices will stay "stronger for longer" as financing becomes a real constraint on supply growth because of the global credit turmoil, Goldman Sachs JBWere Pty said.

"Credit restrictions and volatile equity markets have implications for the supply side," the Melbourne-based firm said in a report. "Junior companies wishing to finance greenfield projects that would have had little difficulty in raising either debt or equity 18 months ago, would likely struggle today."

Raw material prices, as measured by the Standard & Poor's GSCI index, have climbed 12 percent since Sept. 16 as the dollar dropped on concern the U.S. government's $700 billion plan to buy bad mortgage debts would erode confidence in the currency. Gold, a traditional haven in times of financial crisis, has gained 13 percent.

"Longer term, we believe the structural bull market endures, based on supply and demand fundamentals," Goldman Sachs JBWere said. "The theme of industrialization and urbanization in emerging markets has not disappeared. Neither have the supply constraints for certain commodities been sustainably alleviated."

In China, "growth rates have been slowing for some time, but fears of a collapse in demand for raw materials post- Olympics are unfounded," it said.

"We expect sentiment to improve as a cleaner read on the Chinese economy becomes available during the fourth quarter of 2008, and that the outcome in China will be considerably stronger than the market currently seems to fear," it said.

Credit Curbs

For the medium-term, credit restrictions will put pressure on demand for raw materials.

"The housing market collapse in the U.S. has already taken a large and obvious toll on demand for raw materials," as well as the weaker outlook for automotive sales in many parts of the world, the firm said.

In the short-term, tighter credit availability and higher financing costs have restricted the activities of commodities traders in the physical and derivatives markets with de-risking and switching of counterparties, it said.

"The dollar has become the key short-term price driver, not just for gold, but for all exchange-traded commodities," it said. Short-term speculative money has moved neutral for oil or net-short for base metals, it said.

A few interesting remarks: Last week, as I sent out the entry "Minding the Shop" I had to run and catch a flight to Zürich. Now, this is the interesting part: On Tuesday, it was announced that AIG would be saved by Paulson & Bernanke - a "classic" flip-flop if ever there was one, having just said on the Sunday prior, that saving Lehman Brothers was "not on" and that of moral hazard was mentioned.

On Wednesday morning, the streets of Zürich were very sombre and seemingly many more smokers stood out on the pavement in huddled groups, especially in front of the main UBS building. The AIG office just down the street was empty. They had been told.

That evening we had dinner and were constantly checking the Blackberry - gold was up $90 - its highest one-day advance in near history and the red wine flowed... silver was up about $1.30. That night the steak simply tasted better.

The point is: as I have already hammered home to readers, VOLATILITY is here to stay and the US authorities are obviously VERY cared. As a former executive in industry, I once paid for classes myself to learn nuances in body language and human behaviour to prepare myself for business negotiation - anything to give me an advantage.

In yesterdays Capitol Hill testimony to Congress, Paulson and Bernanke were exhibiting body language of dire frustration, urgency, and fear. Obviously THEY know more than they are willing to say - obviously. Dick Cheney, absent, was noted to have said "Things are bad - do something".

Another tidbit - I went to a local coin dealer to exchange some gold coins - I was given MORE than the spot price - the spread has been totally whacked out of alignment. Nobody currently knows where this massive bailout is going and if the government puts a $700 billion price tag on it, we can likely assume the REAL price is either unknown or shall exceed to the upside - I consider that a safe assumption. The markets will likely take years to recover and the financial institutions are, as I have previously said, the key to growth going forward.

To get a perspective on what the low-end cost of $700 billion means: according to the website http://www.nationalpriorities.org/costofwar_home the ongoing cost of the Iraq War - now going for 5 years is $555 billion. The economist Joseph Stiglitz' book said with all collateral costs, it is likely to be $3 trillion. The US' endless War on Drugs http://www.drugsense.org/wodclock.htm is costing $37 billion. Total is $592 billion. In total, the bailout is so massive by itself, that for all intents and purposes, such a bailout plus war, plus drug wars, plus a 50yr. old infrastructure, plus Medicare ... is the de-facto bankruptcy of the US when including ongoing expenditures and future obligations.

In further thought, and I have thought about this long and hard - very critical indeed, the bailout dynamics. In either case, should the massive bailout be approved, then the USD and confidence in the US economy will likely plummet as massive debt and deficits will be piled on. If no bailout is approved (this seems unlikely) then likely the US economy would tailspin into a massive recession / depression. That is what Paulson and Bernanke were alluding to in their body language and often rather straightforward testimony - the US taxpayer is already "on the hook", Paulson kept saying.

Now, we have seen that they - the authorities - in US, UK and Europe - have started to bully and ban short selling. The US has short-term rescued the horrendous US auto industry with a $50 billion injection - it must be obvious to all : they will do ANYTHING to save the system. This is not necessarily wrong , but it is being done in dictatorial fashion. The government can OUTLAW anything, including non-fungible gold instruments. They could even ban going LONG on gold stocks - but I doubt it.

My market thoughts are: accumulate more gold; my downside DOW target is currently 8000. A swiss banker (now retired) which I met, now has put in standing orders to his bank to buy gold coins every week - price is of no interest - just buy & accumulate.

Reminder: we are currently in a real no-mans land as Paulson and Bernanke stated. Nobody knows where the markets are headed nor what the REAL underlying debt of these derivatives is and what instruments the government can or plan to use in "cleansing" these, e.g. reverse auctions, etc.

We are in unprecedented times: I have talked about a massive hyperinflationary bust in past newsletters and blog entries and also of a Kondratieff Winter. We may be witnessing this soon in more gore and detail. If the last 300 years of European history is any guide, we can assume that any US bailout will be bloated, taxpayer and consumer negative, intransparent and bad for your personal wealth and well being. I know of no historical guideline whereby holding some gold has been detrimental to ones well-being in times of crisis.

Best regards from the GMR,
Randolph Buss
www.dinl.net

Berlin, Germany
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