9-11 gold sell-off...
again I say R E L A X!
By Craig R. Smith, CEO SATC
Sep 11, 2006

On this somber day of reflection over the 9-11 tragedy a toxic financial bomb hit the commodities markets. It was a combination of speculative liquidation, chart-based selling, central bank selling, dollar strength and falling crude oil prices that sent precious metals tumbling on Monday.

Gold prices skidded about 4 percent back under $600/oz. for the first time since June 30th, then bouncing off a low of $585/oz. gold closed at $590/oz, near it's major support level.

My response: Relax, the world is still full of financial risks and owning some gold offers the peace of mind that no other asset can provide -- especially for a nation that is at war -- culturally, ideologically and financially!

As a Sr. broker at the firm said in this morning's meeting, "If your car insurance agent called to tell you that your insurance renewal was on sale by 10%, what would you do?"

You'd probably thank him and gladly renew, right? Because you understand that having insurance is an important part of protecting your future. Well, if you own gold for it's asset protection and diversification properties, any drop in price should also be viewed as a major buying opportunity.

Keep in mind there’s growing concern among economists that the global financial system is hanging on by a few well-worn threads that could snap at any time. Here are just seven of the growing risks that gold serves as a hedge against...

1) The $10.4 trillion real estate “bubble” is losing air fast -- along with a very shaky derivatives market. Pending sales of U.S. homes plunged 7 percent in July to their lowest in over three years. Sales of previously owned homes in the U.S. dropped to the lowest in two years in July. 'Home for sale' signs have edged out gas price billboards as the most important sign of downside risk to the economy," said Lehman Bros economist Ethan Harris.

2) Consumer spending, a major driver of the U.S. and world economy is falling. "A retrenchment in U.S. consumption is slowly unfolding", reports BCA Research. "U.S. retail sales jumped in July, but this reflected an incentive-induced rise in auto sales and soaring energy prices." The real estate price explosion of the last five years is a powerful example of asset inflation. "Asset inflation generates phony collateral for runaway consumer indebtedness, luring the consumer into unprecedented debt excesses," reports Dr. Kurt Richebacher, a former central banker.

3) The U.S. Government needs to borrow huge amounts of money to finance our debt and deficits. Defense spending is going through the roof, as we battle terrorism on several fronts. With a $9 trillion debt ceiling the world, which historically is willing to lend us money, is becoming very nervous about our ability to pay them back. Many foreign holders of dollars have been prevented from using those dollars to buy real companies or assets. More and more restrictions are being put in place in the name of homeland security.

4) The U.S. dollar has fallen 40% over the last 5 years -- even after 17 consecutive interest rate hikes. If the Fed was to raise rates to an inflation-fighting level it would plunge America (and the world) into a deep recession. Major players like Warren Buffet are still shorting the dollar, knowing full well it's value over time must drop further. The M-3 money supply report is no longer offered. At last look it was growing at 8% per year.

5) Geopolitical risks from Iran, North Korea, Venezuela, etc. are not going away. Dr. Michael Economides told me at a recent hard asset conference, that if the current geopolitical threats blow over for now, we could see an equilibrium price of $40/bbl. for oil, but that he sees $1,000 as an equilibrium price for gold. And he's not alone http://www.swissamerica.com/article.php?=SID&art=04-2006/200604240205f.txt on seeing four-digit gold in the years ahead. He hastened to add that "we are only two headlines away from $100/bbl. oil today." http://www.swissamerica.com/article.php?=SID&art=04-2006/200604190250f.txt

6) Recession threats are also increasing. The United States is headed for a recession that will be "much nastier, deeper and more protracted" than the 2001 recession, says Nouriel Roubini, president of Roubini Global Economics. "Practically every indicator at our disposal and the historical record suggests that the next wave after the Fed has inverted the entire yield curve is either a hard landing or a very bumpy soft landing," says David Rosenberg, North American economist for Merrill Lynch & Co. Inc. Investors are betting that a slowing economy will bring inflation back under control. If they're wrong about this, stagflation with mediocre growth and rising prices will be the inevitable outcome" says Forbes.

7) Inflation expectations are real. Most countries, fund managers and sophisticated investors are taking defensive positions against rampant inflation. Core rates have been consistently going up. As they go higher, bonds will take a beating. "My historical studies show that gold is very highly correlated with future inflation, as measured by the CPI. At today's gold price — which has more than doubled from its lows about five years ago — CPI can be expected to start running between 5% and 7%" wrote Smart Money's Donald Luskin recently.

There should be no doubt in anyone's mind that the price of all real assets will increase on a long-term basis, given what's happening in paper currencies around the world. Any single event in the world could easily reverse the recent cooling of the metals markets.

Therefore, I believe it's incumbent on us to stay the course with our strategy of acquiring gold, and buying the dips. Between 5-15% of a portfolio should have an insurance position in gold. Gold should remain the bedrock of a portfolio regardless of price. Recent increases from $265/oz. in 2001 to $590 today -- a jump of 122% -- are great, they're just the beginning of a long-term bull market that should continue for many years to come -- I call it "The Rule of Gold."

Remember: The long-term trend is your friend. Commodities and high quality collectible investments are on track to outperform paper investments like stocks, bonds and CDs again in 2006, just like they have every year since 2001! -CRS

P.S. Here's my publisher's FREE BOOK, CNNfn DVD and "RULE OF GOLD" offer.

Related Stories:
9-11-06 -- Gold below $600, buy! - Latest Market News Digest
9-8-06 -- HARD ASSETS '06 SUMMARY - By Craig Smith
8-30-06 -- Why buy metals now? - By Craig Smith
6-14-06 -- Metals Sell-Off, Relax! - By Craig Smith

DISCLAIMER: All of the provided information is believed to be accurate, however errors are possible. The opinions in the Commentary section do not necessarily reflect the opinions of Swiss America. Past performance of any investment is no guarantee of future performance. All investments have risk.

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