Friday, July 18, 2008 - Vol. 10, No. 170 Today's comment is by Eric Roseman, Investment Director and editor of Commodity Trend Alert. The global economy continues to slow. Markets are dropping under the increasing weight of soaring inflation and a credit contraction. We're facing an outright bear market in financial assets and... Gold is approaching its finest hour since January 1980. From its all-time intraday high in April, spot gold prices have declined 8%. Even though gold has soared over the last few years, the spot price of gold is still 55% below its inflation-adjusted high since January 1980. Gold Is Still Miles Away from Where It Should Be Amazingly, gold remains miles off its inflation-adjusted high. Unlike many of the skyrocketing base metals this decade, gold prices are just US$106 above its best levels in the last bull market in 1980. Over the same period, U.S. inflation as measured by the consumer price index or CPI has averaged 3.9% per annum. There's Still Time to Buy! From a technical perspective, spot gold prices remain well above their 50-day and 200-day moving averages. Spot prices should take-out the intraday high of US$1,033 an ounce on the next up-crash cycle. This should occur during the summer or early fall. Seasonal strength for gold has arrived early this year, typically starting in the fall. But as far as I'm concerned, the latest price action is bullish because the United States and other countries are starting to lose control of inflation. In June, U.S. CPI hit 5% — the largest annualized gain since 1991. Gold prices are heading much higher before this bull lays to rest. This marks the first time in history that every facet supporting the bull market is riding on steroids! Global gold production is now declining since 2005 with South African and Australian output virtually stagnant in 2008. Net supplies are approaching deficit as production fails to meet rising demand. We've seen a booming demand mainly from exchange traded funds and a dramatic asset allocation shift among investors. Retail investors are dumping dollars and other fiat paper money for the relative safety of gold.   The Euro Is No Panacea Longer Term In Europe, dollar-based investors have been dumping the buck in favor of the euro since 2002. But there's just one problem with this plan. Growing economic problems in the Eurozone will fracture the euro at some point. More than any other region, I visit Europe several times per year and can tell you with absolute certainty the Continent is suffocating under the strong euro. Though unimaginable to many dollar bears now, the euro will unlikely remain strong over the next several years. Right now, weaker countries in the Eurozone are plunging into a hard recession - namely Ireland, Spain, Italy and possibly, France. That hurts the euro's overall strength. It's also possible that one or two Eurozone members might leave the single currency altogether as deflation threatens economic growth and stifles export competitiveness. This scenario is growing more likely by the day. When that happens, gold prices will rally even higher as investors dump what's perceived to be the ultimate king of fiat currencies. Even if the U.S. dollar does recover and posts a cyclical bear market rally, gold prices can still rise. This occurred in 2005 as spot gold prices climbed 18.3% while the dollar rallied 12.8% against the euro. There's no steadfast rule that gold must decline if the dollar strengthens, especially in a counter-cyclical bear market rally. Provided investor demand remains strong for gold and global interest rates remain historically low, gold prices can climb to new highs as the dollar strengthens. It's Not the '70s All Over Again...It's Worse Unlike the 1970s when the global economy suffered through stagflation, the late 2000s offers a completely different economic paradigm. This is not stagflation all over again - or not exactly. For the first time in the post-WWII period, investors are struggling with "inverse stagflation" or deflation in housing, credit and financial assets (stocks and bonds) combined with soaring inflation in food and energy prices. If this was truly an inflationary economic cycle, textbook economics would support rising home values. But this is certainly not the case considering the S&P Case-Shiller Home Price Index has plunged more than 15% over the last 12 months through April (latest data available). This data is certainly not consistent with traditional inflation supporting housing values. In the 1970s, inflation-adjusted home prices increased, unlike in the post-2006 period. The U.S. financial system is another source of deflation as banks struggle to recapitalize and purge their illiquid backlog of derivatives tied to housing and other opaque securities. Banks are now lending less - also a deflationary event. If less credit is flowing, then the economy can't grow. The CPI Numbers Don't Tell It Like It Is Of course, prices for just about everything are soaring over the last 12 months. The government's official CPI numbers don't tell the whole story. Consumers are paying much more for goods and services today compared to last year. In fact, some consumers are paying more than double for items like gasoline and certain foods. Yet, the official CPI is just 5% over the last five months through June. The bull market in gold is still sitting pretty. Investors, policymakers and consumers are scrambling to decipher how to stop rising inflation. Meanwhile central banks in some industrialized countries can't aggressively hike lending rates because deflation has already gripped housing and bank credit. It's an awfully delicate macroeconomic landscape. Inflation and deflation now co-exist for the first time since 2001. I'm not sure which economic evil will win this war. But one thing is for sure. If given a choice, the Federal Reserve and other central banks would much rather allow inflation to grow than deflation or an environment of accelerating falling prices. This, in fact, has been the sad history of all paper money. Over the next 12-24 months, I suspect the Fed and its international counterparts will aggressively print credit because deflation is seriously threatening the global economy. They don't have a choice. Millions of consumers are witnessing a purge in asset values. Inflation is the lesser evil and central banks recognize this. So...gold anyone? ERIC ROSEMAN, Investment Director P.S. I know it's easy to say "buy gold." But where do you start? Exchange traded funds? Gold stocks? Bullion? Coins? And I know you want to buy right now while gold is still 55% below its inflation-adjusted high. So you have to decide how to buy fast. To help out, I've written all my favorite gold plays into my newly updated report. I believe gold is so crucial to your portfolio right now that I asked my publisher to sell this report for the lowest price possible, so everyone can afford it. You can get all the details on this report right here.

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Currencies:

How to Jump in the Currency Markets with Less than $100 Global investors have fallen in love with ETFs since the first one was created back in 1992. And in 2006, the ETF market took another giant leap forward for average investors by creating currency ETFs. But still, not many would-be currency investors know they can diversify out of the dollar and invest in currency ETFs right on the NYSE. That means you can call up and buy one with your average stock brokerage account. They're cheap too. Some currency ETFs sell for less than US$100. Also, here are some ideas about how you can use ETFs to build your portfolio: 1. Create a diversified currency portfolio with the click of a mouse - Protect your capital against a falling dollar. 2. Use ETFs to hedge currency risk in an international stock portfolio - If you have major position of a stock or international fund, you can short-sell the corresponding currency ETF to guard against currency risk. 3. Ride a long-term currency trend - Since they have no expiration date, you can buy and hold for a major trend. 4. Actively trade currency ETFs to position yourself for special situations - One of the major themes we're watching relates to "overheating" in the global economy. In this market, you need to be able to "short" some of the most vulnerable currencies. In this case, you would simply ask your broker to "sell short..." It's that easy! And you can always place a buy-stop order to exit the position and limit the risk of being wrong. Since most currency ETFs trade on the New York Stock Exchange, there is no problem using stop-loss orders for risk control. ERIKA NOLAN, Managing Director P.S. Build your own long-term currency portfolio...at our FX University this fall.

Privacy & Rights:

What "Pitches" the Worst Scammers Use On Tuesday, I gave you the 13 worst fee scams that intelligent people fall for every single day. Now, I'd like to introduce you to what type of "pitch" an advance fee scam consists of and what other warning signs you should watch for. Here are a few clues: The message is labeled "confidential," "urgent," "secret" and demands that you act immediately The sender claims to be a wealthy person, a military officer, or a high-level government official A central bank or other government institution is involved (in many cases, the Central Bank of Nigeria) You must provide extensive personal information, including bank account numbers, passport details, etc. You must obtain forged or false documentation; e.g. an Anti-Money Laundering Certificate Requests that funds be sent via Western Union or through a similar untraceable method Knowing these facts, you're much less likely to be taken in by an advance fee fraud. Be careful!!! MARK NESTMANN, Privacy Expert & President of The Nestmann Group www.nestmann.com

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