Today's comment is by Eric Roseman, Investment Director and long-time commodity expert for The Sovereign Society.

For the first time this year gold prices are breaking important technical support levels. In fact, gold might drop below US$800 an ounce before this painful correction is over.

Worse, gold stocks have collapsed since July. These stocks now sit at the same levels they were at two years ago.

Major Correction Likely

The correction now underway in gold prices will probably be far more severe than the declines posted in mid-2005.

We're seeing a wicked U.S. dollar reversal this month and commodities are coming undone.

Since peaking on July 11, the CRB Index has tanked a cumulative 19%. Meanwhile gold prices have declined 16% and the XAU Gold & Silver Index has plummeted 34%.

If commodities were heavily overbought heading into July, then now the opposite is true. We've seen brutal declines in just four weeks of trading.

Blame It On Oil and Germany

What's causing the latest drop in gold prices? You can blame it on the resurgent U.S. dollar, falling crude oil prices, and the latest batch of economic data in Germany. The latest data coming out of the biggest Eurozone economy points to a contraction of second quarter gross domestic product (GDP). This data was critical because it compelled foreign exchange traders around the globe to shift their focus and dump the euro last week.

A big drop in crude oil prices is another major factor lending support to rising stock values since mid-July. As inflationary pressures continue to ease, the market has begun to discount the possibility of a quick economic recovery in the United States later this year.

Lower commodity prices act like a tax cut for consumers. These lower prices reduce the coast of living and allow consumers to spend more disposable income to non-energy and food items.    

The dollar, of course, had been heavily oversold for months. Since peaking just north of 1.60 euro, the greenback has rallied an impressive 6.5% since early July.

In Europe, economic growth is now slowing sharply following the release of second quarter German GDP, which showed a contraction. Along with other stumbling economies in the Eurozone, the European Central Bank (ECB) is unlikely to keep raising interest rates this year - especially if oil prices continue to decline.

Dollar Rally Won't Last Forever

Fundamentally, there is nothing to support a long-term U.S. dollar rally. 

Unlike 1995 when the dollar established a secular bear market low against major currencies, this uptrend will inevitably run out of gas.

Bear market rallies appear quite convincing and can muster significant strength over a short period of time. But this one simply has no long-term muscle.

Let me explain. In the late 1990s, the United States posted consecutive budget surpluses, enjoyed massive foreign direct inflows and low consumer prices in an environment of accelerated disinflation. No major military conflicts occurred and oil prices crashed to US$10 a barrel by late 1998 amid the Asian economic crisis and the collapse of hedge fund Long Term Capital Management.

Today's U.S. and global macroeconomic scenario is nothing like it was 13 years ago.

Remember the Credit Crunch?

The Fed is in no condition to raise borrowing costs despite high inflation. The ongoing credit crunch has not abated with overnight borrowing costs still elevated and mortgage-backed securities still clogged.

Over the last 30 days the stock market is up almost 8% but most credit indices remain at the same level or lower ever since Treasury Secretary Paulson guaranteed Fannie Mae and Freddie Mac wouldn't fail.

That tells me credit markets are still far from stable as the economy remains fractured across key industries like housing, retail, autos, and airlines.

Gold Stocks for a Song

While gold prices are likely to decline further in this correction, gold mining stocks have already been pounded much harder. That makes some of the best mines in the business highly attractive at these low levels.

One important indicator I track now suggests a massive rally lies ahead for distressed gold stocks. 

Since 1974, the Gold-XAU ratio has been greater than 5.0 for about 15% of the period.

The XAU Index or Philadelphia Gold & Silver Index is a composite of leading gold and silver mining companies. Most of the stocks in this index are large-cap gold shares.

When the Gold-XAU ratio has been 5.0 or more, like now (currently at a whopping 6.02), the XAU Index has recovered with an annualized gain of 89.6%.

The Last Time This Chart Looked Like This Gold Rallied Over 280%

This chart above is quite mind-blowing if you're a Gold-Bug. Basically it strongly points to a major up-crash for gold stocks. No one can say exactly when this will happen but it's safe to say speculators will earn a bundle once it bottoms.

The current Gold-XAU ratio is an extreme 6.02 as of August 7 and at 5.99 as of August 11. The last time this ratio stood north of 6.0 was back in 2001. Seven years gold stocks soared more than 280%.

For now, the U.S. dollar rally still has legs and gold along with most commodities will probably continue to decline.

The buck has been badly oversold for months. Now the greenback is embarking on a secular bear market rally. But without higher interest rates to support the buck, balanced budgets or a rapid return to above-trend economic growth, there is absolutely no reason for the dollar to sustain this rally beyond a few months.

The United States will not escape an economic recession, possibly a hard recession. The contraction of credit combined with deflationary forces still plaguing the housing industry are events that won't disappear with a minor housing rescue package or a government spending bill.

The real threat to the United States is deflation, not inflation. This threat to consumption will likely lead to below trend growth for at least another six to 12 months.

The dollar's rally won't last forever. Don't abandon gold.     

ERIC ROSEMAN, Investment Director

Be your own inflation hawk!

Looming inflation has the Fed on the ropes. Take matters into your own hands.

That's why you have to take action on your own. Take a bite back out of inflation and watch your earnings soar.

Click Here to fatten your wallet on the back of inflation's bad intentions.

New Research Shows These
Muckrakers are Flat-Out Wrong

A few weeks ago, I commented on the latest dog and pony show happening in Washington starring the dynamic duo of the U.S. Senate Finance Committee, Baucus (D-Mont) and Grassley (R-Iowa).

As I noted here in the A-Letter, these senators are dumping all over the Cayman Islands. They claim any American corporations with a subsidiary company offshore (which is fully legal) should be treated as suspect tax dodgers. The Baucus/Grassley Show was based on a report the two senatorial pals ordered the Government Accountability Office to write.

The senators asked this congressional watchdog agency to investigate a five-story building (Ugland House) in the Caymans that is listed as the business address for corporate subsidiaries of more than 18,500 U.S. companies. That number has nearly doubled in the past four years.

Leading offshore tax expert, Vern Jacobs, CPA did a little research and found that the General Accounting Office report the Senators used to justify their ridiculous attacks contradicts what these senators have been saying.

In the July GAO Highlights they state that "... about 5% of these (18,857) entities (in the Ugland House) were wholly U.S.-owned and 40 to 50% had a U.S. billing address. The Cayman Islands' reputation as a stable, business friendly environment with a sound legal infrastructure also attracts business. This activity is typically legal, such as when pension funds and other U.S. tax-exempt entities invest in Cayman hedge funds to maximize their return."

Vern Jacobs also points out that: "U.S. multinational corporations are permitted to defer U.S. taxes on profits from foreign business operations (earned by foreign subsidiary corporations) as a way to compensate for the fact that the U.S. is the only major country in the world that imposes tax on its corporations without regard to where the company in doing business."

Bravo! Nice to see someone is watching over the watchdogs.

BOB BAUMAN, Legal Counsel

Welcome to the Olympics...and Big Brother Part I

You're finally living your lifelong dream...you just arrived in Beijing for the opening Olympic ceremonies. 

No doubt you've brought your suitcases, video recorder, and if you're a bit more adventurous, a Chinese language phrasebook. But when you arrive, you'll have an unknown, but very real, presence traveling with you during your visit: Big Brother.

This isn't the Big Brother of old, as China displayed to the world at Tiananmen Square in 1989. No, the new Chinese Big Brother is a lot subtler.

For instance, you'll probably need a cab ride to your hotel. Nearly all of Beijing's taxis have microphones and video cameras that the Chinese security services police can remotely activate to eavesdrop on passengers. And please don't discuss politics: If you say something offensive, you could be deported before you even arrive at the opening ceremony! 

Assuming you arrive intact at your gleaming five-star digs, you'll no doubt want to log on to the Internet to catch up with events at home. With what China calls the "Great Firewall," you might notice you can't access certain websites, particularly if they're reporting on events in Tibet, human rights violations in China, and the Falun Gong spiritual movement. Other websites, like BBC or Voice of America sites, are blacked out entirely.

But more likely, you want to read emails from home and perhaps correspond with your colleagues at work. You'll be glad to know that you won't be the only one reading your communications: More than 30,000 full-time security officials monitor email, Internet forums, blogs, and news sites. 

Also, if you're staying at one of Beijing's luxury hotels, your room probably comes with a video camera and microphone as well that officials can remotely activate anytime.

That's not even half of it. Tune in tomorrow and I'll explain how long the Chinese Big Brother's arm really is.

Just Say "NO" to Your Friendly Neighborhood Banking Spy

In the U.S., your friendly neighborhood banker has become a government spy...who is required to tell the government when you do anything "suspicious."

A "suspicious" action could be something as simple as paying off your credit card bill, or depositing a large inheritance after a relative's death.

But fortunately, there are places in the world (beyond your backyard), which still safeguard your financial privacy.

Click here to learn more about how you bank, invest and shield your assets from prying eyes in these last remaining offshore havens.