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"I have been disappointed that mining stocks have dropped so drastically over the past few months. I am down a significant amount of $$ due to the fact that I bought a significant position of silver/gold in March based on what I was reading in many different financial newsletters. So now that I am down 25-30%, I am wondering: do I hold on or cut my losses? Stocks like NEM and PAAS seem to be WAY below their 200 day MA and if they have further losses I am concerned that they will go even farther down due to blowing past technical resistance points. Also the USD is above the 50 day MA, so it is all confusing, esp. with all this talk about inflation, etc. Lastly, it seems like if mining stocks tank, it can be literally decades before they recover in some cases if you look at historical stock prices for NEM and PAAS over the past 10 years. Thoughts?"/ Mike

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Mike, since you referred to "the past few months", I took that as being three months. I ran the chart below of the Dow 30 Index and compared it to five absolutely solid, well-managed companies in the Basic Materials sector over that time frame. All these companies are on the Cara Global 100 Best Companies list. You will see that my choice of gold stock, GG (blue), has fared poorly as well, but not as bad as DOW (gray?), NUE (brown?), or BHP (red?). Only RIO (a Brazilian company) (green?) is tracking close to the Dow 30 Index (red?) at 10.463.

I really am totally color-blind, so I have to check the lines by testing the candlesticks just to see which one is which. Kind of makes this tough.

The point I am making is that traders often just compare USD to Gold because that's the TH mantra. But, a rising and falling USD also has an impact on other sectors, and, as shown above, on non-precious metal stocks of the Basic Materials sector.

Mike, as for your being down so much on your gold and silver selections, the only time you ought to be considering selling is after the USD has run through a strong bear cycle. You have to learn to buy into weakness and sell into strength if you ever want to buy low and sell high.

In my view, there are cross-currents that have come into the present market that are pushing the USD higher than I believe it should be, relative to the PPI/CPI trend and the reality of the nation's twin deficits.

I believe the Japanese are buying U.S. Treasury securities in order to prop up the USD, and lower the Yen, which gives the Japanese manufacturers a leg up on the Americans in selling products into the USA, China, Korea, and even Europe. Japan is interested in creating high-paying jobs in its manufacturing sector.

The Bush administration would like the People's Bank of China to revalue the Renminbi (yuan) upwards against the USD, which devalues the USD and permits its manufacturers to do what Japan is now doing. Yes, consumers will pay more for goods imported from China and other countries abroad, but that will cause Americans to buy more domestically produced goods, so in addition to manufacturing exporter jobs being created, there would also be a lot of other jobs created as well. Tourism too would be enhanced with more visitors from Canada and Europe ("Destination America"), based on the attractiveness of a low USD.

The rub today is that the Japanese or the Chinese (who themselves don't mind a high USD because that means a high yuan, which is important to China as it happens to be a net importer) are collaborating to buy U.S. debt, which pushes down yields, and that in turn provides plenty of attraction for homebuyers (including real estate speculators).

So, being caught in a trade war is causing an even bigger problem at home with domestic speculation. It started with Crude Oil prices, but that has been arrested. Now, it's the housing market bubble in several major U.S. markets.

That is the Fed dilemma today.

And as house prices skyrocket, which mortgage company is buying up the debt? It's the Govt Sponsored Agencies, Fannie and Freddie.

You can see from the numbers I gave this morning that this GSA debt has gone from $132 million (1990) to $1.5 trillion (2003), which is unsustainable. Greenspan said that again today.

What happens to these agencies when interest rates start to lift? What happens when some of the debt defaults?

Although most of the mortgage debt has been packaged and sold to other parties, like hedge funds and banks, what happens when the defaults on that asset-backed paper cause them to lose their appetite for more syndicated loans from Fannie and Freddie?

You got it, Fannie and Freddie have to keep that debt, or crank up the rates (lower the prices) to get rid of it. This is a death spiral. It just gets increasingly worse.

Japan went through this type of situation, and their interest rates did not have to go very high before the banks collapsed.

Do you recall the salad days of Japan, when their banks ranked something like eight or nine of the world's top ten? Well that's like America today. And tomorrow will be tomorrow, because we've seen it all before with Japan.

I don't have an answer. I don't even know if my analysis is totally correct. But I do feel strongly that (i) there is a problem building within the U.S. financial system, (ii) there is a present issue re higher inflation than the U.S. authorities are prepared to admit, (iii) the economy is not that bad right now, but it could explode into either deflation or inflation tomorrow because of the problems inherent in the system today, (iv) the Gnomes (smart money) have no allegiance to jurisdiction, and could easily overwhelm any attempt by the Fed to stop a crash in the USD (as the Bank of England could not withstand George Soros tactics against Pound Sterling), and (v) the problem as well as the solution (if there is one) is tied up in the 10-year U.S. Treasury Note.

With respect to the last point, there is no way that PPI and CPI can trend for so many months on end at these high levels, and 10-year T-Note yields also be falling toward 4.00 pct (it hit 4.04 during the day yesterday). It just cannot happen for long.

In fact, had the USD not rallied to the extent it has over the past seven months, interest rates would have zoomed, gold would have moved to the next level (say $450 to maybe $550), and the Fed would have been in a bigger mess than it is today.

So, Mike, as much as it pains me, I'm hanging in with gold. I simply focus on the best quality companies, and buy longer call options as they get cheaper.

These are extreme times, and whenever that happens, either potentially inflationary or deflationary, I have turned to gold.

Good quality bonds are not going to help much if the scenario turns inflationary. And in a severe deflation there will be a lot of failures on the debt side as well as the equity side, so either way, I don't think holding this paper is a proper strategy for Extra-Year (i.e., very long-term oriented) Traders.

The question remains; until we know who really is buying these U.S. bonds, and for what real purpose, then is it appropriate to sell gold and gold shares? I think not.

P.S. #1. I finally got the screen capture program working. What amazes me is how, when nothing else is going on, all the registration for this program changes without input from me, and I have to start all over again.

P.S. #2, I see Alan Greenspan has already started to think about retiring as far away from Washington as he can, while still staying in the USA. Did you hear his Don Ho rendition at lunch..."Tiny Bubbles..." Yep, he was telling us that he and Andrea are off to Hawaii.