First off, Credit Suisse today issued a cautionary report on Commodities, which highlights how the contango situation in forward contracts combined with falling spot prices is one driver of lower commodity prices.

They also believe that a slowdown in global Industrial Production (which I alerted readers to back in June) is another driver of lower commodity prices.

Download the Credit Suisse Sept 26 Commodities Report.

In this report, you'll see that they hold to their 610-660 3-month time-horizon target for gold. So you are seeing Credit Suisse, UBS, Merrill Lynch, and some of the major financial houses entrenched with a belief that the $USD is headed south. All of them are forecasting that Gold will soon start trading above the 200-Day Moving Average, which is a Bullish case.

I have been saying that for some time. There was a $USD rally that I believe will run its course. That rally was a legitimate one in my view because of an inventory build-up in the energy complex as economic growth started to slow, and as speculative long positions in gold and silver were sold (fig. 15 and 19 in CS report), where the capital was likely re-invested in Treasuries.

UBS Research today issued a report on the European Miners that highlights the growing concern that the unfettered growth in China, which was a key driver in higher materials prices, might be in a state of change, which would lead to a possible lowering of expectations and enthusiasm for the Materials sector.

Download the UBS Sept 26 European Miners report.

So, as UBS and CS opine in their reports, there are near-term risks. As I see it, there could be more margin calls, hedge fund failures, or whatever, to come.

But if you step back and ask yourself if the big picture is really changing much, I think you have to come to the conclusion that this pull-back in commodity prices is just a normal cyclical correction where speculative excess is reduced. It's not the end of the Materials Bull.

Since the beginning of 2006, gold and inflation expectations (using 10-year TIPS as a proxy) have been tracking closely. Fig. 13 in the CS report shows that situation clearly. Interestingly, there wasn't much of a correlation in 2005, and I think the reason was that outside of myself and a few lonely independent bloggers, the wisdom from Wall Street was that there was no inflation problem.

The TIPS market didn't much change, but the Talking Heads were continuing to beat the drums that inflation was not a problem. It was only early this year when the Fed Heads realized the Fed rate was getting up into scary levels that an explanation was needed, and that's when we started to hear about inflation issues.

Of course, Wall Street liked the opportunity to develop a new story line, which is par for the course, and they went in that direction until this past month or so.

But I do think we need to keep an eye on the Gold/TIPS tracking. Maybe a reader can run the chart and add it as a comment.

My view is that inflation is not dead " just resting for a couple months due to the sell-off of speculative positions in the commodities, but by the 1st or 2nd quarter of 2007, the global Industrial Production numbers will heat up, and the shortages in metals inventories will start to have an impact. Of course, traders sense those kinds of things say 3 months in advance, o it could be any time soon that the metals complete their intermediate-term bear phase (within a long-term " secular " Bull market) and start to rally.

A break-out into the 610-660 range is needed to confirm that.

On another point, after hearing the news of a probable proxy fight between Rob McEwen-led forces against Ian Telfer's Goldcorp, I decided this morning to remove Goldcorp (TSX: G and NYSE: GG) from the Cara 100 " possibly temporarily.

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Goldcorp Inc [GICS 15, removed at least temporarily from the Cara 100 Sept 26, 2006]
(GG: Yahoo Finance file)
(GG: StockChart chart)
(GG: Investertech chart)
(GG: ADVFN Financial Data)
(GG: ADVFN Financial Data)

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There is a serious issue of corporate governance at stake. McEwen is demanding a shareholder vote, and Telfer says it's not necessary. Trust me, it is necessary.

I am very disappointed that these two gentlemen could not work out their differences in a meeting room rather than drag the matter through the mud, where both end up dirtied.

I personally like and respect both people. Obviously there was a time recently when the two of them were a mutual admiration society.

At the merger between McEwen's Goldcorp and Telfer's Wheaton River, Rob McEwen could have pulled out a couple hundred million from the deal, but he didn't. He was proud of the assets he had built and the financial condition he had left the company, but he respected Ian and believed the McEwen legacy would remain whole.

The difference today is that Rob is fighting a war over the loss of tens of millions of dollars of his money as well as loss of reputation for McEwen Capital, which is proud of its track record of building shareholder value through cash flow, and so forth, while Ian is reaching to grow the company into the top tier of the goldminers, under his leadership and Other People's Capital.

That's the difference " Rob's money vs OPM, and Rob is demanding that, before that money is invested, the Other People have a right to vote.

And I concur.

Speaking of putting one's money where their belief lies, the Golden Star CEO and CFO have acquired 111,200 shares of GSS at current prices. That is a strong message.

Unfortunately, I've been disappointed in the production delays at Golden Star, so I wouldn't be chasing it here.

We'll be at the end of the 3rd quarter this week. October is likely to be a time of relevant market action. As we get there, just remember that before any sustainable move to the upside, there will be a shake-out of the weak and undecided.

I hope you stick with what the Credit Suisse's, UBS's and Merrill Lynch's are telling you. Commodity prices, they say, are not going to crash, and the commodity-producer stocks are not going to burn.

These stocks are at Accumulation Zone levels or close by. If, as and when there is a middling to monster shake-out, remember that somebody is buying every share that is being sold, and these are not people who have been living in outer space in recent months. They know the score as well as the sellers.

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ADDENDUM

The Goldcorp removal from the Cara 100 is not based on the deal itself. It was an expensive deal, but I previously commented that I liked the combination of Goldcorp and Glamis for the reasons I gave at the time. Had gold prices been trading in the 700+ range today, there may be fewer critics of the premium Goldcorp paid.

My concern is strictly with the corporate governance issue. This deal was so material that it verged on merger status. It requires, in my view, shareholder approval.

Could you believe that the CEO of Ford or General Motors could take over the other without a shareholder vote of approval? I find it quite extraodinary how far management control has gone today. Management and the Boards are cutting self-serving deals that shareholders never have an opportunity to see. That has to stop.

If Goldcorp chooses not to be a good corporate citizen, then why would I want to support them, and bring attention to the high quality of their management?

If on the other hand, Goldcorp comes to an agreement with McEwen on this issue, and holds the shareholder special meeting and vote, then win or lose that vote, I'll likely put Goldcorp back on the Cara 100.