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March 23, 2008

What is Behind This Sharp Correction in Gold
by Boris Sobolev

This is an excerpt from the Resource Stock Guide Newsletter posted on March 22, 2008.

What caused such a vicious correction in commodities which took gold along for the ride? We have recently expressed concerns that sentiment became overly optimistic and a technical correction was needed to relieve overbought conditions.

But why was the correction so sharp? The main reason is that the de-leveraging process began to spread from financial paper, particularly mortgage backed securities, into other markets including the commodities sector. Stricter lending standards are causing traders to reduce overall positions, decrease risk and reduce their dependence on borrowed funds. Led by the hedge funds, the highly leveraged players started selling speculative positions in commodities. The correction happened in an instant as some hurried to take profits, while others were met with margin calls.

Excess cash was quickly funneled into the shortest maturity government debt - 3-month T-Bills, which typically approximate the fed funds rate set by the Federal Reserve. As a result, the T-Bill yields collapsed to a historic low of under 0.50%, light years away from the fed funds rate of 2.25%.

The chart of the 3-month T-Bill yields above shows an extreme level of panic in the markets. Traders are operating by a philosophy of "sell first, think later," dumping all of their proceeds into what is perceived to be the safest possible short term investment.

The flight to safety panic cannot continue much further and this unusual amount of cash sitting in T-Bills will have to find a home elsewhere. It will return to the most oversold sectors of the stock market, stabilizing precious metals and related stocks in the process.

Boris Sobolev
Denver, Colorado
www.ResourceStockGuide.com

Resource Stock Guide (RSG) provides a free dynamic database for over 120 gold, silver and uranium companies. Stock, metal and currency prices are updated daily; company resources, costs, finances, etc. are updated within 2 to 5 business days after their release. Premium Services including the Newsletter are also available.

Database content includes but is not limited to:

A broad list of mineral resource stocks representing the most appealing investment opportunities
The various types of Mineral Resources owned by companies
Value of In Situ Mineral Resources broken down by category
Market Valuation of Resources owned by companies
Geography of mines and projects
Wide range of Financial Metrics, Proprietary Benchmarks and Metrics
Company Profiles containing comprehensive data on individual mines, projects, resources, costs, latest news and developments

RSG tools allow our users to sort, group and compare mining companies based on various characteristics. Moreover, these tools help user identify resource companies that are undervalued compared to their peers and have a potential to appreciate in price.

Disclaimer: The above information in this article pertaining to investing, stocks, securities must be understood as information provided and not investment advice. The information provided by Resource Stock Guide is obtained from sources believed to be reliable but is not guaranteed as to accuracy or completeness. Resource Stock Guide advises all readers to seek advice from a registered professional securities representative before deciding to trade in stocks featured on Resource Stock Guide or any stocks for that matter. All statements and expressions of the companies featured are not meant to be a solicitation or recommendation to buy, sell, or hold securities.