While the Dow may soon briefly take out its old 11,700+ highs, the real story of late in our opinion is the recent pummeling of all commodity markets. Though we follow oil, natural gas, copper, and other commodities with great interest, our continued belief is that the best risk/reward set up in the major commodities comes in the form of the precious metals - namely gold and silver. You see, after peaking at $720 an ounce on the yellow metal and $15 an ounce for the poor man's gold, the two metals have come under a great deal of selling pressure. We think this correction is due to a number of factors. The first being that the precious metals likely got a little ahead of themselves (gold was up 40% less than 5 months into the year and silver was up 75%). The second reason for the correction has likely been the continued resilience of the U.S. Dollar. For most of the year this was due in large part to the fear that "Gentle" Ben Bernanke might actually grow a backbone and would ratchet rates up a great deal more than originally anticipated to break the back of inflation. Bernanke is by no means Paul Volcker having revealed his true stripes long ago. So late this summer, the rest of the market learned that Bernanke was done and curiously gold and silver have not been able to rally since. With the intense correction in the commodity complex, it appears that the black box traders (who can from time to time dominate gold and silver markets) are selling gold and silver simply because they are going down. Selling has continued to beget more selling and the fact that a clearly weakening U.S. economy only supports the case for gold and silver is overlooked. (Remember, gold and silver should be looked at as "money" rather than plain commodities)

Despite temporarily lower prices, gold and silver's strong fundamentals haven't changed one bit. If anything they have only gotten stronger. We have recently seen that gold mine supply through the first half of the year amazingly dropped 2% year-over-year on 10% higher cash costs as the continued supply constraints from the difficulties in finding world class low cost gold mines remain. Likewise, we have also seen that despite stepped up September gold sales ahead of the annual September 26th deadline, the European Central Banks (for the first time in seven years) will likely fall about 20-25% short of their 500 ton gold sale maximum quota as central bankers led by the Germans begin to realize the investment value of gold. The news is also fundamentally strong for silver with the silver ETF continuing to gobble up ounces at a far greater rate than anyone had ever expected. Despite silver being 30% off its yearly high, SLV just recently reached a new peak number of ounces in its vaults. A world record monthly trade deficit of $68 billion was recorded in August by the U.S., which once again should be long-term U.S. Dollar negative and gold and silver positive. Yet, despite all this, panic has set in the metals markets. Most investors seem quite confident that a commodities bubble is unwinding and gold and silver will be no different than copper or natural gas for that matter.

Over the last couple of years, we have tried to step up during these steep and nasty metals corrections and say that these times will turn out in hindsight to have been great buying opportunities for long term gold and silver bulls such as ourselves. Now, once again, we sense the level of angst for gold and silver participants is high and the level of concern about the U.S. Dollar is low. Those with the courage to hold $600 gold and $11 silver in September 2006 will likely find heady metal gains in their stockings in the years ahead. Picking the exact bottom is impossible but the precious metals have now lost 15-20% in a little over a few weeks' time and when one considers the supply/demand tightness in both markets, we think that such buying opportunities won't exist for very long.