Financial Market Meltdown

The warning signals have been sent out and the time is NOW to seek refuge from the coming financial market meltdown that is about to engulf our world.

If you have put off preparing for this event thinking that all will be well, you will probably be feeling deep and profound regret in the very near future.

The financial system as we have known it is about to get a major reality check. This will be the first major shockwave in a series that will transform and reshape the order of things. It will bring the greatest transfer of wealth the world has ever seen.

Many will go from having money in the bank to having little or nothing at all.

Unsuspecting investors and citizens will soon learn the ugly truth that they are very low on the totem pole of priorities when it comes to decisions regarding who gets what.

Financial Market Meltdown

The recent Indy Mac bank failure is a case in point. Investors were told that depositors with less than $100,000 in the bank would be guaranteed to get their money, while those with more than $100,000 would be getting 50 cents on the dollar for every dollar over the $100,000 limit. The bank had thousands of depositors with savings in excess of $100,000.

This is only the first of what promises to be a long string of banking failures that are about to hit investors and depositors. To think that FDIC will be able to bail out all those depositors is a complete joke.

SIPC insurance, which is supposed to protect the stockholders in a brokerage, is even worse.

Just remember that when push comes to shove, the financial banking pukes who created this mess in the first place will be first in line to get theirs while the average citizen caught in an ugly bank failure will be sucking wind.

Don’t think for one minute the Federal Reserve has your best interests at heart. You are low man on the totem pole and need to plan accordingly.

The reason this is happening is the mountain of OTC derivatives has suddenly become a massive landslide into the ocean causing the biggest financial tsunami the world has ever seen.

Jim Sinclair, who I greatly respect said the following regarding those who created this problem: "Those that create and peddle OTC derivatives are guilty of financial murder one."

He gave the best advice I have come across regarding what you should do about this right now.

1. You should hold no dollars except what is required to pay bills for six months. You know now that FDIC is grossly under-financed compared to potential claims. Get all your money out of financial entities now before you have to stand in line to get it. Screw interest rates. Keep six months of cash in your safety deposit box, invest the balance in short term treasuries of other currencies.
2. You should put a minimum 1/3 of your LIQUID net worth in gold and gold equivalents.
3. You surely know by now that SIPC is grossly under-financed when it comes to covering potential claims. The secondary insurance held by brokers is written to them for you, but not for you.

Jim mentions investing in the short-term treasuries of other currencies. I like short-term Canadian T-bill for this suggestion. And you already know my position on owning the precious metals. I recently was quoted saying, "Cash may be king in the near future, but physical holdings of precious metals will be the ultimate form of cash."

The one item I disagree with Jim in his advice above is the use of safety deposit boxes. I don’t trust them. I feel it is better for people to invest in a good fireproof safe and secure this safe into a foundation wall or floor. Safeguard you own valuables, don’t put them into someone else’s trust, particularly a bank.

Junior Mining Shares

In the fifteen years that I have personally been trading the junior mining shares, (eight years as a newsletter writer), I have never seen such a painful, difficult period as the one we are currently witnessing. It has been an awful time.

As I see it, the current horrendous market situation is due to the following factors:

1. Continued naked short selling of the junior mining share market
2. Major redemptions with the hedge funds who are being forced to liquidate
3. Lack of buyers in the market
4. Panic selling by investors who get spooked seeing such losses

Let’s look at each one of these individually so you can understand what you are faced with as an inves-
tor in the junior mining market.

First, naked short selling has devastated our market the past nine months. This activity, which is criminal behavior in my opinion, is best summed up by some recent comments by Dan Norcini who posts regularly at jsmineset.com. In that post Dan said the following:

"The bigger disappointment is in the mining share sector. Perhaps we could change the names of some of the mining issues to First Financial Gold Mine, or Federal Mining Association Inc, and then the SEC would get off their asses and crack down on the naked short selling in this sector. Folks – you are witnessing the utter corruption of our financial system where the US government decides to selectively enforce the current laws on the books regarding illegal naked short selling. What is happening is so blatantly corrupt that it rivals the kind of moral and ethical decay that marked ancient Rome as it went into its period of decline. Where in the US constitution does it confer the right upon governmental bureaucracies to subjectively enforce the laws that govern our system? Are we a nation of laws or of men? The answer, it would appear, is that we are no longer a nation of laws but one of men where certain industries or sectors have special rights and privileges conferred upon them while those of the less-fortunate, out of favor with the powers that be, apparently do not enjoy equal treatment under the law. Here, in 21rst century America, the blind-folded goddess of justice first peeks under her blindfold to see who it is that is standing before her as she dispenses justice! Should she see a natural resource entity or gold mining operation, she calls for the bailiff who promptly has them dragged out from before her tribunal and ignominiously thrown into the street to fend for themselves. It would seem that all that is left of the once-proud American Eagle is a featherless vulture which consumes the very things necessary to sustain its existence in current form."

I wholeheartedly agree with Dan’s wise observation! There will come a moment, however, when the pressure will blow like a top to the upside forcing these shorts to cover.

I believe that will occur when the precious metals prices begin to rise dramatically as more and more financial institutions become insolvent. This in turn will begin to draw a larger portion of the investing public towards the precious metals and the mining shares.

The upside volatility at that point could be wicked when this occurs. This is the reason I don’t recommend selling your core positions of your quality junior mining shares. Just weather the storm and know that this market will rebound with authority at some point.

Quality companies with good management teams, new discoveries, cash flow, low cost profitable production, or near-term production will be rewarded in a big way as market events continue to unfold.

Second, the hedge fund situation has taken a turn for the worse. What we saw in March and April was only the beginning of major selling on the part of the hedge funds.

As I have mentioned before, the hedge funds, who have been big supporters of our junior mining shares at times, suddenly find themselves in a selling stance.

The reason for this is simple; their customers need to raise cash and have sent in redemptions. The hedge funds then need to decide what to sell in their portfolio to raise this cash.

Since they are no longer getting full value towards their collateral requirements for holding a Canadian mining share that is priced under a dollar, they have been forced to sell a good portion of these stocks.

Unfortunately, this activity appears like it could be with us for a few more months as the financial crisis deepens and more people need to turn to cash.

CASH COULD BE KING IN OUR NEAR FUTURE, THUS THE PRESSURE ON THE PART OF MANY TO BATTEN DOWN THE HATCHES AND CASH UP.

Third, there is a very pronounced lack of buying at the moment. This is due mostly I believe to seasoned junior mining share investors sitting on the sidelines betting that share prices will be going lower before they start to move higher once again.

Those of us who have supported this market for years and haven’t been afraid to buy when things are down have had been badly hurt with our purchases the past six months. When you add this fact to the two I listed above, it’s no wonder we are experiencing such downside pressure.

Fourth, with such a tough market, badly shaken investors start to panic sell which only exacerbates the downside selling pressure.

All in all, with such astonishingly large losses looming over the financial world there is no perfect solution that will protect you from anything or everything that could happen.

I maintain however that the two best places to reside with a good portion of your investment dollars is in physical purchases of the precious metals and the corresponding quality junior mining shares.

A massive financial mega-storm is about to hit that will shake investors to their core. But if you remain firm in your quality positions, I believe we will be richly rewarded.

Hang tough and keep running to higher ground!