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Bad News for Financials, Good News for Gold


Inflation means higher prices globally for yellow metal.

Given the continued collapse in the gold mining shares, I thought I'd see where we are in the gold trade.

For the third week in a row, gold has refused to take out its August 15th low, even as the euro has plunged to another new low and the US Dollar Index has made another new high.

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At some point, people will begin to connect the dots that gold isn't "the euro" - and it isn't a weak dollar play, either. And that's when the gold complex is going to explode, including the gold mining shares that appear at present to be the most hated equity sector on the planet (even more than subprime mortgage lenders, apparently).

However, I should add that somebody sure seems to be buying the gold mining equities from the hedge funds that are coughing them up. The Rydex gold equity fund has seen an inflow equal to nearly 50% of its assets over the past 5 days, and I understand other gold equity mutual funds are seeing similar inflows. That's the biggest inflow in the face of falling gold mining stock prices that I can recall seeing in years.

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That's not "retail buying" going into a gold fund in the face of a horrific decline in gold stocks; those are value-based strong hands buying gold stocks at a time when the XAU/Gold ratio has returned to its all-time low back in 2000, indicating that gold stocks are the cheapest they have ever been relative to gold.

Additionally, this is occurring now even as the gold/oil ratio is actually rising (meaning the revenue/cost ratio is moving more and more in the favor of the miners' bottom lines).

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Gold mining bulls were in a very similar position last July-August. In fact, I think we may have been at the same stock prices too, judging by the XAU.

Back then, gold stocks were being tossed off a cliff in the face of a gold price that had barely even corrected for fear of imminent "deflation" - even though anybody with an IQ over 20 knew the Fed was going to aggressively inflate into the housing bust. Which of course they did, sending gold up 50% over the next 6 months and gold stocks with it.

The same principle is true here - though I honestly don't know why people are selling miners this time, other than the fact that many hedge funds blew up when Paulson and the SEC pulled their stunt back in July. And liquidation has occurred in many commodity stocks ever since.

Very soon, the Treasury will be forced to nationalize Fannie (FNM) and Freddie (FRE), and the Fed will be easing even more (along with foreign central banks as well). It's well-nigh inevitable, and it will produce even more global inflation. Bank on it. Where the dollar goes vs. other fiat confetti is irrelevant.

The fact is that gold is rallying in all G7 confetti (see the charts below). And the reason gold is rallying in all currencies is because of just what Paul Volcker said today: THE FINANCIAL SYSTEM HAS "BROKEN DOWN." Default or debase... those are the only 2 options, and they both lead to the same place: More inflation and higher gold prices globally.

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