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Even as the fierce outer winds of Hurricane Ike roared through my neighborhood in Beaumont, Texas, in September, (after a few weeks of serious disruption we’re fine) I was keeping an eye on another even scarier storm – the big blow whipping and ripping through the U.S. financial system, including stock indexes dropping at record rates. It’s a storm so savage in its wrath that the Bush administration warned of a complete meltdown of the American financial system unless its radical $700 billion bailout plan was approved.

Amidst the roar of this storm, I couldn’t help thinking how dreadfully wrong were the misguided mavens that only recently were crowing that the gold bull market is dead…and how dangerous are the consequences for investors who fall for that nonsense.

However, the inmates of the asylum in Washington went ahead and eventually passed the bailout plan anyway. Bad for the country… but GREAT for GOLD! The bailout plan is mostly a feel-good psychological boost that has little real chance of fixing the economy as the Pollyanna’s believe. It only glosses over the problems at the root of the crisis so they don’t look as ugly. But the flood of government money that will be gushing from multiple pipelines should swell inflation over the next year, which spells higher gold prices ahead when sanity returns to the markets.

Banks, brokers, and the free market capitalist system weren’t the first casualties of the massive storm rampaging across the American financial landscape, nor will they be the last. Here’s a brief recap of the lowlights (can’t call this kind of news highlights!) of the past few months:

• Early in September, mortgage behemoths Fannie Mae and Freddie Mac had to be saved from drowning in a storm surge of red ink in a controversial rescue by the federal government that could cost American taxpayers billions, possibly trillions of dollars.
• In July, federal regulators snatched huge mortgage lender IndyMac Bank from the brink of disaster.
• In March, global investment banker and broker Bear Stearns was snatched from oblivion at the last minute by JP Morgan Chase, with a generous helping hand from the Federal Reserve.
• In January, Bank of America salvaged major mortgage lender Countrywide Bank floundering in a swirling sea of failing high-risk sub prime mortgages.
• Since the credit crisis blew in last summer, 13 U.S. banks have collapsed – 12 of them so far in 2008, more than three times as many as all of last year…and there’s still time for more to fail this year. FDIC lists 117 banks and thrifts it considers in trouble, and the list keeps growing, twice the number at the same time last year and the largest number in five years. “There’s going to be more, no doubt about it. We are in a challenging environment,” FDIC Chairwoman Sheila Bair told a discussion panel at the New York Stock Exchange recently.
• The FDIC itself may need a bailout within the next year...to the tune of over $150 billion. Christopher Whalen, managing director of Institutional Risk Analytics in Torrance, California, calculates that the FDIC will need $200 billion during 2009 to bail out collapsing banks. But the agency only has a little over $45 billion in its till to protect deposits in more than 8,000 insured banks. The law allows the U.S. Treasury to loan FDIC a maximum of $30 billion at any one time. That still leaves a shortfall of $125 billion if Whalen is right about the magnitude of the coming bank failure wave.
• Estimates of global losses tied to the credit crisis range from an ultra-conservative $945 billion forecast by the International Monetary Fund to the more alarming $2 trillion projected by Nouriel Roubini, renowned professor of economics at NYU’s Stern School of Business.

Over the last year, this slow-motion perfect storm of financial turbulence has only picked up force and speed…and we haven’t even seen the worst of it yet. “The worst is yet to come in the U.S.,” warned Kenneth Rogoff, Harvard economics professor and former chief economist at the International Monetary Fund (IMF).

For my readers, I rang the alarm in August with a red alert bulletin warning that the financial storm was gaining strength and could threaten cash held in banks as the FDIC resources become stretched to the breaking point. Even if your cash deposits are insured, you may not get your money back quickly if your bank fails. There’s no legal time limit on how long the FDIC can take to make good your insured deposits. If the FDIC’s vaults are emptied by a rapid-fire succession of large failures, it could take months or years before you see your money. But it’s the best protection we’ve got.

In the August alert, way before our present crisis, I urged you to protect your wealth by spreading your cash over several insured accounts and to divert a portion of your cash into physical gold as a safe haven insurance policy. I repeat that recommendation today in light of the recent developments and more trouble to come. But now I add even greater urgency. Do it! Do it now! This is serious stuff, an epic, historic crisis that demands huge respect and no small measure of prudent self-preservation fear.

The name of the game for coming months is volatility. Right now it’s like playing poker with a deck filled with nothing but jokers. It’s hard to know what your hand is if they’re all wildcards. I’ve been pounding on this point repeatedly in recent issues, emphasizing that there will likely continue to be dizzying swings in all markets, including gold, for months to come. Expect the unexpected. Expect moves that make no sense whatsoever by any rational measure. Expect the talking heads to dream up reasons why it happened, even though they haven’t the faintest clue why. Expect some of them on any given day to pontificate about how the bull market in gold and commodities is over and done with. Then switch over and watch cartoons, which make more sense and are more in touch with reality.

The important thing to keep in mind in this turmoil is to look beyond it to the future. Keep the long view in sight. The overall bullish fundamental picture for gold and for commodities has been modified some but not basically changed. Let’s look at the facts to see why and try to make some sense of the madness…

Five Reason Why Gold Fell

The surprise pullback in gold prices from nominal record highs in the spring still has many analysts scratching their heads to find an answer to the question: Why? The tumble was sudden and deep without apparent provocation, defying logic. But in these testy times, markets don’t seem to need a reason to act screwy.

Even so, there’s no lack of suspects being blamed for the sharp correction that struck gold and pretty much all other natural resources beginning about July. All of them ganged up to mug gold at the same time. The five most apparent reasons are these:

• REASON #1: Global economic slowdown. The economic and financial crisis in the U.S. is spreading globally. The economies of Britain, Europe, Australia, New Zealand, and Japan are stumbling. Even the hot emerging economies of the BRIC group – Brazil, Russia, China, and India – have a cooled somewhat over recent months. Investors see The Big Chill reducing demand for energy and resources as spending is cut back. Although gold is money, not just a commodity like the rest of the natural resources, it got dragged down in the undertow of the general commodity sell-off.
• REASON #2: Plunging oil. Because of the global slowdown, investors assume that demand for oil will slow, too. The speculators believed to be responsible for artificially inflating oil to record prices over the past year bailed out. Hedge funds that were heavily leveraged in oil bailed, too. The fast-slipping prices triggered a wave of program trading sell stops, which hastened the cascade down. Gold usually tracks alongside oil, so the petro-plunge sucked gold down with it.
• REASON #3: Dollar rally. Since the dollar’s long slide began in 2001, the euro has thrived as “the other white meat” currency, gaining favor as the dollar lost its savor. Yet inexplicably in July, the dollar seemed to catch a new wave of popularity (surprise, because there was no fundamental reason to support a rally) that surged the greenback higher by nearly 18% into early September. The surprise rise in the buck wasn’t because it had gotten any stronger (it’s weaker than ever with the financial meltdown in the U.S.) but because the euro, the Australian dollar, and the New Zealand kiwi lost some of their shine as reports of their softening economies began percolating to the surface. As concerns about these popular dollar-alternative currencies spread, the dollar didn’t necessarily look stronger, just less weak. The dollar rally blindsided gold, which usually moves opposite to the greenback (gold did not fall in terms of the Euro).
• REASON #4: “Softening” inflation. Though there is evidence to support it, investors and economists seemed to accept as inevitable fact that falling oil and commodity prices along with still-plunging housing values will automatically lead to reversal of the rising inflation trend. This is muddled and myopic logic, in my opinion. After all, we still have official inflation above 5% and REAL inflation in double digits. However, in these crazy times, investor perception drives the markets, not reality. If they THINK inflation is easing, the markets ACT like inflation is easing, even if it isn’t. Evidently a fair number of investors decided they no longer needed the inflation hedge of gold and oil and sold out.
• REASON #5: Gold bubble deflation. One cause for the sharp drop in gold prices that hardly anybody else seems to be talking about is that it NEEDED the correction to clean out the fluff and hype. Beginning about this time last year, a mini-bubble in gold bulged up to nominal record highs. Up until then, gold had been rising steadily in an orderly way consistent with sound fundamentals that made sense. Then the speculators took notice and piled in, as they had done two years earlier, and drove up gold to record highs – too much too fast.
  
  I know many gold-lovers cheer when their favorite metal goes parabolic like that, but it’s generally not a reason to celebrate. A sharp correction usually follows a sharp spike. It’s simply a matter of gravity – if there’s nothing to support an object up in the air, it will fall to the ground. Gold prices soared way above gold fundamentals and couldn’t be supported there.
  
  What we’ve seen is just a healthy correction, not the demise of the supercycle gold bull market. The correction, painful as it was, merely brought gold back near the long term trendline where it belongs.

Take note: Even with the sharp correction, in the days just after Black Monday gold was still up almost 20% for the past year, while the Dow had lost nearly a fourth of its value (23%) in that time.

FIVE REASON WHY GOLD SHOULD RISE AGAIN

That was the bad news. Now the good news. After seeming to be defenseless under the pummeling from other forces, gold reared up and fought back in September, serving notice that it wasn’t going to take the beating lying down. While the stock market quaked in fear from the financial bloodbath, gold roared back and took command again as a safe haven.

However, a few days trading does not a trend make. To prove its point, gold has to establish and maintain upward momentum substantial enough to dispel any doubts that it has staying power. It needs to do this in an orderly, deliberate rise.

That may prove to be too tall an order to expect in these highly-volatile days. The entire financial world has been stood on its head. The old rules of American free enterprise have been trampled in the dirt and new ones are being fashioned ad hoc to fit the crisis du jour. We’ll just have to wait for awhile to see how it ultimately all plays out.

There are so many flying objects swirling in the maelstrom to dodge that it’s hard to know which way to duck. But here are the five most compelling reasons I believe gold should be your protective shield in this storm:

• REASON #1: Gold shortage. Quite simply, there isn’t enough gold to meet demand, even before the big surge in demand from the wedding season in India adds more demand. Reuters reported in September that gold dealers were struggling with “a shortage of gold bars in Singapore and Hong Kong as jewelers stepped up purchases ahead of religious festivals in India, the Middle East and Southeast Asia.” In August, the U.S. Mint suspended sales of uncirculated American Eagle one-ounce gold coins for the first time since 1986 when the program started because they couldn’t find enough gold supply to meet the demand. American Eagle silver bullion coins were put on rationing. I’ve talked to coin dealers all over the country and in some foreign countries; the story is the same everywhere – not enough gold coins available to keep up with the demand. This strikes all coin dealer’s I’ve talked to as very curious at a time when gold prices fall.
  
  On the face of it, the gold shortage alone should have sent prices skyrocketing, but in all the aforementioned confusion with a bunch of setbacks hitting gold all at once, the usual supply demand rules were temporarily forgotten. The key word is “temporary.” The basic rules still apply…they just got misplaced briefly. That should be corrected soon.
  
  By the way, on its very first day of trading, Hong Kong's first gold-backed exchange-traded fund, SPDR Gold Trust, turned over $18.8million on its debut on the Hong Kong Stock Exchange, with over 208,000 shares sold. Asians LOVE gold!
• REASON #2: Oil rebound. I think the general assumption that the slowdown in developed economies will drain oil prices even further, down into the $70 range, overlook or ignore the fact that the biggest growth in oil demand comes not from the U.S. not from Europe, not from Australia or Canada, but Asia.
  
  The economic booms in China and India have cooled only slightly as a result of the Western troubles, and are on-track for another year of double-digit growth. Newly-prosperous citizens of both countries are buying new cars by the millions. Future growth in demand will be driven (literally) more and more by new Asian motorists, not by Americans or Europeans. I’m not saying oil prices WILL go back up, but that they SHOULD go back up.
  
  Even if it takes awhile for oil to stabilize and rebound, gold has shown it can stand on its own power independent of oil if it has to. During the big September Blowup, oil slumped and slouched but gold took off like a scalded cat, leaving oil far behind. [$500 oil]
• REASON #3: Dollar slide. The end-of-summer dollar rally was doomed from the get-go because the fundamental reasons why the greenback has been skidding lower for the last seven years haven’t changed. The only impetus the buck had for a rally was a perception that the euro, the main dollar offset other than gold, was hitting a rough patch. For the moment, the dollar might have seemed less weak by comparison to its continental alter ego, but weak is weak, no matter the degree. The dollar slide is likely to resume (sending gold in the opposite direction up the charts) as all the major currencies fade with the ebb tide.
  
  “What we are about to see is a race to the bottom by the world's major currencies as each tries to devalue against others in a beggar-thy neighbor policy to shore up exports, or indeed simply because they have to cut rates frantically to stave off the consequences of debt-deleveraging and the risk of an outright slump,” writes Ambrose Evans-Pritchard on Britain’s Telegraph.co.uk Blogs. “When that happens - if it is not already happening - it will become clear that both pillars of the global monetary system are unstable, infested with the dry rot of excess debt.” He adds, “Gold bugs, you ain't seen nothing yet. Gold at $800 looks like a bargain in the new world currency disorder.” Now the markets are beginning to speculate on additional interest rate cuts by the Fed before the end of the year, which should deflate the dollar bulls’ false optimism.
• REASON #4: Liquidity inflation. Billions to rescue Bear Stearns and IndyMac. Tens of billions to bail out AIG. Hundreds of billions to salvage Fannie Mae and Freddie Mac. The flood of emergency liquidity from the government keeps gushing in wave after wave so fast I can’t even keep count of it all.
  
  You don’t have to be a Harvard economics Ph.D. to know that so much unusual and out-of-the-ordinary extra cash flooding an economy, especially one that’s not producing as much as normal in a recession, has to have the inevitable effect of pushing inflation up dramatically. The cash has to go somewhere, and if it can’t be absorbed fast enough, prices have to go higher. It’s as simple as that, and all the current confusion doesn’t change that basic fact.
• REASON #5: Safe haven. As the September carnage on Wall Street spilled blood in the streets, gold reclaimed its traditional role as a safe haven, performing superbly in classic fashion. When the Dow plunged more than 500 points (4.4%) on Monday, September 15, the SPDR Gold ETF (GLD) gained 2.7%, one of the small minority of stocks on the board in the green for the day.
  
  Two days later, after a half-hearted rally in-between, the Dow tripped over itself again and tumbled more than 450 points (4.1%), dropping 300 points in the last hour of panic trading. On the same day, GLD shot up 11.3%! New York spot gold soared as much as $90 an ounce, ending the session with a scorching 11% gain from $770 to $869… in one single day! More and more frequently, gold has managed to climb even on days when the dollar also rises and oil falls, a clear sign that gold is asserting its own command independently of the other common price drivers.

That should shut up the naysayers claiming that gold has lost its “mojo” as a safe haven asset, at least for now.

There are almost certainly more rough spots ahead for gold as the markets continue to boil and roil in confusion. The moves are fast and sudden, so you need to have your gold position locked in NOW. Even with the gold shortage, there are still some attractive deals on gold coins. They could be much more expensive tomorrow, or even in the next few hours the way things have been going lately.

Remember this, though: Gold has endured as the only true form of money for 5,000 years (Pharaohs believed gold could provide external wealth). Many governments, currencies, and even whole civilizations have come and gone in that time. But gold is still money. Gold is still the best safe haven in a storm…and there’s plenty more bad weather threatening on the horizon. Now is the time to accelerate not hold off as our supply of quantity gold is going fast and is getting harder and harder to replace.