this comes from don coxe, of the bank of montreal. i am summarizing, but there is a link to the podcast below. it's important to hear this from someone who's a mainstream analyst, and not a gold bug.

in early july, oil was over 140, gold was heading for 1000, fueled by surges in the cpi. soybeans were at 14, and corn at 7 1/2, raising the threat of food inflation. the dollar index was near 70 and breaking down, the euro was near 1.60, and the banking stock index (bkx) had fallen from 90 to 50. the deals sovereign wealth funds had done with the banks were underwater, and the fed's balance sheet was weakened by swapping treasuries for cdo's. fre and fnm were on the verge of collapse, threatening foreign interests as well as our own banking system.

oil's move through $140 was due to us dollar weakness, and the fed had to raise interest rates to support it. but the fed could not raise rates with the banking system at risk.

however, there was a goldman sachs alum at treasury, and he had the info needed to intervene successfully. the cftc told him who was driving the commodity rally; i.e levered speculators led by hedge funds. paulson's focus was on oil, gold, and grains to remove the inflation scare.

they intervened in asia on a sunday, and leverage unwound dramatically. when new york opened, banks gapped up, and true panic set in. funds that were short financials and long commodities got killed. the sec helped out by enacting a rule against short selling banks. all the regulatory agencies stepped in at the right time to help the short covering rally.

commodities were also hurt by deteriorating economic numbers coming in from foreign central bankers. the world's central bankers knew which positions are held around the world, and with their cooperation, they knew intervention would work.

there were no new buyers to stop the descent, oil and gold broke down, and the collapse fed on itself. even the rains stopped, leading to a better outlook for the grains. the unwinding was brutal, and commodity stocks were hit twice - once because they were stocks, and again because they were commodity related.

but the commodity bull market is still intact, and given an eight-year run, we are entitled to a 9-12 month selloff. the rise in the dollar was a force-fed rally, and the arguments for gold are even more compelling now. the adjustment process can last a year, and things can still get cheaper, but the long term basis is still a bull market.

the markets will need new buyers to provide support. the near term supply of oil is generous, and bullish sentiment changed dramatically. the slowdown of china expected after the olympics would remove a large buyer of oil and metals.

but the fundamentals for paper money are deteriorating. negative bond yields (10-year at 3.58% with cpi at 5%+) are a clear warning of inflation. the goal is to rebuild equity in the banking sector. they want to get bank stocks up again. we may hear that all of the bad news is out, but it isn't. when these stocks start reflecting the the value of actual transactions, they'll be in the soup again.

investors will turn to companies that have real balance sheets that aren't in danger of bankruptcy. the residential housing market has not improved, and overbuilt commercial real estate is the next shoe to drop. banks and other financials are hugely levered; they are basically hedge funds. even if they have 7% capital, they are levered 12-15 times, and write-downs will be devastating

in contrast, commodity companies are still making money at these levels. resources in the ground are growing in value, and the long term forecast gets better. the commodity boom was not a bubble, and the underlying value is now better than it has been in several years.

http://events.startcast.com/events/1...