As I prepare my application for the upcoming Las Vegas Money Show, it dawns on me that this is the first time in at least five years that I am changing the title of my editorial presentation. For years, the title had been "America's Bubble Economy: Implications for your investments when it finally bursts". (If you have not seen this presentation, watch my presentation from the 2005 Orlando Money Show on YouTube here.) My new title is "America's Bubble Economy: Implications for your investments now that its burst". To me this represents a significant change that profoundly affects the nature of my message.

The fact that we were living in a bubble can no longer be denied. That it has already burst is, at best, debatable, but it certainly appears to me that it has. The powers that be can attempt to blow more air back into it until they are blue in their faces, but there are far too many holes for their attempts too succeed. It is now simply a matter of how long it takes to completely deflate and how much air was in there to begin with. Rather than waiting for the answers, the best course of action is to get out before mainstream investors finally start asking these questions as well.

From my perspective, my dire warnings about the fate of the U.S. economy and dollar-denominated investments, which lead CNBC to nickname me "Dr. Doom", have for the most part come true. Any way you slice it, what is happening now would certainly meet anyone's definition of economic or investment doom. Given that, the only difference now is the extreme sense of urgency with which I now make my investment recommendations.

There is precious little time with which to get your investment houses in order. The dollar's value declines with each passing day, and a major collapse at any time can not be ruled out. These are very dangerous times, and I can not stress enough the importance of being prepared. Monday morning on CNBC, Paul McCulley, the number two man at PIMCO, pleaded with the Fed to print more money and use it to buy mortgages. He also urged the government to put a floor underneath home prices. My guess is that soon he will be calling on the Fed to print money to buy houses as well. The message is clear. If the world's biggest creditor is also calling for inflation, what else will the Fed deliver? When the bond market vigilantes join forces with the government, all hope is lost.

As if it heard McCulley's cries, the Fed responded on Tuesday by announcing that it would auction off $200 billion of treasuries in exchange for mortgage-backed securities. This marks a major step down the road to hyperinflation, and is reminiscent of the French failed experiment with paper money during its revolution at the end of the 18th century. The paper notes, backed by mortgages on church property, lead to hyperinflation in France and eventually became practically worthless.

Most on Wall Street are downplaying the significance of what is happening. To them, what we are now experiencing is a normal cyclical down-turn, perhaps even a mild recession by historical standards. They could not be more wrong as the current recession will be anything but typical. To appreciate the scope of what is happening, the closest examples are the 1930s and the 1970s. However, even those comparisons are not exact. My prediction is that this will be much worse than the 1970s in that the current recession will be much deeper and longer lasting and inflation rates will rise much higher. How the entire period ultimately compares to the Great Depression is still an open question, but there is certainly a possibility that in some ways it will be worse.

The main reason so few on Wall Street appreciate the problem is that they still do not understand that we were living in a bubble in the first place. As a result, what is happening is not placed into its proper context. If you do not understand the nature of the preceding boom, how can you possibly appreciate the extent of the coming bust? As a result most on Wall Street are waiting for the Fed to put the pieces of our economy back together without understanding why they never really fit in the first place. An economy built on consumer credit was destined to fall apart. As such, all the Fed's horses and all the Fed's men will never put that phony economy back together again.

To appreciate the depth of this misunderstanding, watch this August 2006 CNBC debate between me and Art Laffer. After you do I defy you to keep any of your savings in U.S. dollars!

Conventional wisdom says to get rich in the stock market you must buy low and sell high. Unfortunately, many investors follow the media hype, and end up buying high and selling low, when the hype turns into pain. To buy low you must look at those areas of the market that are giving people pain, and look for bargains among those stocks.

Just because something is low does not mean it is valuable. Things can always go lower. We would advise avoiding residential real estate at the moment, for example. But in what we think is an otherwise on-going bull market in commodities, every now and then a sector or two appears to lag behind the main flow.

We think we have found two companies in industries that have been giving investors pain, but still offer excellent value.

Canadian Mining Group

Uranium produced electricity has been a profitable venture for decades, but has been politically out of favor. Today there are 439 producing reactors in the world with plans for 350 more. The demand for more electricity has been rising and the demand for uranium will be rising right along with it. Enough people move from rural to urban China that they build a city the size of Phoenix (over 1million) every month. The demand on electricity this signifies is staggering. Market demands will push aside politically-correct ideas and will take electricity from what ever source it can.

Our first company selection comes from the Uranium industry.

The company is a large mining group, based in Canada, with world-wide operations. Two of their properties have caused investors pain. Their stock price is off about 70% from its April 2007 highs. One of the reasons for this pain has been the potential loss of company-specific uranium supply.

One site of potential loss is in South Africa. In South Africa, the government mismanaged the electrical infrastructure to the point where electricity has been rationed to miners. This in turn has caused supply to drop and prices to rise. The company reported at an investment conference on Monday, February 25th that they have installed diesel generators to supply their mines with all the electricity they need. Problem solved.

The second potential loss dealt with acquiring a raw material necessary to process their uranium in a 3rd world location. At the same conference they announced a supply agreement with a nearby country and that they had entered into an agreement with the host country to process the needed material by 2010. Problem solved here also.

Another source of pain has been the falling price of spot uranium. It is off almost 50% from its June 2007 highs. The long-term price of uranium, the price at which most contracts are written, has not dropped, but has been relatively unchanged for the last year. The spot price is heavily reported in the news and influences investor sentiment. The seldom-reported long term price is where the miners make their money and has not dropped in years. Production, not Price, is the key.

The company is running a loss, but cash flow from operations was 10 times higher that last year. Market cap is about US$2.3 billion. 52 week high was C$18.39 on April 10th, 2007, and 52 week low was C$4.50 on February 22nd, 2008. Price currently around C$4.90.

Australian Base Metals Company

The other pick is a large mining company producing zinc, lead, and copper from mines in Australia.

The price of their stock dropped about 50% from its all-time high. This caused a lot of pain.

Zinc is mixed with copper to make brass. It is used to galvanize steel to prevent rust and corrosion. Lead is a major constituent of the lead-acid batteries used in cars. Lead is used as insulation in high voltage power cables.

From 2002 to December of 2006, zinc prices rose 5 times. It has dropped off 50% since then. The price of zinc is up almost 20% from its January 2008 lows. Lead ran up over 7 times in price during the end 2002 to October of 2007 period. It dropped, along with other base metals, about 40% from October to December of 2007. Lead is up about 35% since then.

Copper is near all-time highs.

We think demand for base metals, including zinc and lead, will continue. Recently, a Chinese company paid 65% more than last year for its iron ore. Net profit doubled for the company year over year, but the company reports in June. The last 6 months will not be as good since commodity prices were lower during that period. We think their revenue will increase going forward as base metal prices rise.

The stock trades on the Australian exchange. Market cap is $US1.1billion. The stock's 52 week high was A$7.22 June 12, 2006, and its 52 week low was A$3.50 on January 22nd. Its price today is near A$5.38 (~US$5.00). Yield ~4.1%.

Resource companies, while having potential for substantial gains, also have the possibility of extreme volatility and risk of loss. Investments in mining companies, by definition, must be considered speculative. Much of the information above has been supplied by the company. Euro Pacific Capital is very familiar with this company and its officers, and feels confident in making this recommendation for suitable investors. However, Euro Pacific has not independently verified the information supplied by the company, and cannot make any representations as to its accuracy. While every effort has been made to assure that the accuracy of the material contained in this report is correct, Euro Pacific cannot be held liable for errors, omissions or inaccuracies. This material is for private use of the subscriber; it may not be reprinted without permission.

© Euro Pacific Capital Inc. All rights reserved. 1-800-727-7922
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"Gold, perhaps the most glamorous of the commodities, has hundreds of years of history of being noncorrelated with financial assets."

- Dick Davis, "The Dick Davis Dividend" (2007)

In January, gold hit a new record, besting its previous high of $850 an ounce way back in January 1980. Any day now it will hit $1,000. Oil, the other hot commodity, is now above $100 a barrel.

I well remember those days of heady double-digit inflation when the dollar was crashing, the world suffered from its first energy crisis, silver was at $50 an ounce, and gold was hitting new highs every day. Howard Ruff's book, "How to Prosper During the Coming Bad Years," and Doug Casey's book, "Crisis Investing," were bestsellers. And even people at church were coming up to me and asking how much "junk" silver they should buy.

But $850 gold and $50 silver turned out to be the top - a good time to sell, not buy. The year 1980 was a "tipping point," when Ronald Reagan was elected president and Paul Volcker, his Fed chief, imposed tight money and high interest rates to kill the inflationary psychology. It worked, and commodities fell sharply - even as traditional stock and bond markets came back to life. (I wrote a promotion for my newsletter entitled, "The Financial Shock of 1981," saying "Reaganomics will work - sell your gold and silver and buy stocks and bonds!" My promotion failed miserably because it was a contrarian view that investors didn't believe.)

Is 2008 another tipping point in financial history? The Midas Metal has been on a tear since the war on terror erupted in 2001. Above all, remember that war is inflationary, and the central banks have been busy printing a lot of new dollars, euros and yen since 2001 - and even more since 1980. It is clearly catch-up time for commodities in general and the precious metals in particular.

Have we reached the top of the commodity bull market? Today's Wall Street Journal op-ed page has an article entitled "The World Has Plenty of Oil." Energy expert Nansen G. Saleri reports, "Cambridge Energy Associates forecasts the global daily liquids production to rise to 115 million barrels by 2017 versus 86 million at present." Moreover, he adds, "We can pump 100 million barrels of crude a day till the end of the century." So perhaps the high price of oil is not a reflection of limited supply, but rather rising demand. The problem is still with the central bank's penchant to constantly inject liquidity into the global monetary system. Without a gold standard, the Fed and the central banks are at sea without a rudder.

Three Vital Lessons about Gold

If you follow the price of gold since 2001, you will note several important points.

First, gold has tripled in price, from $300 an ounce to nearly $1,000. Still, it may have further to go, since in real terms, gold is relatively cheap, given the massive devaluation of the U.S. dollar since 1980. According to Frank Holmes, president of U.S. Global Investors, gold still is 30% below its 1980 price, if you take inflation into account. It's not the bargain it once was, but it could move higher.

Jimmy Rogers has made an historical study of commodities and found that the typical cycle lasts 15-20 years. That means we could be in for another decade of higher commodity and gold prices. But it will be volatile on the way. Commodity prices are inherently unstable, given that they are so far removed from final consumption.

Much depends on the dollar and monetary policy. If the Federal Reserve keeps aggressively cutting short-term interest rates, and bailing out the banking and mortgage markets, the dollar will continue to slid and gold and oil will move higher. But if the Fed and other central banks stop inflating, the dollar could rally and gold and commodities in general might fall back down to earth.

Gold as an Inflation Hedge
Second, gold is the ultimate inflation hedge. In the latest (4th edition) of Jeremy Siegel's classic book, "Stocks for the Long Run," the Wizard of Wharton notes that "the price of gold closely follows the trend of overall inflation for the past two centuries. Its price soared to $850 per ounce in January 1980, following the rapid inflation of the preceding decade. When inflation was brought under control, its price fell."

For gold to perform well, the inflation rate has to be rising, as it has been since 2001. If the money supply declines and the inflation rate falls, the price of gold will fall.

Third, gold is a good, "non-correlated" investment, as Dick Davis points out in his new book, "The Dick Davis Dividend" (highly recommended). By this, I mean that gold often moves the opposite of other markets and industries. Notice how gold actually rose when the stock market went into a severe bear market earlier this decade. Gold has continued to outperform the stock indexes since 2003. Since the start of 2008, while stocks have floundered, gold and gold stocks have skyrocketed.

In short, gold serves as an excellent, non-correlated investment in your portfolio. David Swenson, the highly successful manager of the Yale Endowment Fund, has emphasized the importance of having "non-correlated" investments in your portfolio, including energy stocks, real estate, foreign investments, and precious metals. Because of "non-correlated" investments, his Yale Endowment Fund consistently has beaten the market during the past 20 years, and even rose during the 2000-03 bear market.

The Midas Metal should be an important part of anyone's portfolio and account for anywhere from 5-15%. Right now, I'm recommending 15%. But that figure could be reduced if we hit our protective stops on gold. Remember, gold is a good, long-term inflation hedge, but in the short run, the yellow metal can be volatile.