By Claude Cormier , Posted Tuesday, Jan 20, 2009

Stock markets all over the world have collapsed losing on average 50% of their value or something in the neighborhood of $25 trillion US dollars. Unemployment is rising everywhere. Economies are contracting at a rapid pace. We read more and more analysts suggesting that this is the worst crisis of the last 60 years. But some are already calling for THE crisis to become worst than the 1929 crash and last 10-20 years. Your guess is as good as ours. We cannot be sure.

But there are a few things we can be sure of, or almost, with a high degree of certainty, at least, enough for us to make our own opinion on what is happening out there:

-1) The United states of America and its monetary authorities are creating dollars at an increasing pace that is now approaching 10% per year. Money aggregates are exploding and the new president-elect promises to throw even more money at the economy. The coming deficits will likely exceed $1 trillion in the US. Unemployment is rising and will soon be at 10%. There is no end in sight. This crisis will not end soon. Furthermore, this crisis is global.

-2) The US dollar has been the reserve currency of this monetary system for the past 60 years. The odds are high for the dollar to lose this prestigious status in the coming two years, as the USA is where the crisis will do the most damages. The risks of foreigners eventually losing their confidance in the US dollar is growing.

-3) The current deflation in prices of all sort will enventually be replaced by price inflation if only because the US dollar will weaken because of the monetary inflation and the drop of confidence in its capacity to maintain its purchasing power.

-4) The falling economy is causing the demand for goods to drop all over the planet, even in Asia.

-5) The growing debts of the USA feed on itself, cause the dollar to lose value and will eventually cause interest rates to explode.

-6) This is an environment where it will be very difficult to preserve capital in real terms. Although the new Obama administration and its hundreds of billion dollars of new money creation will likely create a relief rally in the stock markets of the world, it is likely that the rally will be of short duration and markets will collapse to new lows later this year. This may be the last opportunity to recover some of the losses of 2008 and to get ready for the next collapse.

Given such market conditions, here is what we are doing:

-A) We try to pay our debts and as usual, we avoid margin.

-B) We are long only the best and purest gold stocks with the best balance sheets and the less exposure to other metals, especially base metals. We prefer producers with a minimum of 5 years of reserves and strong cash position and incoming cash flows. Size is not really important, the current market valuation and the balance sheet of the company are.

-C) We are willing to trade anything from senior gold stocks to oil and gas trusts in these short term rallies.

-D) For maximum leverage, we will trade on occasion the Beta Pro or Pro shares ETFs mentioned in these pages or elsewhere.

-E) When we perceive that an intermediate top is in place for gold stocks, we will buy put options as an hedge to cover potential losses in our juniors.

-F) We avoid base metal stocks as we think that they have no future until we start to see the light at the end of the tunnel. This could be only in 2-3 years from now.

-G) Many like silver. We have some silver exposure through a few of our favorites. But clearly, we think gold will outperform.

Clearly the actions we are taking based on our opinion of the current situation could be wrong. But that is our current plan until further notice. It is very important that you make your own opinion based on all your readings and the advices you received from various sources, and that you act on it. Be proactive and do not believe that the worst is over. It may not be.

Gold touched the middle of its support zone at $800 last week and rebounded upward very quickly. We doubt that we will see new highs in 2009, but we also doubt that gold and gold stocks will collapse with the rest of the market during the balance of the year. Costs have been coming down significantly widening the margin of most producers. After a period of consolidation following the 100% rally we just add, we think gold stocks should slowly move upward. Silver and silver stocks will also do well but will underperform in the longer term.