Big Money Being Made … and Lost

Were coming to the end of a couple of exciting weeks, with some big money being made in the investments weve been tracking for you here … and equally big money being lost in those we’ve been telling you to avoid.

So I want to give you a quick update on where things stand and what might be coming next.

First, gold: After 3 years of steady rises, gold has now broken out of its previous pattern and has begun surging at a quicker pace.

This is the blast-off phase!

Last month, the yellow metal suffered a quick correction, but on a weekly chart, it never even fell below the UPWARD channel it had maintained in all those years.

Kudos to Larry Edelson. He was among the first to call the shots in gold and do so unambiguously. Others may claim to have predicted golds rise. But among those, most were die-hard gold bugs who always predicted golds rise, even during the nearly two decades of gold price declines, when Larry was among the lone gold bears.

If youre holding on to any of the leading gold exchange-traded funds, such as GLD, stick with it.

Second, gold shares: The action in mining companies is even more dramatic: While gold rises 10% or 15%, many of their shares have jumped 50% or 75%.

Royal Gold (RGLD), for example, which owns a diverse portfolio or different mining operations, is also in a blast-off stage.

You should be on the look-out for a sharp correction, which could come at almost any time. But with bullion prices surging, its not likely to last for very long.

Mutual funds that specialize in gold shares, such as U.S. Globals Global Resources Fund and Scudder Gold & Precious Metals Fund, are still good bets.

Third, other commodities: This isnt just a gold phenomenon. We are smack dab in the middle of the broadest, fastest, most profitable and potentially most dangerous commodity price upsurge in a quarter-century.

Copper is a perfect example. Its surge is both steep and relentless. And any traders who have tried to play this market on the downside hoping for a normal correction
must have gotten burned.

Not all commodities are as persistently strong as copper. But its a good metaphor for the entire commodity market, including not only metals, but also energy, food and construction materials.

This is sending the signal of worldwide inflation. And its also delivering bad news for …

Fourth, the dollar: I was a bit premature on Monday in warning that a dollar collapse may already be beginning. With yesterdays trade deficit news not quite as bad as some people feared, the dollar may regain some strength temporarily.

But heck, $64.2 billion in red ink is still huge the third largest in history. And we still imported the most cars and nearly the most oil ever. This is not exactly bullish news for the U.S. dollar.

For protection against a dollar decline, a diversified portfolio of gold and energy investments should do the trick. In addition to Royal Gold, which I just mentioned, that portfolio could include:

• Enerplus Resources Fund (ERF), which gives you both a high dividend yield and the potential for substantial capital gains, a rare combination in todays market …

• Global Resources Fund (PSPFX) or Scudder Gold & Precious Metals Fund for a stake in the mining shares …

• A global income fund that keeps most of its portfolio in short-term fixed instruments denominated in foreign currencies. The more the dollar falls, the more money you make. Plus, as an extra bonus, the fund produces a yield that is now rising. For all the details, see my current issue of Safe Money Report.

• Undervalued small-cap mining shares that have not yet blasted off but could do so at almost any time. Click here for Sean and Larry’s latest report.

Fifth, regarding Enerplus: Since many readers have acted on our recommendations to buy this Canadian royalty trust, let me tell you whats happening here as well.

The trust paid out 36 U.S. cents per unit December 20, and another 36-cent distribution is scheduled for January 20.

Meanwhile, after the government of Canada removed concerns that they were going to change the favored tax treatment of royalty trusts, the stock surged to new all-time highs last month.

Whats especially impressive to me is the fact that, even after its meteoric rise, Enerplus is still holding firmly near those high levels.

We think its still a buy, and will be an even greater buy if and when theres a correction.

Sixth, oil and natural gas: As Sean explained on Wednesday, the energy markets are split between crude oil prices that are rising and natural gas prices that are falling.

This pattern has not changed. But it doesnt have to.

Crude oil is, by far, the larger, more dominant market.

As long as crude oil continues to march higher, it will continue to drive up the price of energy shares nearly across the board.

That includes …

Seventh, major oil producers: I showed you last week how the shares in oil service stocks clearly surpassed the highs they made last year in the wake of Hurricane Katrina.

Now, we have another landmark event:

The energy Select SPDR (XLE) has just broken to new, all-time highs.

This is the exchange-traded fund thats concentrated in shares of the major oil-producers like ExxonMobil, Chevron and Conoco Phillips.

This alone is no guarantee that the stocks will continue to move higher at this juncture. And indeed, yesterday, they were off a bit. But with the oil service stocks now far beyond their post-Katrina highs, the likelihood of higher prices seems good.

Eighth, General Motors: With the S&P and Nasdaq strong so far this year, youd think the rising tide would carry all ships.

Not so!

Lets not forget the investments that are going down, starting with General Motors.

Kirk Kerkorians staff is pushing General Motors to make a radical break with the past.

But turning around GM is like turning a sinking aircraft carrier with a broken rudder and a drunken captain.

Sure enough, despite any talk of turn-around efforts and despite temporary rallies, GMs shares continue to sink, and have started back down again this week. Yesterday alone they fell nearly 4%!

So the stocks sickening downtrend, which began many months ago, remains firmly intact.

Ninth, PC companies: Here also, youd expect the rising tide of the broad Nasdaq to help give some of the leading personal computer makers a nice little boost.

Dell, for example, tried to rally off its recent low, but seems to be failing miserably so far.

Kudos for Tony last year (and earlier!) for warning our readers, over and over again, to avoid PC makers, especially Dell.

Computers have been reduced to cheap commodities. And the upgrade frenzy that used to prevail in the 1980s and 1990s is gone.

Reason: No matter how fast the computers calculation speed, what counts more nowadays is the connection speed. And this is not the end of Dells decline. Even with a rising Nasdaq, its a company to avoid.

Tenth, Treasury notes and bonds: Except perhaps for the price of things like personal computers, nearly everything else in our world, especially commodities, is rising.

Thats inflationary.

And in an inflationary environment, two other parallel consequences are inevitable: Interest rates go up … and the value of investments locked in at fixed rates goes down. That includes even the highest quality investments in the world U.S. Treasury notes and U.S. Treasury bonds.

For the past few months, some people on Wall Street have been whipping themselves into a bit of a frenzy based on the hope that the Fed would soon stop raising interest rates. But from what we can see, thats pure fantasy.

With inflationary tinder wood like gold and copper on fire, how can the Fed suddenly give up the battle against inflation? It makes no sense whatsoever. More to the point: It borders on nonsense.

Nevertheless some bond investors fell for it.

After declining throughout almost all of 2005, they bid up Treasury-note prices toward the end of last year.

But now, that rally may be ending. If so, it means higher borrowing costs for businesses … more increases in mortgage rates for consumers … and more Fed rate hikes this year!

Conclusion

First, don’t let anyone persuade you that inflation is not going to have a major impact on our lives in the months ahead. Almost all markets you look at the ones going down AND the ones going up are being impacted by inflation.

Gold and copper are going higher. That’s inflationary.

Treasury note and bond prices are going lower. That’s also inflation.

And even the declines in stocks like General Motors are the consequences of inflation surging energy costs and rising interest rates.

Second, make sure you’re all set to profit from this massive, worldwide trend.

There’s no more need to delve into all the mathematics of supply and demand. Nor do you we have to spend much time debating the pros and cons. Because it’s happening. To see it, all you have to do is look out the window and watch the wind blow.

You can do it on your own. Or you can follow the specific instructions we provide in ..

My Safe Money Report for risk-adverse investors.

Larry’s Real Wealth Report, focused on natural-resource investments.

And Sean’s exclusive service for investors in small-cap stocks his little giants of inflation. To read Sean and Larry’s latest report click here … One word of warning, though. It’s strictly limited to 500 members and there are only 108 membership slots left.

Good luck and God bless!

Martin

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