On Tuesday September 16th, we sent out our monthly letter with the following front-page title:

Deflation Is “Winning,” for Now; Avoid “The Falling Knife.”

The gist of our article was that even though many of our stocks are hugely undervalued, they might become even more so. So why be in a hurry to buy them now? Wait for the knife to fall and bounce once or twice before rushing out to buy ridiculously undervalued junior mining stocks.

It didn’t take long for the knife to hit the table. It definitely did so the following day, on Wednesday September 17, the day I was having minor surgery at 10:00 a.m. at Lennox Hill Hospital in New York. My surgery was purely elective so there was nothing serious about it, although it was painful. Painful that is, until I called my assistant, Claudio from the recovery room to check up on the markets. Claudio informed me that
afternoon that the price of gold had shot up about $85! (See Kitco chart above.) Suddenly the pain from my surgery was gone! Funny how that worked, eh? That was the biggest one day dollar gain for gold ever as fear over a total financial market seize up sent people scurrying for real money—asset money—the kind of money that never goes broke because in and of itself it is value. Gold and silver cannot default as paper money can because its value is not dependent on the ability of others to repay their debts. Gold and silver is unadulterated value. Suddenly for the first time in many, many trading sessions, green appeared everywhere on the screens of those going long gold and silver stocks. The knife definitely hit the table and bounced at least once. In other words, there was a strong indication that it might be time to start seriously buying our undervalued mining shares once again.

So take a look again now at some of the stocks we have been highlighting over the past couple of weeks. Go back and review what we wrote last week, starting on page 9 under the caption “Undervalued Stock Opportunities Galore!”

It is with exceptional interest that we note how the knife bounced off the 20-month moving average table, shown in the chart below, on Wednesday, September 17. As of Tuesday, the average price of gold for September falls to $789.23, or just $0.05 from its 20-month moving average. The following day we get this dramatic $85 rise in the price of gold that has allowed the bounce of the knife to $789.89 monthly, versus $788.66 for the 20-month moving average. Of course, the month of September is not yet over and our fascist government manipulators could cause a great deal of grief to harm the price of gold in their endless effort to perpetuate their fiat currency lies. But as we have noted on frequent occasions in the recent past, whenever the monthly average price of gold has brushed up against the 20-month average, we have seen a major surge in the price of gold thereafter.

What caused the dramatic rise in the price of gold on Wednesday? Some of you may recall an interview I did with Ian McDonald in the June 2007 monthly letter. Ian is a professional gold trader, who established the precious metals department for Commerzbank AG, New York, in 1999. Ian now has a job as a gold trader in Dubai. Regarding the question of what happened on Wednesday, here was Ian’s response:

“A lot of you have been calling me tonight to find out what the hell happened to gold in the last few hours. We have a number of reasons.

• The central banks of the world are pumping into the system hundreds of billions of US Dollars. Never in history have we seen an operation of this magnitude.
  
  
• No one has any physical gold, so the price just had to go up. The disparity between the paper and physical markets has never been this great in history.
  
  
• The central banks of the world have stopped selling and they are now showing the world how incompetent they really are.
  
  
• The SEC have just given us a boost today by banning “naked short sales”. Hmmm ETF!
  
  
• We have no investment bankers in the market to short sell and write new complex derivatives – I understand most investment bankers have been told to sit on their hands.
  
  
• The derivative traders at the investment banks all have the same positions on their books, so they are having to Delta hedge as the market goes up (to the layman that is equivalent to buying high and selling low) – I always loved these guys as customers.
  
  
• No one trusts the financial system anymore, so they are buying gold – Another word is currency disdain.

“Please would you ship all your gold to Dubai tonight because we need it.

“In gold we trust. Cheers, Ian”

September 20, 2006
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com