Market conditions for the junior mining sector continue to deteriorate as we approach mid-summer. Several forces are currently at work,  causing problems not only for our sector but for stock markets in general. Here is what I believe is happening:

First, fear is rapidly increasing that the next shoe is about to drop on the credit derivatives time bomb. Recent research I have been doing had led me to the conclusion that a major banking crisis is soon to unfold not just in America but Europe as well. The size of this debacle is going to be colossal. It will involve huge write-downs by the banks which in turn will cause instant liquidity problems and possibly bankruptcy for some of these institutions.

Many of these banks are already insolvent, but have been able to stay afloat using their credit lines and liquidity. What I mean by insolvent is that their debts are bigger than their assets. The problem as I see it moving forward is that not only are many of these banks insolvent, but they are about to become illiquid as well. It looks like the end of August or early September could be reckoning day for at least 20 financial institutions across the United States and Europe. The fallout will be devastating to financial stocks and depositors of troubled and or failing banks and institutions.

The Fed Response

The Fed will respond to the growing crisis with their usual denial and twisting of the facts. Recent meetings behind closed doors indicate clearly they are getting ready to deal with the next round of failures. It was one thing to bail out Bear Stearns without any comments from the public but now the Fed will be trying to bail out or benefit 17 of the largest financial institutions in the country without any public disclosure. Of course it won't be labeled a "bailout" but that is exactly what is will be. Where is the money going to come from to pay for all of this insanity? The answer is massive inflation.

All of this is in my opinion is leading up to a major banking crisis that is going to hurt a lot of innocent people. Unfortunately for many unsuspecting depositors and clients of the affected companies, looking to the FDIC and SPIC to protect your savings and investments will be a joke.

In the past few weeks they talk like they are going to raise rates, but in the end as the banking crisis goes to the next level they will be left with no choice but to continue lowering rates. Raising interest rates at this point would slaughter the economy, stock and housing markets. It will also precipitate the failure of even more banks were they to raise rates. So despite what you hear in the media, know that the Fed will be forced to lower interest rates in the face of the coming banking collapse.

This is why I believe we are getting so much pressure from Dr. Evil (Hank Paulson) as he is aggressively trying to increase the powers of the Fed. This activity is frightening and should be opposed by all citizens of the United States. It is leading us down the wrong path. It also shows the Fed clearly knows what is coming and that there is little they can do about it. Giving the Fed more power at this point is not going to change the outcome; it will only allow them to steal from the average citizen even more than they have in the past!

From what I have been able to gather it appears the banks have run up against the wall with their credit derivative liabilities. A nasty reckoning day is close at hand. It will probably be round two of what looks to be a series of worsening rounds of financial debacle on an unprecedented scale. It will bring inflation to our economy with a vengeance.

So take note and be forewarned. This is one of the shockwaves that I said would hit in 2008.

What Does this Mean for Gold and Silver Prices

As these banking failures pile up starting in the next few months, look for gold and silver prices to have their biggest moves yet since the bull market in precious metals began back in 2002. These banking failures and the corresponding inflation that will take place will finally take the U.S. Dollar Index below the critical "70" level. Gold in my opinion will begin to have a series of $100 up days taking the yellow metal to $1,500 per ounce and possibly even higher before the end of the year. Silver will be trading at no less than $30 an ounce and probably much higher as well before year end.

What about our Mining Stocks

I am now changing all of our recommendations to a hold for now. I don't think anyone should consider buying at this point because it looks like the prices will be hit just like everything else will be hit. I imagine the Dow could lose 3000 points or more depending on how bad the fallout is from the coming financial crisis. If you want a preview of what is coming, just look back to Mid-August of 2007 and multiply the seriousness of the problem by a factor of ten, possibly even more.

The junior mining stocks are already getting hit with more of the hedge fund selling I have been mentioning since March. This time around the funds are dealing with major redemptions where their clients are liquidating, forcing in turn the hedge funds to liquidate. It looks like cash will be king for the immediate future and many are scrambling to raise that cash at the moment. This liquidation is beginning to ripple through the system and will take stock prices much lower unfortunately.

The good news for the junior mining sector is that as the precious metals prices make aggressive moves higher, the precious metals mining shares should kick back into gear with authority. The coming financial shockwave will finally wake up a "sleeping public" to the benefits of owning the precious metals in such a time. I see a major amount of new buyers coming into our market as the painful realities of the financial mess created by the corrupt, greedy Wall Street crowd comes home to roost in the next four to six weeks. While the initial blow-off will take our junior mining shares down for a period of time, I expect that this is where we could finally see a very volatile upside as new investors start looking for new places to protect their money.

How Should Each of Us Play This Situation

The big question many of us are asking ourselves is should we sell now and try to buy back at lower prices, or is it wiser to just stay the course and weather the worst financial hurricane this country has seen in a very long time. It is not an easy decision.

For now I am recommending to not buy anything and just continue waiting to see where prices bottom out. For some of us the question is, "Should I dump those stocks I no longer want to hold now or wait for potentially higher prices in the fall to sell then?"

To answer that I would say if you have no cash on hand, sell now and take your losses on those companies that are pure exploration plays. Having cash on hand means you should be able to pick up some incredible bargains as the effects of the meltdown swamp our junior mining shares for a season. Last August, the bargain period only lasted a few days before things solidified. This time around I imagine things will be much worse for a longer period before we see any recovery.

Personally, I am holding all my quality positions (staying the course) and looking to off-load the companies that have little in the way of assets. Those exploration juniors that should be announcing drill results shortly, like a Kettle River, are worth waiting on to see if we can get some good news before considering selling. Other exploration juniors that have no drilling going on and little money in the bank would be candidates for selling now or in the fall. I plan on doing the annual housecleaning a bit earlier this year probably around late September, or early October.

Good Investing,

Greg McCoach
Editor, Gold World