AS A DOUBLE TOP IS COMPLETED FOR MANY ASSET CLASSES, THE BIGGEST WORLDWIDE EQUITY/COMMODITY CORRECTION IN NEARLY SIX YEARS HAS BEGUN (October 22, 2007): The media has talked a lot about how the financial markets "keep making new highs". While this has been true for the indices which the media talks about most often, such as the S&P 500, the Dow Jones Industrial Average, and the Nasdaq, and is even more true for emerging-market indices and most commodities, there are several notable exceptions which are likely serving as a clear warning for the serious investor.

To begin with, most U.S. domestic equity mutual funds have not surpassed their mid-July peaks. Investors who check their accounts online, or peruse their brokerage statements, are probably puzzled as to why they have not enjoyed the gains that they keep hearing about. Similarly, many broad-based domestic equity indices including the Russell 2000 (RUT), the S&P Midcap 400 (MID), and the S&P Smallcap 600 (SML), among many others, never surpassed their highs from the middle of July 2007. A double top is a classically bearish chart pattern.

While the prices of gold and crude oil had continued to set new peaks as recently as Friday, October 19, the shares of the companies that produce these and similar commodities have struggled, especially since October 11. Very few investors probably realize that even with gold having surged to its highest point on Friday, October 19, 2007 since way back in January 1980, the high for gold mining share indices such as HUI, the Amex Index of Unhedged Gold Mining Shares, has glaringly underperformed. This index topped out at 423.16 on October 11, 2007, which was only 5.345% above its previous peak of May 11, 2006. A mediocre money-market fund would have provided a better rate of return over the same 17-month period of time, with far less volatility.

Much more importantly, emerging-market equity indices began to rise nearly vertically in September, and have only begun to move lower during the past four trading days. Whenever any financial asset reaches the point of euphoric ascent, there are only two possible outcomes: 1) a continued euphoric ascent; or 2) a collapse. Now that the nearly vertical rise has terminated, the only realistic path is a plunge. If China's Shanghai "A" Index were to decline by 57% from last week's historic peak, it would still be above its February low, so even a half-price blue-light special for many emerging markets would not make them bargains on a fundamental basis.

As equity indices accelerate their very recent downturn, global speculators will be selling their most strongly appreciated assets such as gold and crude oil, and likely covering their enormous profitable short positions in the U.S. dollar, in order to pay for margin calls on their other accounts--or simply to have tax gains that will be offset by their losses in financial shares, housing-related sectors, and other underperforming equity groups. The steeper that these declines become, the more widespread will be such margin calls and tax-loss selling. The time of year with the greatest tax-related adjustments (i.e., November and December) is closely approaching, so this could create a worldwide snowballing juggernaut effect that will bring down virtually all equities and commodities in its wake.

Only the U.S. dollar and U.S. Treasuries are likely to appreciate in such a scenario, as has been the case during the first several months of every major equity/commodity correction since gold was delinked from the U.S. dollar in 1971.

Gold "commercials" are jewelers, fabricators, and others who are most familiar with the gold market since their business is buying and selling physical gold. As a group, they have not been this heavily net short gold since the traders' commitments were first reported in modern form (which was after January 1980), according to the data at http://www.cftc.gov/ . See also http://www.softwarenorth.com/ for more than one decade of this data in easily readable chart form. The traders' commitments are released each Friday at 3:30 p.m. Eastern time. Currently, gold commercials are long 77,405 and short 316,501, for a net short position of 239,096 contracts. Each contract represents 100 troy ounces of gold. This means that once gold begins to decline, it will be a long way down.

The biggest surprise for investors in gold mining shares will be how quickly they will return to their lows of August 16, 2007. If HUI repeats this bottom, as I suspect will likely be the case, this would represent a decline of more than 32% from its October 11 peak. Such a pullback would be merely average when compared with the previous five such corrections during the past seven years, as described in detail in the link below: