Junior mining stock investors are feeling "pulverized" as the precious metals and their mining stocks continue to sell-off in dramatic fashion in the face of the Lehman Brothers collapse. Investor portfolios across the board are now showing tremendous losses, causing even greater worry and concern for the U.S. financial markets than we have already experienced.

The latest cause for this activity seems to be more than just hedge fund selling and is most likely attributed to smaller investors giving up on the market. Watching these stocks lose so much of their value in the last six months has been tough to bear, even for the most seasoned investors amongst us. It now appears those with less experience in our market are starting to panic and bail. Others who simply need cash are opting for the exit now instead of waiting for what may lie ahead.

Fortunately, the volume of selling in most cases is rather low, but with so few buyers willing to offset this minimum selling pressure, prices continue to move south. The market wants to go lower, so investors with cash sense are waiting to put in their buy orders. At the moment, we just can't seem to find a bottom. The liquidity crisis appears to be spreading like a contagion to a much broader audience, all of whom need to raise cash. To raise this cash, individuals and/or companies have to sell something such as stocks, bonds, real estate, gold, silver, etc. The credit crisis that began in housing—and then infected the financial sector—is now spreading throughout the economy.

Credit is becoming harder and more costly to obtain across the board. That is making it more difficult for consumers to boost spending, and for businesses to borrow and invest in their operations. This is having a real, measurable, and severe impact on the overall economy.

Unfortunately this activity looks like it will be increasing in the future and will be felt throughout the system, not just in our mining stocks and metals prices. That is the bad news.

U.S. Financial Market Problems: Good News for Precious Metals Investing

The good news is that the confluence of problems in the financial system within the United States and elsewhere is telling me we are getting ready for explosive moves in the precious metals. The financial tsunami I have been warning about is ready to hit. I fully expect by next month that we will be hearing about a multitude of failures in the financial sector, in addition to Freddie, Fannie, and Lehman. Fed Chairman Bernanke has made some comments recently that are very telling in my opinion. A few days agos Bernanke repeated his call for Congress to provide new regulatory powers to insulate the economy from damage if a Wall Street firm collapses. He again urged congress to give the central bank explicit authority to oversee systems that process payments and other financial transactions by investment firms and banks.

Rumors have been swirling for weeks that a big investment house is about to go under. The name that is most associated with these rumors is Merrill Lynch. The Fed has been pumping massive amounts of money into the financial giant for months just to keep them afloat.

Other known suspects that are in major trouble include Washington Mutual, Wachovia, Bank of America, , Morgan Stanley and Citigroup. The sheer greed, corruption and stupidity of these firms is beyond belief. Unfortunately, for many of their unsuspecting depositors and investors, they are about to learn some terrible things about the status of their funds.

Another recent quote from a Fed official said this:

"We see that mounting losses at financial institutions, and an increasing reluctance among investors to invest new capital while the economic outlook is unclear, are forcing financial institutions to 'shrink their balance sheets.'

What he is saying is that a loan is counted as an asset on a bank's balance sheet. Banks hold capital in part as a reserve against the possibility that a loan will default. Thus banks attempt to maintain a reasonable ratio of capital to assets. If a bank experiences a reduction in the value of its capital or an increase in its assets (for example as credit lines that were extended in better times are tapped), the bank must take steps to shrink the asset side of its balance sheet in order to restore its desired capital-to-asset ratio. In other words, the bank becomes more restrictive in its lending. This shrinkage in lending entails tighter underwriting standards, wider interest rate margins, and reduced credit availability." This is all rippling through the system as you read this.

Troubled U.S. Banks

On top of this, the Wall Street Journal recently had an article talking about 117 banks are now on the FDIC problem list. In my opinion that number is very conservative and is just the beginning of what is to come with the financial carnage that lies ahead in our near future.

The Fed response in dealing with this mess will be their predictable bail-out talk and need for more regulatory power. But with so many large firms in trouble and losses in the trillions there simply is not enough money on the planet to do so. At some point, the Fed will become a triage ward where they will ascertain who they can help and who they can't. It is going to be an ugly reality faced by all Americans. Can you imagine how those will feel that didn't get the bailout versus those that did? Or what happens when (soon in my opinion) the FDIC and SIPC reserves are used up and hundreds of banks are still imploding into oblivion? These are sobering questions but realities that are soon to make headlines in mainstream America.

Other very strong rumors are starting to circulate that foreign countries such as Russia, Germany, China and others have had their fill with US T-bonds and may opt to start dumping them very soon. This has always been the moment in my opinion where the U.S. Dollar scam will come to a very rapid and abrupt close. If foreign countries start forming alliances to dump their U.S. T-bond holdings in an attempt to change the current U.S. Dollar hegemony, then life as we've know it in America is over. It's that simple.

What Does This Mean for Precious Metals & Junior Mining Stocks?

I want to repeat what I have been saying the past few years that "this volatility in our market is going to get worse, much worse" and "before we get to the parabolic moves that many of us anticipate and hope for, we may have to experience some dreadful downside periods'.

We are experiencing that downside volatility in its greatest degree at the moment. It may get even worse, but what this indicates to me is that we are probably getting ready for explosive moves in the metals prices which in turn will ignite junior mining stocks. I never said this was going to be easy, I only said it would be worth it for those who could ride out the downside volatility and eventually reap the biggest rewards yet as the prices for the precious metals and junior mining stocks go into the stratosphere.

I know how difficult this must be for many of you. At times you must feel like road-kill that has now been sliced, diced, ground up and spit out. And just when you've gotten to the point where you were hoping and expecting things to go our way, we find out we're about to be grilled. Agggh!!!

One subscriber I recently talked with described what he was feeling and said, "I feel as if I am walking on a very narrow balance beam that narrows even more as you try to move forward. The balance beam is stretched across a deep canyon. Falling off to either side is catastrophic but moving forward to try and get the reward is getting more and more difficult." It's incredibly nerve wracking but I continue to hold the precious metals because it one of the few things that makes any sense in the current situation".

There is no doubt that these are the kind of times that try our souls. How we manage though at moments like these may make all the difference. I say hang in there and stay the course. Don't be shaken off. Hold on even tighter.

Junior Mining Stocks: Their Time is Coming

I also want to emphasize just how quickly things can change with our junior mining stocks. This market can turn on a dime as any of the above financial scenarios I've described begin to play out. Our time is definitely coming.

With each passing month, the quality junior mining shares are increasingly being picked up and held by stronger hands that have no intention of selling at current levels and have the staying power to wait things out. The weak hands (funds and those who need to sell for liquidity purposes) will eventually disappear and the shares will form a base from which they can move higher. As proof of that, if you try to buy large blocks of any of our good stocks right now, you can't buy them at current levels without taking the price much higher.

As the world comes to grips with the new economic realities of our times, the move by panicked depositors and citizens into the precious metals will be one for the record books. Those who managed to hold on will reap the greatest rewards. Those that didn't will be wishing they had.

Greg McCoach