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Are we heading for a share market crash?

Yes, of course we are. Markets run in cycles, and a downturn is an eventuality.

The question is when and how bad it will be.

Not far away according to one veteran fund manager. Han K. Lee, the co-founder of Prime Value Asset Management, believes inflation is about to rise, hitting global sharemarkets hard, and warning investors to prepare for the biggest fall since the Global Financial Crisis (GFC). Since March 2009, markets have been on a tear, with the S&P/ASX 200 Index (index:^AXJO) (ASX: XJO) rising 65% – not including dividends.

Lee and Prime’s other co-founder Y. Yong Quek earned the loyalty of their investors when they advised their clients against adding more cash to equities ahead of the GFC.

He now says inflation will overshoot, thanks to unprecedented central bank stimulus. Markets are now more globalised, and effects can ripple across countries, meaning no country will be left unscathed, should markets crash.

Lee says America has over-borrowed and overspent, while China has over-borrowed and over-invested, “Neither strategy is viable in the long term, so something has got to give.”

When inflation starts to turn, Lee says investors will want less exposure to the financial system and more exposure to real assets. That would normally mean good news for gold stocks – with Silver Lake Resources Ltd (ASX: SLR), Northern Star Resources Ltd (ASX: NST), Beadell Resources Ltd (ASX: BDR) and Doray Minerals Limited (ASX: DRM) my best picks, for diversity, number of mines, cash costs and sensible management.

Lee doesn’t rate Australia’s largest miner, Newcrest Mining Limited (ASX: NCM), saying, “The kindest thing I can say about Newcrest is that the company has management issues.

He also notes that consumers in China and India are continuing to buy more physical gold, and that will drive real demand growth.

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Motley Fool writer/analyst Mike King owns shares in Silver Lake Resources and Beadell Resources. You can follow Mike on Twitter @TMFKinga

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