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What’s Ahead for the Eurozone?

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Is Another 2008 Imminent for Global Equities?
By: Jim Nelson, Portfolio Manager

End Game
By: Peter Schiff, CEO & Chief Global Strategist

The Treasury Auction Shell Game
By: Peter Schiff, CEO & Chief Global Strategist

Race to the Bottom

By: Peter Schiff, President & Chief Global Strategist

By: Peter Schiff, President & Chief Global Strategist
Euro Pacific Capital

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In a commentary about a month ago, I described how the economic world seemed to be drifting into two opposing camps: the Washington-based “Stimulators,” who insist that more government debt is the best means to end the financial crisis, and the Berlin- and London-based “Austerians,” who argue that debt is the crisis itself. If recent economic data and currency movements can be considered votes of confidence, then the Stimulators should be sweating. Moreover, these recent signals should provide economic analysts and investors with a road map for the future. 

To start, the latest economic news for the US has been bleak. Although 2Q GDP figures show the economy to be “expanding” by 2.4%, the pace is little more than half the average rate over the previous two quarters. What’s worse, US debt levels are expanding faster than GDP.

As everyone with a credit card knows, it’s easy to expand spending if you charge it. But even this borrowed growth has failed to make a meaningful dent in persistent US unemployment. The just-released July payroll report shows the American economy shed another 131 thousand jobs, marking three full years of private sector layoffs.

Almost lost in the news is the disappointing reversal of US trade flows, which in May unexpectedly widened to the highest level in 18 months. In other words, the weaknesses that pushed our economy into crisis in the first place show no sign of abating.    

In countries which have decided that further government economic stimulation will produce more harm than good, the story is markedly different.

Spurred by robust exports and strong corporate earnings, the German economy is experiencing a bona fide recovery. This comes despite stringent fiscal moves by the anxious German government. Unemployment there has fallen back to almost pre-crisis levels.

In China, 2Q GDP figures show that the country has likely passed Japan to become the world’s second largest economy. Strong earnings and stock market performance seem to confirm that China’s efforts to rein in debt have been effective.

Meanwhile, just this week, the Stimulators in Washington got some moral support from St. Louis Federal Reserve President James Bullard, who was formerly known as a monetary hawk. Bullard issued warnings that unforeseen “negative shocks” could lead to an inescapable deflationary quagmire. In such a scenario, warned Bullard, the Fed must be willing to buy up to $2 trillion of government debt in a process academically known as “quantitative easing” – and popularly known as “money printing.” 

With the monetary cards now so clearly on the table, currency traders have placed their bets, and the smart money is quickly running away from the greenback. If current trends hold, we are facing an eighth consecutive weekly decline in the Dollar Index.

This week the Japanese Yen hit a fifteen-year high, with the dollar now buying fewer than 86 yen. The yen is up more than 10% since the beginning of May. The euro, after being written off for dead in the days of the Greek currency crisis, has staged a similar rally, and is now up 11% from its June lows.

As a result of the falling dollar, the commodities market has reignited.

Gold has rallied 2.5% in the last week, after declining 6.5% in July (a pullback that had some pundits loudly chortling about the popping of the “gold bubble”).

But the oil market holds far more near-term significance. On Monday, oil busted through the $80 price ceiling that had held since May. Any additional breaks to the upside would be extremely significant and could potentially send crude up to the mid-$90s before another correction takes hold. The danger for the dollar is that rising oil prices could be considered one of the unforeseen “negative shocks” of which Fed President Bullard warns, triggering a new round of inflation.

If the government fears the “recovery” will be derailed by higher energy prices, then look for quantitative easing to become the driving force of our economic policy. The Fed will perversely argue that rising oil prices are deflationary, as they will cause cash-strapped consumers to reduce spending on other goods. In reality, higher oil prices are merely evidence of the inflation the Fed itself has been creating. Instead of solving our problems, quantitative easing could tip the dollar into a death spiral.

The only thing that could prevent a devastating decline in the dollar at that point would be foreign intervention from the Chinese. But given that China is already slowly but steadily reducing its purchases of US Treasuries, it is likely not interested in playing crutch to the US forever.

Investors who are aware of these developing trends have an opportunity to position their assets accordingly. The current issue of the Global Investor takes a look at economic developments in China and Canada, and gives overviews of two companies we think have great potential in this changing world. The esteemed John Browne also provides some thoughts on the just-passed Financial Regulation law. I hope you find this issue informative and thought-provoking. As always, Euro Pacific Investment Consultants are ready to answer any questions you may have at (800) 727-7922 (U.S.A) or 1-888-216-9779 (CA).

 

China Can Deal With Its Asset Bubble
By: Russell E. Hoss, CFA, Portfolio Manager
Euro Pacific Halter China Fund (EPHCX)

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Although most other countries would have envied the economic indicators coming from China in the first half of 2010, the results were nevertheless disappointing given high investor expectations. Growth was slowing, inflation rising, and monetary policy became more restrictive. These factors pressured China’s equity markets. Global risk aversion, driven primarily by the European sovereign debt crisis, further pressured Chinese stocks. As a result, the Shanghai Composite was down 26% in the first half of 2010– making it one of the worst performing markets in the world. 

Many prominent market commentators have since suggested that China’s debt levels may pose an increased risk to the overall economy. These headline-grabbing reports have been widely echoed in the financial media and have grabbed the attention of investors, many of whom well remember how debt crises can ravage stocks. 

For those investors who believe that China will be the dominant economic player on the world stage for years to come, and who have structured their portfolios accordingly, this issue does not merely make for interesting cocktail party conversation; it’s a matter of utmost financial importance.

While China’s economy isn’t without a number of complex challenges, we don’t see a credit-induced asset bubble that is ready to burst. Instead, we see an economy that has rapidly emerged from the global recession of 2008 and is now transforming itself from an investment- and export-driven economy to a more balanced model, whereby services and consumption account for a larger portion of gross domestic product. The transition will not be without volatility, but some shocks are the unavoidable growing pains of a strengthening economy. 

Most of the predictions of the impending bubble bursting in China are derived from the massive credit expansion that began in late 2008. When global liquidity dried up due to the failing financial system in the US in the fall of 2008, the Chinese government announced a massive US$586 billion stimulus package to help break the negative feedback loop that had seized world markets. Subsequently, in late November 2008, the Shanghai Composite reached a bottom at 1,665.

Much of the Chinese stimulus was earmarked for infrastructure spending. In total, Chinese banks lent 9.6 trillion yuan ($1.4 trillion US) in 2009, compared to 4.2 trillion yuan ($620 billion US) in 2008– a significant and unsustainable increase. Meanwhile, because Chinese municipalities cannot borrow directly from banks, local government financing platforms (LGFPs) were created to borrow from banks and disburse funds for local infrastructure projects. Unfortunately, local municipality financial statements are not publicly available, which prompted speculation that the LGFP debt might be as high as 11-12 trillion yuan. Recently, China’s banking regulator said these outstanding loans were 7.38 trillion yuan at the end of 2009. Although less than many of the previous estimates, these debt levels are 70% higher than those in 2008, which has reinforced investor concerns about non-performing loans. 

We believe there are two key characteristics of the Chinese financial system that should be addressed when assessing China’s credit expansion. 

First, Chinese capital markets are still relatively simple compared to other developed markets. Because of the simple structure, Chinese banks and LGFPs act as the primary financial intermediaries, rather than bond or equity markets. According to CEIC and Morgan Stanley Research, in the US, over 60% of financial intermediation is completed through the bond market and over 20% through the equity market, versus only 5% and 10% respectively in China. In other words, China doesn’t rely on capital markets for funding but rather relies on its own commercial banking system. Because the structure of their capital systems are so different, a direct comparison between the US and China is misleading. 

Second, Chinese external debt levels are less than 10% of GDP– one of the lowest levels in the world. Typically, high levels of external debt lead to sovereign debt crises because governments can’t control currency exchange rates or international interest rates. Because China has run such a large trade surplus for so many years, its external debt is negligible when compared to its reserves. 

On the other hand, domestic debt levels can still be problematic if not managed properly, particularly if assets are too small or illiquid relative to liabilities. Fortunately, in China, government assets are larger than any worst-case debt scenarios that we’ve seen. Its equity holdings in publicly traded state-owned enterprises (SOEs) alone are larger than the aggregate level of domestic debt (and we aren’t even considering the annual cash flows of those equity holdings). Additionally, according to Morgan Stanley Research, the government has approximately 2.5 trillion yuan in foreign currency reserves, approximately 3 trillion yuan of cash deposits by other government and public agencies, and significant land holdings (land sales from 2004-2009 amounted to 5.7 trillion yuan). 

We would be naïve to assume that all Chinese local municipalities are in strong financial condition and will avoid cash constraints as non-performing loans increase over the coming years. Much like the problems associated with off-balance sheets arrangements experienced in the US, the lack of transparency and appropriate financial disclosures will create uncertainty regarding the financial health of many municipalities. Clearly lending standards were relaxed as the government flooded the banking system with liquidity; however, we believe the central government has the willingness and ability to mitigate the risk of a debt-induced crisis. 

Recent reports out of China suggest that the government is addressing the situation by limiting lending to municipalities, tightening credit standards, and requiring more comprehensive disclosures. While these measures are creating a slowdown of economic activity at present, they will lead to a healthier banking system that can support more sustainable growth in the long-term. 

As long as the Chinese economy continues to grow at a brisk pace, we believe its debt levels are manageable. The bigger challenge is balancing growth against inflation and social unrest, while reducing dependency on business investment spending and exports.  Investment spending has slowed meaningfully in 2010, with current spending focused primarily on enhancing Western China’s infrastructure. Export growth is unlikely to rebound to peak levels reached prior to the financial crisis, as demand from developed economies remains sluggish. Further dampening the export industry is a strengthening currency and rapidly increasing wages, which make exports less competitive. As a corollary, these trends have improved the fundamentals for those companies focused on domestic consumption and services. We expect the Chinese consumer market to remain strong for many years into the future as wage growth accelerates, the yuan strengthens, and consumer-oriented government policies persist.  

We anticipate economic growth to stabilize at 8-9%, inflation to peak at 3-4%, the yuan to continue strengthening, and monetary policy to move towards neutral. While there are still external and internal risks to the economy and equity markets, we are optimistic regarding China’s economic future and believe that we can generate positive returns over the long-term for shareholders. 

Despite the noise created by those who see danger in China, we still see it as one of the best places for Americans to direct investment assets. 

 

Investment Opportunities

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If you decide to make investments in the Far East, it is important to seek promising stocks to help maximize return. Although Asian equities can offer relatively high dividend yields (along with higher risk), it may be surprising to many that dividend yield in the Far East can be found in sectors rarely associated with yield. For instance, we currently think that two technology stocks in this region offer high yields and good prospects for potential growth.

Company #1

Company #1 mainly designs mobile phones and bluetooth chipsets. It is a global provider of testing, hardware, software, and exterior design solutions. The company lists its stock on the Singapore Exchange. It sells its products globally, but more than half of its revenue is generated within the Chinese market alone.

Investment Highlights

A fast-growing company, its recent quarterly sales were double those of the same period last year. We like this company for its exposure to the growing market for 3G handsets throughout Asia. This small-cap company trades at a single-digit valuation and has offered consistent dividend payout for many years. At current prices and projected distributions, the dividend yield is approximately 5%. Its 52-week high was 78 Singapore cents, and its 52-week low was 38 Singapore cents. 

Risks

Risks in owning this company are: competition from other mobile handset designers, dropping prices if the market becomes saturated, and a general slowdown in purchases if a recession develops.

 

INTERNATIONAL INVESTING MAY NOT BE SUITABLE FOR ALL INVESTORS. 

CLICK HERE TO RECEIVE MORE INFORMATION ABOUT THIS COMPANY, AND TO SEE IF IT IS SUITABLE FOR YOUR INVESTMENT OBJECTIVES AND RISK TOLERANCE, OR CALL 1-800-727-7922(U.S.A) or 1-888-216-9779 (CA) TO SPEAK TO AN INVESTMENT CONSULTANT. 

Company #2

Company #2 provides solutions in the desktop monitor and LCD TV markets. Listed on both the Hong Kong and Singapore stock exchanges, the company has a $1.4 billion US market capitalization and is the largest monitor maker in the world. It commands a strong position in China, with major customers including: Dell, HPQ, IBM, Lenovo, and Fujitsu-Siemens.

Investment Highlights

We like this monitor manufacturer for its position in China, a key growth driver in the global demand for both monitors and LCD TVs. According to the company, last year PC monitor shipments in China surged 33.7 % year-over-year, while China’s overall demand for LCD TVs increased by 106.4 %.

The company’s cost management is impressive. Though revenue was down in 2009 over 2008, internal cost cutting resulted in gross income rising 9% year-over-year. Based on the prior two semiannual payouts, the company offers a dividend yield of just under 3%.

Risks

Risks in owning this company are: a market shift away from LCD products, increased competition eroding pricing power, and a world-wide recession affecting sales.

INTERNATIONAL INVESTING MAY NOT BE SUITABLE FOR ALL INVESTORS. 

CLICK HERE TO RECEIVE MORE INFORMATION ABOUT THIS COMPANY, AND TO SEE IF IT IS SUITABLE FOR YOUR INVESTMENT OBJECTIVES AND RISK TOLERANCE, OR CALL 1-800-727-7922 (U.S.A) or1-888-216-9779 (CA) TO SPEAK TO AN INVESTMENT CONSULTANT. 

Dividend yields change as stock prices change, and companies may change or cancel dividend payments in the future. The fluctuation of foreign currency exchange rates will impact your investment returns if measured in U.S. Dollars. Past performance does not guarantee future returns, investments may increase or decrease in value and you may lose money.

Investing in foreign securities involves additional risks specific to international investing, such as currency fluctuation and political risks. There can be no guarantees of success in pursuing any of the strategies we recommend, or that any of the specific companies will gain in value. Risks include an economic slowdown, or worse, which would adversely impact economic growth, profits, and investment flows; a terrorist attack; any developments impeding globalization (protectionism); and currency volatility/weakness. While every effort has been made to assure that the accuracy of the material contained in this report is correct, Euro Pacific cannot be held liable for errors, omissions or inaccuracies. Euro Pacific has not independently verified the information supplied by the company, and cannot make any representations as to its accuracy. This material is for private use of the subscriber; it may not be reprinted without permission. The opinions provided in these articles are not intended as individual investment advice.

Why don't we provide the company names?
Under FINRA Rule 2310, broker-dealers are required to make sure that every investment recommendation is suitable for each client's unique investment objectives and risk tolerance. The company overviews provided here are meant to give an indication of the type of recommendations a Euro Pacific Investment Consultant may make, depending upon your unique investment goals, risk tolerance, and profile. If you have questions about the companies described in this report, or think they may be suitable for your portfolio, please call (800) 727-7922 and a Euro Pacific Investment Consultant will assist you, with no obligation to purchase from us.

 

Canada: A Bridge to the Future 
By: Stephen Johnston, Managing Partner
Petrocapita Income Trust & Agcapita Farmland Investment Partnership

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In this hostile financial climate, long-term investors must now give more thought than ever to capital preservation and sustainable growth. It is not a profound observation that growth is not sustainable if it is driven by debt-fueled consumption. Sound fundamentals for growth include:

• Favorable demographics;
• Low national debt levels;
• High savings rates; and
• Persistent trade surpluses.

Many emerging economies have all of these characteristics, while the so-called ‘developed’ economies have virtually none of them. Take Canada as an example. It can be argued that Canada suffers from many of the problems of the typical developed nation, though to a lesser degree than its G8 brethren. Canada is the best of the worst, so to speak. Still, it has familiar developed-economy problems, including:

• Aging population, with unfunded liabilities for social benefits;
• High debt-to-GDP levels;
• Low savings rates;
• Increasing government regulation and intervention in the economy;
• Large fiscal deficits; and
• An overly accommodative monetary authority.

This raises the question: why should investors emphasize investments in developed economies such as Canada over emerging economies? The fact is that direct investments in emerging economies often come with higher levels of political risk – see Russia's expropriation of oil assets or Argentina’s punitive export tariffs on agricultural commodities during its 2008 food crisis. The challenge becomes how to obtain emerging economy growth with developed economy risk.

That is the investment draw of Canada. Even though it faces many of the issues of the rest of the developed world, there is an opportunity to capture emerging market returns in Canada due to its uniquely bifurcated economy.

Eastern Canada, represented by Ontario and Quebec, is heavily exposed to deteriorating US demand through its automotive and aerospace industries. To put it simply, Eastern Canada imports what the emerging economies need and exports what they make – putting it under pressure on both the cost and revenue side of the equation.

Meanwhile Western Canada, represented by British Columbia, Alberta, Saskatchewan and Manitoba, is in the enviable position of exporting what the emerging economies need and importing what they make. What do I mean by this?  It’s a well-understood process that energy and food consumption undergo rapid growth as a developing economy makes the transition to a middle class standard of living. Energy and agriculture are Western Canada’s dominant industries – and this region, with only 10 million inhabitants, is one of the world’s largest net exporters of both energy and agricultural commodities.  Here’s a breakdown:

Energy –

• Oil (13% of world reserves; 4% of world production)
• Uranium (8% of world reserves; 20% of world production) 

Agriculture –

• Potash (60% of world reserves; 30% of world production)
• Wheat, coarse grains, oilseeds (21% of the world export market for wheat; 10% for oilseeds) 
• Farmland (80% of Canadian total) 

Therefore, investing in Western Canada provides exposure to emerging market growth in energy and agriculture within one of the most politically stable markets on Earth. In addition, investors who have a ‘value’ orientation have been provided what I believe are attractive entry points into the Western Canadian market by some recent events. 

In the energy sector, the credit crisis has caused financing to become scarce for junior oil & gas companies while low natural gas prices are reducing their profitability. They are being forced to sell assets to stay in business. This has created a buyers’ market for the acquisition of smaller oil production assets – assets that are highly cash-flow positive at current oil prices. 

In the agriculture sector, the regulatory barriers that made it difficult to invest in Saskatchewan farmland have recently been liberalized, allowing capital to move in and acquire the cheapest farmland (on a productivity basis) in Canada and perhaps the world.

We all expect China to overtake the US as the world’s leading economy, but I think Canada’s fortunes will surprise many. We have grown side-by-side with our North American neighbors for nearly a century, but we will not let them steer us off a cliff. Instead, Canada’s uniquely bifurcated economy can serve as a bridge from the developed to the developing world – at least for investors wise enough to cross it.

Stephen Johnston is the founder and managing partner of Agcapita (one of Canada's largest direct farmland investment funds) and Petrocapita (a private energy royalty trust). Formerly, Stephen was the head of the private equity team at Societe Generale Asset Management - Emerging Markets UK. In this capacity, he was responsible for the private equity allocation of closed-end funds covering the Baltics, Central and Eastern Europe, and the Middle East, with C$500 million under management. Stephen has a BSc. and an LLB from the University of Alberta and an MBA (1994) from the London Business School.

Please note: Neither Stephen Johnston, Agcapita, nor Petrocapita are affiliated with Euro Pacific Capital. This material is authored by a third party. Euro Pacific does not guarantee the accuracy and completeness of third-party authored content. In addition, any opinions expressed are solely those of the third party.

 

More Strings, Less Net
By: John Browne, Senior Market Strategist
Euro Pacific Capital

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In 1999, the Depression-era Glass-Steagall Act, which had prevented commercial banks from taking high risks with federally-insured deposits, was repealed. I believe this set the stage for the financial crisis of 2008. In the decade following the repeal, bank deposits were put at risk by gamblers masquerading as bankers, confidence men posing as politicians, and yes-men making a mockery of rating agency reliability.

By removing the limitations of Glass-Steagall, without enabling any market mechanisms to engender restraint, the federal government made massive bailouts inevitable. As the public looks to lay blame for the worst financial collapse in 80 years, tremendous pressure has been placed on Congress and the Administration to ‘fix’ the system.

As a result, we are now the lucky recipients of the 2,300-page Frank-Dodd Financial Reform Act. Even its most ardent supporters have no idea what effects the bill will have on our financial markets. But students of past government regulatory efforts should know that any intended consequence will spawn many more. Putting that aside, many legislators and financial observers believe that even the bill’s expressed intentions are an expensive, vague, and highly complex attempt at window dressing.

Before getting into the details of our new regulatory environment, a little background is in order. For decades, politicians have been unabashed in the open purchase of votes with pork barrel add-ons and massive entitlement programs. Socialist-oriented Democrats and hypocritical Republicans (who claimed fealty to fiscal prudence while racking up unprecedented deficits) are equally guilty.

By flooding the US, and the world at large, with a torrent of cheap dollars, the Federal Reserve has been the prime enabler of our disastrous economic drift. The housing boom, which in reality was just a concentrated and more visible representation of our entire economy, was caused by the Fed’s loose monetary policy and Congressional pressure on mortgages lenders, such as Fannie Mae and Freddie Mac, to lend to non-viable borrowers.

When Wall Street bankers repackaged and securitized these mortgages, the regulators failed to act. The rating agencies, bought and paid for by Wall Street and given special protection by their friends on Capitol Hill, seemed to slap triple-A ratings on any mortgage-backed security that came down the pike. These worthless mortgages now form a cement block around our economic feet as we try desperately to swim up for air. To no small degree, the sovereign debt crisis, which attracted global attention in the first half of this year, resulted from the persistence of these questionable assets in bank investment portfolios.

Although a post-mortem on the financial crisis should be as simple as an autopsy of a skydiver with an unopened parachute, Congress and the Administration have nevertheless established a Financial Crisis Inquiry Commission to probe the “mystery.” Strangely, the same Congress supported the Financial Reform Act before that Commission had a chance to report its findings. So the new Act is not based on even notional evidentiary findings, but rather on the election-year political bias of people with little or no knowledge of economics or finance. Therefore, it is not surprising that the Act fails to address the problems that created the crisis. Consider what the Act does not cover:

• Fannie May and Freddie Mac, whose activities led to the ballooning and collapse of house prices, are not mentioned. In the last two years, the amount of mortgage debt held by both companies, which are now simply government bureaus, has skyrocketed. The vast majority of new housing loans now come from Fannie and Freddie, but Congress has done nothing to impose greater discipline.

• The Federal Reserve is not mentioned, save to increase its powers! Furthermore, the Fed successfully resisted a comprehensive audit of its multi-trillion dollar spending of citizens’ funds.

• The SEC and other regulators, who were asleep at the switch, are not covered. It was their blindness which allowed the banks to gamble with depositors’ funds.

• The rating agencies escaped major reform. In fact, the same system of mandates, which require issuers to utilize only federally-approved providers, remains in place. This will make it more difficult for new, independent agencies to gain traction in the marketplace. The Act also makes no provision to change the system of rating agency compensation, leaving in place several conflicts of interest. 

• Major banks labeled as ‘too big to fail’ are still allowed to hide their toxic assets and can still trade in the highly risky derivatives market. Although the term ‘bail-out’ has been replaced by ‘wind-down,’ the bill ensures that failures at major financial firms will be paid for by taxpayers forevermore.

Given all of these shortcomings, it is unlikely that the longwinded legislation will correct any of the abuses and market perversions that it was meant to address. On the other hand, two things are certain: the Act will create a vast new bureaucracy with vast new funding requirements, and the Act has created such regime uncertainty that it risks pushing our country from recession into depression. 

 

Euro Pac in the News
Recent Articles in which Peter Schiff was interviewed or quoted:

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Gold Prices Extend Rally as ‘Odious’ Dollar Drops Versus Euro: Bloomberg Businessweek | August 6, 2010

Laar and the dilemma of monetarism: Baltic Reports | August 2, 2010

Fed chair Ben Bernanke isn't all doom and gloom: Chicago Sun-Times | July 25, 2010

Last week, the European Central Bank abandoned all pretense that the euro would be the worthy heir of the Deutsche mark; based on the enormity of the nearly $1 trillion bailout of Greece and the moral hazard it creates for other spendthrift member-states, the euro is instead on its way to becoming the worthy heir of the drachma. While the bailout was intended to restore calm to the continent, thereby strengthening the euro, the result is a currency that has lost its shot at glory.

	If the global economy could be described as a three ring circus, then the center attraction would definitely be the currency and debt exchanges between the United States and China. But for the past month the world's attention has been distracted by an entertaining sideshow in which Greece and the European Union are jostling over a potential bailout for Greek debt and whether the European Union, and the euro itself, will exist for much longer. I believe the short-term problems in Europe are being overblown and the potential demise of the euro highly exaggerated. For those who can connect the dots however, the drama throws some much needed light on the far more daunting problems unfolding within our own fiscal house. The scenario that is eliciting the greatest fears is that resentment from the more solvent EU members will prevent a bailout for Greece. If the Greek government then fails to adopt austerity measures that will bring it back in line with EU debt requirements, then an expulsion, or withdrawal, from the Union becomes a possibility. This could set off a domino effect that will bring down larger European political or monetary union. On the other hand, if Greece does receive a bailout, a moral hazard will be created that will encourage other indebted countries (Portugal, Spain, etc.) to press for equal benefits. The fear is that either scenario would destroy confidence in the euro, remove the biggest rival of the U.S. dollar, and give a shot in the arm to the dollar's global status. However, there is a third more likely alternative that few are considering. My gut is that Greek politicians will find the prospect of being forced out of the union and re-creating their own currency, formerly called the drachma, even more unpalatable then swallowing the bitter pill of fiscal austerity. Even if defying the EU might seem like good politics now for Greek leaders, the risks associated with economic independence could be so daunting that politicians will refuse to roll the dice. Their better political choice would be to talk tough against draconian spending cuts but vote for them anyway. By playing the role of callous bullies, politicians in Berlin, Paris, and Brussels can provide Greek politicians with the political cover necessary for them to make the unpopular decisions. That way Greek politicians could have their cake and eat it too. The best case for Europe would be a solution that is all stick and no carrot. This would mean that Greece would have to get its fiscal house in order with no help from the EU. However, even a solution that involved some help from Brussels, but still forced real reforms in Athens, would be seen as a positive for the euro. Rather than being the beginning of the end for the euro, the Greek drama may well become the euro's first major victory. If the EU forces Greek politicians to act more responsibly, the Union will show that it cares about the value of its currency and that it has the political will to keep its members in line. On the other hand, the negative consequences for the EU, and the euro, of an outright Greek bailout would be devastating. Central to the euro's viability is the limit it places on the ability of member nations to run deficits. The moral hazard associated with a Greek bailout would create a situation that would actually encourage all EU nations to run larger deficits because the costs of doing so would be borne by the more responsible members. Contrary to conventional wisdom, Greek bankruptcy is actually preferable to a bailout, and while the initial reaction might be perceived as euro negative, sentiment will quickly turn in the currency’s favor. A solution that involves a restructuring of Greek debt, that imposes some losses on creditors, would be the most honest way out. Not only would this be positive for the euro, but it would have the added benefit of reminding lenders that loaning money to heavily indebted nations is risky. Governments of such nations would then find it more difficult to borrow money, forcing greater fiscal discipline around the world. While I still have my doubts about the long-term viability of the euro, I feel that there will be many short-term successes before the experiment ultimately fails. In the meantime, if the euro can survive its current trial, its health could be bad news for the dollar. A battle tested euro, backed by a disciplined union, will have greater credibility as the currency capable of dethroning the dollar. This will eventually refocus attention back on the United States and will highlight the significant distinctions between the two economic powers. First, while the European Union may have several member nations with fiscal problems, the same situation exists in the U.S. where many of our most populous States are currently navigating similarly dire financial straits. Like Greece, California cannot print money. So if leaders in Sacramento can't find the will to raise taxes or cut spending, absent federal bailouts, default will be their only option. However, my guess is that the political pressure in the U.S. to bailout State governments, or to avoid the huge cuts in State spending that would be required to avoid default, will be too great to resist. While Germans are vehemently opposed to bailing out Greeks, I do not foresee the same level of opposition on the part of New Yorkers to bailing out Californians, especially since New York will likely need its own bailout in the not too distant future. This is especially true since most voters will not be asked to pay higher federal taxes to finance State bailouts. We will simply "pay" for State bailouts the same way we "pay" for all the others, we will borrow from abroad or print money. As a result, none of the States will be forced to make the necessary spending cuts, and many will actually increase spending even faster, even as their tax bases continue to shrink. Those States that may have otherwise acted responsibility will likewise be incentivized to run large deficits themselves to get their fair slice of the bailout pie. Of course, on a Federal level, there will be no one to force Uncle Sam's hand, because unlike Greece, our government can print money. Since printing money is far more politically popular than cutting spending, raising taxes on the middle class, or honest default, it is the most likely option our leaders will choose. If these two scenarios unfold, the EU holding the line on Greece and Washington caving to California, creditor nations will be presented with a clear message as to where to hold their currency reserves. The stampede out of the dollar will begin, and the greenback's tenure as the world's reserve currency will enter its final act. Such an outcome would also throw light on the solvency of the United States itself, which has its own debt issues which in many ways are far more daunting than those faced by the European Union. The real tragedy will play out not in Greece, but in America.
	Peter Schiff is President and Chief Global Strategist of Euro Pacific Capital, a full service registered broker dealer that specializes in foreign securities, Member FINRA/SIPC. He is an expert in foreign securities markets as well as currency and gold markets. Mr. Schiff delivers lectures at major economic and investment conferences, and is quoted often in the print media, including the Wall Street Journal, New York Times, L.A. Times, Barron's, Business Week, Time and Fortune. His broadcast credits include regular guest appearances on CNBC, Fox Business, CNN, MSNBC, and Fox News Channel, as well as hosting a weekly radio show. He is also the author of two bestselling books: "Crash Proof: How to Profit from the Coming Economic Collapse" and "The Little Book of Bull Moves in Bear Markets".

	Featured Companies Australian Energy Companies with Attractive Yields
	While virtually all other advanced economies are still struggling to emerge from the ruins of the 2008 financial collapse, Australia is reporting increasing housing pricesi, declining unemploymentii, and rising interest ratesiii. As Charles Schulz once said, "Don't worry about the world coming to an end today. It is already tomorrow in Australia." His words ring true now more than ever. Stable Government Australia boasts a relatively stable socioeconomic and political environment. In 2009, it was ranked second worldwide for political stability in the IMD World Competitiveness Yearbook, and of the 57 economies surveyed, it came in ninth for transparency of government policy. Its government is widely agreed to have a very good working relationship with the business sector. Furthermore, over the past 30 years, Australia has introduced reforms that have allowed it to become integrated with the global economy, but also has equipped it to withstand external shocks. The reforms have included the introduction of a flexible exchange rate system, deregulation of the financial markets, reduction of tariffs, and reformation of the labor market and taxation policies[i]. This free market approach has allowed for an extremely business-friendly environment. Sound Monetary Policy The primary objective of the Reserve Bank of Australia's monetary policy is to keep its inflation rate controlled at 2-3% on average by keeping interest rates up. Its current interest rate is set at 3.75%iv, which compares favorably to other developed countries' headline rates (see chart below). It was one of the first economies to raise rates in the wake of the financial crisis – a convincing demonstration of its economic resilience. (Source: http://www.fxstreet.com/fundamental/interest-rates-table/, Feb 2010) Due in part to the country's strategically high interest rates, the Australian dollar has risen steadily against the U.S. dollar for almost a year (see chart below). Export & Resource Driven Economy Australia's economy is driven by exports. This sector is dominated by mining (41.5%), but also includes manufacturing (29.7%), services (18.9%), and agriculture (4.1%). The country's exports rose 21.9% in the midst of the 2008-09 crisis, to $284.7 billionv. Rising commodity prices have been a boon to Australia's export earnings, as some of their principal exports include coal, iron ore and gold (see chart below). (Source: ABS catalogue 5368.0 September 2009vi) Australia's major export markets are Japan, China, South Korea, and India. Its largest two-way trading partners are China, Japan, the United States, and South Korea.vii Australia's strong trading relationship with China and other blossoming Asian markets has given it a distinct advantage in weathering the recession. The Australian Energy Market Like much of the Australian economy, the overall energy market has been on a general incline. Here are some key facts and charts from the ABARE Energy Update, 2009viii: Australia's energy production rose 1.6% from 2007 to 2008. Australia's energy exports rose by almost 4%, reflecting strong growth in uranium oxide and coal exports. Coal provides over 50% of Australia's energy export trade. Total electricity generated in Australia grew by about 2.5%. Australia's overall energy consumption rose by about 1.5%. Growth in energy consumption was driven by the electricity generation sector, the transport sector and the residential sector. In energy content terms, in 2007-08, the fuel type to record the strongest consumption growth was gas (up 5%), followed by renewable (up 3%). Caveats Although we consider Australia to be a relatively lower-risk foreign investment, there are certain risks inherent to all international investing, including currency, market and political risks. Currency Risk: Changes in the currency exchange rate can affect your investment. When the exchange rate between the foreign currency of an international investment and the U.S. dollar changes, it will impact your investment return. Market Risk: Foreign markets, like all markets, can experience dramatic changes in market value. Political Risk: Political, economic, and social factors influence foreign markets. Company #1 Company #1 is a dividend-yielding Australian utility trust dealing mainly in electricity and gas transmission and distribution. It is made up of three trusts as well as an investment holding company. The company's asset portfolio contains interests in the following: a conduit that connects natural gas reserves with industrial, commercial, and residential consumers a distribution network a distribution company Additionally, Company #1 owns an interest in an energy utility that provides electricity distribution and transmission services to upwards of 500,000 customers, and a firm with distribution licenses for several gas distribution systems. This portfolio offers regulatory and geographic diversity with exposure to regulated assets across Australia and the United States. There are a number of reasons to consider investing in energy utilities. Generally, these types of companies have established (sometimes even monopolistic) market positions, durable capital assets, established earnings and cash flows, and stable dividend yields. On the downside, yield-producing utilities may be negatively impacted in a high interest rate environment. We like this company because we believe the improving global economic environment will have a positive impact on the demand for electricity and gas transmission and distribution services. We are impressed with the company's strategic initiatives, as well as its strong cash balance, which is a positive for the company's future expansion plans. The company's stock is currently down from its peak in June, 2007, although up from the low reached in March, 2009 (Google Finance, Feb, 2010). We believe this may be a good time to consider this company, with its share price at levels which are below its historic average, and currently offering an attractive yield. Company #1: 6-Month Stock Chart (Source: Bloomberg, Feb 2010) INTERNATIONAL INVESTING MAY NOT BE SUITABLE FOR ALL INVESTORS CLICK HERE TO RECEIVE MORE INFORMATION ABOUT THIS COMPANY, AND SEE IF IT IS SUITABLE FOR YOUR INVESTMENT OBJECTIVES AND RISK TOLERANCE. OR CALL 1-800-727-7922 (U.S.A) or 1-888-216-9779 (CA) TO SPEAK TO AN INVESTMENT CONSULTANT. Risks Declining volumes of two of its segments could negatively impact overall revenue growth, as electricity distribution is one of the prime revenue contributors (40.4% in FY09). Further, rising interest rates in Australia could elevate the company's cost structure and negatively impact its ability to maintain its dividend distribution. Company #2 Company #2 also deals in electricity transmission, electricity distribution, and gas distribution. Its networks provide the following services: Electricity transmission network – carries electricity from power stations to electricity distributors via high voltage towers and thousands of kilometres of transmission lines. Electricity distribution network – carries electricity from the high voltage transmission grid to over half a million customers. Gas distribution network – transports gas to more than 500,000 customers. We expect a boost to revenue growth due to the company's focus on expanding its network infrastructure due to rising demand for electricity and natural gas. Furthermore, Company #2 will be rolling out smart meters and new initiatives in wind energy that could potentially support top-line growth. While its stock has fallen from a 2007 peak, the company has a strong history and attractive dividend yield, and we believe it is on track for healthy improvement. Company #2: 6-Month Stock Chart (Source: Bloomberg, Feb 2010) INTERNATIONAL INVESTING MAY NOT BE SUITABLE FOR ALL INVESTORS CLICK HERE TO RECEIVE MORE INFORMATION ABOUT THIS COMPANY, AND SEE IF IT IS SUITABLE FOR YOUR INVESTMENT OBJECTIVES AND RISK TOLERANCE. OR CALL 1-800-727-7922 (U.S.A) or 1-888-216-9779 (CA) TO SPEAK TO AN INVESTMENT CONSULTANT. Risks The primary risk for investors in this security is a substantial change to the regulatory environment. In particular, a change in the estimation of the cost of equity capital could change our view on the stock. Another risk is the possibility of management making value and/or yield dilutive investment decisions. Additionally, adverse weather conditions could impact demand. While high leverage has been a recent cause for concern, extensive hedging by companies may help mitigate the overall risk of indebtedness if the strategy proves correct. Given that the key value driver is the company's dividend yield relative to real interest rates, changes to the one-year forward 90-day bill rate and changes to dividend guidance will have a material impact on our target price. Litigation related to a disaster in the region may impact the company's bottom line in FY10. The electricity distribution segment's EBITDA growth has declined Y/Y in FY10:H1 due to related litigation costs.
	i http://www.bloomberg.com/apps/news?pid=20601081&sid=a2m9sOZ_JwHQ ii http://news.bbc.co.uk/2/hi/8458636.stm iii http://seekingalpha.com/article/165688-australia-wins-global-race-to-tighter-monetary-policy [i] http://www.business.nsw.gov.au/aboutnsw/climate/A11_govt_efficiency.htm iv http://www.rba.gov.au/ v http://www.dfat.gov.au/publications/stats-pubs/cot_fy_2008_09.pdf vi http://www.dfat.gov.au/publications/stats-pubs/cot_fy_2008_09.pdf vii http://www.innovation.gov.au/Section/AboutDIISR/FactSheets/Pages/Australia%27sExportsFactSheet.aspx viii http://www.abareconomics.com/interactive/energyUPDATE09/
	Investing in foreign securities involves additional risks specific to international investing, such as currency fluctuation and political risks. There can be no guarantees of success in pursuing any of the strategies we recommend, or that any of the specific companies will gain in value. Risks include an economic slowdown, or worse, which would adversely impact economic growth, profits, and investment flows; a terrorist attack; any developments impeding globalization (protectionism); and currency volatility/weakness. While every effort has been made to assure that the accuracy of the material contained in this report is correct, Euro Pacific cannot be held liable for errors, omissions or inaccuracies. Euro Pacific has not independently verified the information supplied by the company, and cannot make any representations as to its accuracy. This material is for private use of the subscriber; it may not be reprinted without permission. The opinions provided in these articles are not intended as individual investment advice. © Euro Pacific Capital Inc. All rights reserved. 1-800-727-7922 88 Post Road West, 3rd Floor, Westport, CT 06880

	My Run-In with Ben Bernanke: Why the Fed Chief Should Resign Mark Skousen
	"The Federal Reserve continues to work actively to prepare for the possibility of financial stress." – Ben Bernanke, January 5, 2007 "[Monetary] policy during that period [2002-04]--though certainly accommodative--does not appear to have been inappropriate..." – Ben Bernanke, January 3, 2010 Does the Fed chairman Ben Bernanke know what he's doing? I have my doubts. I've met personally with the Fed chief twice now, once in January, 2007, right after he became chairman, and in January, 2010 to assess the mindset of the world's most important financial leader. In January, 2007, I attended a private luncheon where he spoke on "Central Banking and the Bank Supervision of the United States." After hearing his address, I wrote in my investment newsletter (Forecasts & Strategies, February, 2007): "Anyone reading between the lines could understand that Bernanke is worried about a financial storm ahead..." "In his speech, Bernanke used the terms "crisis," "panic," "threats," "stress" and similar words at least 36 times." "Bernanke said that the Fed has set up a "crisis center" to handle potential global financial problems - to anticipate them, and to deal with them if they occur. What are the possibilities? A dollar crisis, like the one Paul Volcker suggested would happen in the next few years. A non-dollar currency crisis in Asia, Europe or Latin America (shades of the 1997 Asian currency crisis). A housing crash and foreclosure crisis. A major terrorist attack on a financial center, such as New York, London or Tokyo. A sharp rise in inflation." I concluded: "I doubt if the Fed will cut rates again unless there is an imminent financial crisis of some sort that will require more liquidity and lower rates." A year later, his fears became reality, and the financial panic of 2008 forced the Fed to cut rates to nearly zero, inject billions of new money into the system, and run to Congress for help. Three years later, I approached Bernanke again, this time at a special session at the American Economic Association meetings in Atlanta, Georgia. He was there to give a lecture on "Monetary Policy and the Housing Bubble." I introduced myself and showed him a copy of the talk he gave three years earlier (January, 2007) at the same AEA meetings. Then I asked him pointblank: "Did you know in advance that a financial crisis was headed our way?" He looked nervous and I could tell he was not happy about my question. He stared at me stoically and smiled. He refused to answer. I think he was worried about his job if he said, "Yes." But there was no doubt in my mind what the correct answer was. He knew there was trouble brewing. As the Wall Street Journal states: "Mr. Bernanke was the intellectual architect of the decision to keep monetary policy exceptionally easy for far too long as the economy grew rapidly from 2003-2005. He imagined a "deflation" that never occurred, ignored the asset bubbles in commodities and housing, dismissed concerns about dollar weakness, and in the process stoked the credit mania that led to the financial panic." (WSJ, December 3, 2009, p. A22) After our awkward confrontation, I sat down in the front row to listen to his new speech. Now he was in denial. He rejected the common-sense notion that the Fed's low-interest rate policy in 2002-04 caused the housing bubble or the financial crisis. The housing boom was global, he said, and couldn't be blamed on US monetary policy. Bernanke did take some responsibility for the lack of proper banking standards that led to the housing crisis. According to Bernanke, the Fed took steps to regulate the subprime mortgage market, but the new regs were "too little too late." Afterwards, Bernanke took questions, and I asked the final question: "Mr. Bernanke, I see in your speech you talked about interest rates and the price of money, but you said nothing about the supply of money. Will you comment on the fact that the adjusted monetary base [the Fed's checking account] is now growing again at an 80% rate? Does that suggest you fear another financial crisis or credit crunch soon?" His answer was measured. "No, the rise in the monetary base is due entirely to the Fed's recent purchase of mortgage securities that we agreed to buy." Then, I had a follow up question: "I note that foreign central banks like Bank of India and Bank of China are now buying tons of gold. Is this a sign that foreigners are losing faith in the dollar-based world monetary system?" Again, he had a "What, me worry?" response. "The world financial system is sound," he responded. He showed no worries about the consistently low value of the dollar on foreign exchange markets or the dramatic rise in the price of gold since he became chairman. I came away from my meeting with Bernanke with the following lesson: Don't count on the Fed chairman or any other high government official to admit mistakes or tell us what is really going on. As long as the Fed's Zero Interest Rate Policy (ZIRP) is in place, the dollar will remain weak, gold will rise, and foreign stocks will do better than US stocks. Who should take the fall for the financial crisis? If Ben Bernanke were the CEO of a major US corporation, he would be fired for such dereliction of duty. In 2007, he repeatedly assured Congress and the public that the Fed was alert to any economic problems that might arise. "To make crises less likely," he said in his 2007 AEA speech, "over the years the Federal Reserve has worked effectively with the Congress, other supervisors, and financial market participants to develop statutory, regulatory and other measures." The Fed has worked "effectively" to prevent crises? Give me a break. He also said: "With strong private-sector institutions and good public policies in place, episodes of ...financial stress should be relatively infrequent." Clearly he and the Fed blundered... and the Fed chairman could pay the price. He should not be reappointed.
	Mark Skousen is celebrating 30 years as Editor of Forecasts & Strategies, his award-winning newsletter. He is the producer of FreedomFest, "the world's largest gathering of free minds," set for July 7-11 in Las Vegas (go to www.freedomfest.com to learn more). Speakers include Peter Schiff, Steve Forbes, John Mackey, Burt Malkiel, and many others. Dr. Skousen's book, "The Making of Modern Economics," has just won the prestigious Choice Book Award for Outstanding Academic Title for 2009. For more information about the book, visit Amazon.com. Mark Skousen and Forecasts & Strategies are not affiliated with Euro Pacific Capital, Inc. Euro Pacific Capital does not guarantee the accuracy and completeness of third-party authored content. In addition, any opinions expressed are solely those of the third party and Euro Pacific does not express an opinion on these matters. Using the links above will take you to sites outside the Euro Pacific website. Euro Pacific is not responsible for the content of such sites.

	Euro Pacific in the News
	Recent articles in which Peter Schiff was interviewed or quoted. Click here to access Euro Pacific's print news archives and here to see the latest video interviews.
	January 21, 2010 MarketWatch Obama proposes new limits on big bank risky trading January 21, 2010 Wall Street Journal Obama's Uphill Battle to Rein in Banks January 21, 2010 Wall Street Journal Economists React: Is Obama Bank Plan 'Wrong Solution' or 'Good Idea'? January 19, 2010 LewRockwell.com China and Global Imbalances: Getting the Story Right January 1, 2010 CNNMoney.com 3 reasons home prices are heading lower

	Upcoming Appearances
	Upcoming conferences and seminars at which Peter Schiff is a featured speaker. Click here for more information.
	April 7 – 9, 2010 Halter Financial Summit 2010 Pudong Shangri-la in Shanghai, China April 21, 2010 26th Annual FPA of CT State Conference Aqua Turf Club, Plantsville, Connecticut April 27, 2010 Princeton Club of New York – Investment Strategies Group New York, New York (NOT OPEN TO THE PUBLIC)

Welcome Letter

Dear Reader,

This is the first of what will hopefully be many informative and valuable issues of 'The Global Investor," The purpose of which is to share ideas and insights into global markets and trends with Euro Pacific's current and potential client base.

Among other things, what makes this newsletter unique is its format of bringing investment themes to the reader's attention, while reserving specific recommendations until interested readers have consulted with a licensed Euro Pacific investment representative. Besides allowing us to stay compliant with various NASD regulations, this will enable our readers to more effectively determine which ideas are best suited for their personal objectives and risk tolerances. By combining a traditional investment newsletter with the guidance of licensed professionals, we hope to achieve a new level of reader satisfaction and performance.

Each issue will feature a new economic or market commentary by me, investment themes and strategies from our consulting analyst Andre Sharon, and a guest commentary. We are honored to have the Aden Sisters as our guest columnists in this inaugural issue. The letter will also point out various financial publications which may have quoted me between issues, call attention to future planned seminars or other public appearance, and include other commentaries I have written.

For long time, based on strongly held beliefs that the U.S. dollar would continue its long-term decline, due to pervasive government and current account deficits, inadequate domestic savings and industrial production, and the inevitable bursting of our consumer credit driven, asset based, bubble economy, we have long advocated that our clients keep a substantial part of their wealth in non-dollar assets. Our strategy of identifying conservative, high dividend paying foreign investments has been very successful for our clients, who have benefited from the regular dividends, as well as the increasing value of these foreign investments, due, in part, to the decline in the dollar.

An article which appeared in the Wall Street Journal on October 17 noted that this trend toward overseas investing is picking up steam. Entitled "U.S. Investors Shift Bets Overseas," the article pointed out how an increasing number of Americans were adding foreign securities to their portfolios. Our clients were on the forefront of this shift, and are among the few who have been participating through direct ownership of ordinary foreign shares.

In fact, despite what I believe to be a temporary, short-term bear market rally in the dollar, foreign markets have continued to outperform their domestic counterparts so far in 2005. On August 26th, USA Today ran a story entitled "Foreign Markets Leave U.S. in the Dust," and on Sept. 17th the Associated Press ran a story entitled "Overseas Markets Are on a Roll These Days."

Recent developments now lead me to believe that the economic and market forecasts that I have been making are close to becoming a reality. Time is surely running out to protect what portion of one's wealth that still remains exposed to the U.S. dollar, its financial markets, and its bubble economy. For that reason, the advice and insights contained in this and future issues of "The Global Investor" could not be timelier. I hope all of you enjoy and profit from this newsletter, and feel free to forward it to as many individuals as you feel will benefit form its contents.

Yours truly,
Peter Schiff

Peter Schiff is the President, Founder and Chief Global Strategist for Euro Pacific Capital. He is widely acknowledged as a expert in international markets, and in global economic strategy. He is a speaker at all the major investment conferences. He is regularly featured on CNBC and Bloomerg TV , and often quoted in the Wall Street Journal, Barron's, New York Times, the Financial Times, Investors Business Daily, and many others.

 

Andre Sharon's Analysis
Commodities and Raw Materials

COMMODITIES AND RAW MATERIALS

In the investment world it not an accident that serious money is made by contrarians and by those who think "outside the box". As Baron Rothschild said in his oft-quoted remark, "Buy when the blood is running in the street."

So it was that during 1998, as the tech miracle was gathering momentum amid talk of a new dawn for mankind, commodities scored a 38% negative return. That was the very year when Jim Rogers, the legendary investor, launched his Commodity Index and Raw Materials Fund. Subsequently, as both the technology bubble and the stock market swooned, commodities began to take off, and since then have been exceptionally rewarding to investors.

WHY INVEST IN COMMODITIES AND RAW MATERIALS?

Is now a good time to invest in commodities and raw materials? Is it too late? Here is our take, and current thinking.

1. Supply and Demand. Commodity price cycles often occur at long intervals, some times on the order of 20 -30 years. Very long lead times are involved in bringing on incremental capacity to the marketplace. The world has been massively under-investing in raw materials since the 1970's, in response to previous over-investment. For example, as oil prices soared from $2 a barrel in the 1960's to $40 in 1980, investment in the sector increased sharply. As a result of subsequent over-exploration and over-production oil prices dropped to $10 a barrel by 1980. Pretty much the same thing happened to most other commodities. No smelter has been built in the U.S. since 1969, and no oil refinery since 1976. As a consequence, operations were cut back or shut down, mines and smelters closed, offshore rigs were not deployed, agricultural land lost to other uses, skilled workers quit, and capital migrated to more promising areas.
   

   Hence the supply shortages we are experiencing now, in the face of rapidly rising global demand. Not just from the United States and other developed economies, but of course also from exploding demand from China, India, and other emerging markets.
   

   The economic awakening of China's 1.3 billion people is well known. China is the world's largest consumer of steel, and the second-largest consumer of crude oil. It will continue to experience enormous demand for raw materials to feed its investment in infrastructure alone, including transportation and decent housing. There is another under-appreciated aspect of Chinese demand not well understood outside the country: the quite remarkable extent of the Chinese people's desire to spend. There are historical reasons for this, namely a powerful reaction to an uninterrupted century-long period of extreme uncertainty (wars, civil wars, revolutions, runaway inflations, factionalism and arbitrary confiscation of property) and consequently of ingrained habits of very high savings to cope with the unknowns and to take care of parents. Now, understandably, this generation is thirsty for a better life, and for more and better tangible goods.
   

   Other industrializing emerging markets are also eager to participate in enjoying the fruits of their labor. These include India, south-east Asia, and South America. China's attempt to secure its future needs for raw materials to feed this demand was exemplified by its bid for Unocal. That bid failed, but that fact alone is practically guaranteed to ensure that it (and India) will redouble its efforts all over the world by acquiring producers of raw materials and entering into long-term contracts and strategic alliances.
   

2. Raw Materials as "China Play". Much has been written about attractive ways to participate in China's growth story. Unfortunately, direct investment, including portfolio investments, can be hazardous due to political and legal risks. One clear message has come from the experts, however: buy what China buys not what China sells. Thus, so long as the China story remains intact, one of the simplest ways to participate in its growth is for investors to ride on the coattails of its appetite for raw materials. Ditto India.

3. Diversification. There exists a well-documented inverse correlation between returns on investments in financial assets and housing on the one hand and commodities on the other. At the very least, therefore, it makes some sense to incorporate some raw material vehicles in portfolios for purposes of balance and diversification.

4. Inflation Hedge. If you believe that sooner or later the Fed will be increasingly induced to boost the economy via the monetary accommodation/inflation route, commodities and so-called hard assets will likely benefit, and you should want to own some.

Andre Sharon is Euro Pacific's consulting analyst. He has led an unusually distinguished career in international research at a number of major financial institutions. His previous positions have been Head of Global Research Product Development at ABN-AMRO, Manager of European Research at Merrill Lynch, Chief Investment Officer at American Express Bank International, and Director of International Research at Drexel Burnham.

RECOMMENDATIONS & INVESTMENT IDEAS If the above thesis is correct, raw materials should remain attractive investments for many years into the future. Under investment in infrastructure, plus increasing global demand, particularly from Asia, underpin our optimism for continued rising commodity prices in the coming years. For many investors, some exposure to this sector is prudent and appropriate. For others, it is not. One very important caveat, however: commodity prices can be very volatile in any short term period. Therefore, investors should only invest in raw materials and commodities if they can hold for the medium to long term. We do not believe that commodity futures contracts are appropriate for most investors, given the risk, volatility and leverage factor. We have identified 4 investment options in the commodity/raw material arena that we believe have excellent long term potential. An Australian company that manufactures a board range of critical products for the mining industry. These include specialty chemicals, fertilizers, and explosives and blasting equipment. A Canadian firm that is one of the world's largest integrated natural resource companies. It mines zinc, metallurgical coal, copper and gold, and has recently announced its participation in a major oil-from-tar-sands project. An Australian company which is one of the world's largest vertically integrated zinc and lead producers, incorporating mining, processing, and smelting. It also is a significant producer of silver, and to a lesser extent, copper and gold Since Euro Pacific Capital is a regulated securities broker dealer, suitability concerns as well as prudence prohibit us from mentioning specific securities by name in a general circulation newsletter. If the theme and strategy of the above article makes sense to you, call us. One of our licensed securities specialists will be pleased to discuss in much greater detail the specific companies mentioned in the article above. We will also help determine if these securities are suitable for you, and consistent with your risk tolerance and investment objectives. As international securities specialists, we can discuss other investment ideas and options available through Euro Pacific. 1-800-727-7922 (U.S.A) or 1-888-216-9779 (CA)

Investing in commodities, as well as foreign securities, involves specific risk, such as currency and political risk. Commodity investments can be very volatile. While we have confidence in our recommendations, there can be no guarantees of success in pursing any of the strategies we recommend, or that any of the specific companies will gain in value.

 

Guest Column
Mary Anne and Pamela Aden

GOLD: MEGA BULL UNDERWAY

Gold has been on the rise, recently hitting an 18 year high. Even though gold's already risen 92% over the past 4 ? years in its strongest rise since the 1970s, it's only now starting to attract some attention.

Part of the reason why is because the rise in gold has been slow and steady, but it's being reinforced by the other metals, commodities and gold shares. Oil, copper, platinum and the CRB Commodity index, for instance, have all reached new record or near record highs.

In addition, gold's been rising along with the U.S. dollar over the past few months and this too is important. It means gold is now rising on its own and not simply due to the dollar's weakness. It's hitting multi-year highs against most of the major currencies, which also reinforces that gold's bull market is real and significant, and it has a lot more upside potential.

GOLD IS A LEADER

Also important, gold has consistently been a reliable leading economic indicator and it's very sensitive to inflation. Gold has, therefore, historically led inflation and interest rates, and it's doing so again. Consumer prices, for example, recently soared the most in 25 years. This was followed by producer prices, which had its biggest rise in 15 years with prices surging at an annualized rate of nearly 23%. Interest rates are now at a five year high, but there's more...

Since gold is a leader, its rise is also signaling it doesn't like what it sees ahead or what's happening in the world. Aside from inflation, this could be massive U.S. government spending and the largest debts and deficits the world has ever known, or the war on terror which guarantees more spending. There's also record high oil prices, growing uncertainty, record high commodity prices, global warming, a world flooded with the most liquidity in 30 years, a real estate bubble and booming growth and growing demand for oil and commodities out of China and other emerging countries.

These factors are all positive for gold. While we don't know how this will unfold, we can assume that at least some of these factors will be with us for a long time and chances are, the outcome will not end well. As long as that's the case, this will continue to propel gold higher.

THE TECHNICALS ARE BULLISH

Looking at gold's technical big picture on Chart 1, you can see it's in a strong 35 year uptrend. A couple of years ago it broke above its downtrend since 1980, it's now at an 18 year high and its next resistance is at $500. Once gold is able to rise above that level, there will be no further resistance until gold reaches the 1980 top area at $850.

While this level would put a big spotlight on gold, a 1980 dollar is not the same as a 2005 dollar. In real terms, a gold price closer to $2000 today would be the same as $850 was in 1980, and this level is not an unrealistic target once the mega trend blossoms in the years ahead.

A NEW INVESTMENT ERA

If this seems extreme, it's important to keep in mind that a new investment era began in 1999. This marked a mega shift out of financial assets like stocks into tangible assets like gold. These shifts don't happen often but when they do, the trend tends to last for years. That was certainly the case in the 1980s and 1990s when stocks were stronger than gold, but that's now changed.

Gold has been stronger than stocks for six years now. The percentage gains have been greater and this will likely continue in the years ahead. So gold is where your investment focus should be as long as this mega shift continues.

For now, however, gold has risen far and fast, and it's due for a normal downward correction in the months ahead. If you haven't bought gold yet, that'll provide a good opportunity to buy. And if you already have some gold, then hold onto it or add to your position on any weakness.

NOTE: Euro Pacific is one of the distributors in the United States of the Perth Mint Gold Trading and Storage Program. The Program is sponsored and guaranteed by the government of Western Australia. We believe this is the best such program available in the US today for investors wanting to own physical gold bullion. For further information about the Perth Mint, click here.

Mary Anne & Pamela Aden are well known analysts and editors of The Aden Forecast, a market newsletter providing specific forecasts and recommendations on gold, stocks, interest rates and the other major markets. For more information, go to www.adenforecast.com.

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The views expressed in the guest column above are solely those of the author. Such information has not been verified by Euro Pacific Capital, nor does Euro Pacific make any representations as to its accuracy.

While every effort has been made to assure that the accuracy of the material contained in this report is correct, neither the authors or Euro Pacific can be held liable for errors, omissions or inaccuracies. This material is for the private use of the subscriber, and may not be reprinted without permission.

 

Euro Pacific In The News

Links to articles in which Peter Schiff has been interviewed or quoted, as well as our complete archive of articles for the past 2 years. Click Here.

Oct 10, 2005	Reuters:	Global Investors Seek gold, TIPS as Inflation Hedges
October 3, 2005	USA Today:	For Wary Investors, back-to-work storms darken the gloom
September 30, 2005	The Wall Street Journal:	Sizing up the CPI
August 23, 2005	Smart Money:	The Big Chill

 

Upcoming Appearances

Listing of upcoming conferences and seminars at which Peter Schiff will appear.

Feb 1-4, 2006

World Money Show. Orlando, FL