October 20, 2005

8 Peter Schiff's Economic Commentary
     Welcome Letter

8 Andre Sharon's Analysis
     Commodities and Raw Materials

8 Guest Column
     Mary Anne and Pamela Aden

8 Euro Pacific In The News

8 Upcoming Appearances

Peter Schiff's Economic Commentary
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.

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.

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.

Upcoming Appearances

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

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