In case you were otherwise distracted by a spectacular springtime, April also offered some foreboding signs in the economic skies. During the month, turbulent action in the dollar, precious metals, oil, and bonds market offered clear indications that the supports holding up the US economy have become increasingly unstable. The good news is that since the dangers have been largely unappreciated, wise investors have been granted more time to take appropriate action before the situation deteriorates further.

Gold & Silver

Just two weeks after breaking through $600 barrier for the first time in twenty-five years, gold settled at more than $650 per ounce by month's end. Silver traded as high as $14.50, fell sharply, then finished last week with its largest one day gain since the 1980's, settling at about $13.80 per ounce. Friday also marked the much anticipated debut of Barclays' silver ETF (symbol SLV.NYSE.), which join similar gold ETFs already on the market. Similar ETFs will soon begin trading on other major exchanges throughout the world.

The ease with which physical gold and silver can be bought by retail investors through ETFs will reintroduce an entire generation to an asset class recently thought to be as dead as disco. This soaring demand, when combined with decades of under-investment by mining companies, divestments by central banks, and price hedging by gold producers, will create an explosive environment for metal price appreciation.

Despite the fact that this bull market has been steadily building for the past six years, only recently has the surge caught the media's attention. As a result, cries of "bubble" or "blow-off" have reverberated. One self-professed metals expert was so convinced that a silver "blow-off" was imminent that he publicly promised to "eat his hat" were that not the case. When silver did see a sharp one-day pull back, the same "expert," who has consistently underestimated gold's strength since late 2004, advised investors to sell, declaring that a significant correction in both gold and silver had begun. In reality, the anticipated "correction" ended before the ink had dried on his quotation marks.

As a reminder of just how large bubbles can grow before popping, during the 1990s the NASDQ rose from 300 to 5,000. If the NASDAQ could do it, why can't gold? Sure gold does not pay any dividends, but than neither did the NASQAQ. Plus during the entire NASDAQ rally new shares of stock were constantly being issued, either as a result of IPOs, secondary offerings and option grants. However, the growth in the supply of gold and silver will be far more constrained, creating the potential for far greater appreciation.

It seems fitting that on the first day of trading for the silver ETF, shares of Microsoft, once the quintessential "new era" stock, plunged by 11%. Trading as high as $60 per share in December of 1999, Microsoft shares now trade at about $24. During that same time the price of gold has risen from $290 to $650. Imagine conducting a survey on New Year's Eve 1999 that asked typical investors to predict whether Microsoft or gold would outperform over the next decade. Would even one in one hundred have chosen gold? How many would choose gold today or even realize the extent of its out performance?

For a more in-depth analysis of why the recent action in precious metals is not akin to the technology bubble in the 1990's or real estate today, read my recent commentary entitled "The Top Ten Signs of a Precious Metals Bubble."

Oil

After consolidating price gains below its recently established $70 resistance level, oil broke-out in the second half of April. With prices now surging above $75 per barrel, we have likely entered a new phase in this ongoing bull market. So much for Wall Street's consensus that oil prices had finally topped out, and that relief at the pumps was just around the corner. Higher energy prices will further impair over-leveraged American consumers, and will exacerbate an already enormous current account deficit.

Though many of our favorite energy plays have rallied off their recent lows, I still believe that share prices do not accurately reflect current, not to mention future, oil prices. As a result, if you failed to buy as a result of my "buy the dip" recommendation in the last edition of this newsletter, do not make the same mistake twice. Speak with a Euro Pacific broker to discuss my favorite picks in this sector and to learn which in particular are most appropriate.

Bonds

As the conundrum that wasn't continues to unwind, long-term interest rates have risen to their highest levels in over four years, with ten-year yields rising to about 5.1% and thirty-year yields above 5.2%. The technicals suggest rates could rise to 5.4 and 5.5 respectively before consolidating in preparation for an even more substantial rise later in the year. The jump has severe ramifications for over-leveraged consumers/borrowers, the stock market, the dollar, and the housing bubble; in other words, America's entire unbalanced economy.

The Dollar

Last week the Canadian dollar surged above 89 cents rising to its highest level in twenty-eight years, the Australian dollar rose above 76 cents, also closing in on new multi-year highs, the euro surged above 1.26 and the British Pound above 1.82.

The U.S. dollar Index broke thought major support, closing below 86, suggesting another test of its historic lows near 80 is likely. A failure could send the dollar plunging, with dire repercussions across the entire spectrum of dollar denominated financial assets, the U.S. economy, and the American standard of living. Will the 80 level hold again? I for one certainly wouldn't want to bet on it. The stakes are far too high. Even if the dollar does gain one more reprieve, its fate has already been sealed. My guess is if that if the dollar rallies off the 80 level one more time it will be its final "dead cat" bounce.

Conclusion

The simultaneous break-down in bonds and the dollar, together with concurrent break-outs in precious metals and oil, suggests that the global imbalances could be approaching a key inflection point, one which might finally cause many to remove their rose colored glasses. Readers of this letter are advised to take decisive action before reality sets in. Call Euro Pacific Capital today to find out how you can insulate yourself from the foul weather ahead.

Many American investors have discovered and invested in the high-yielding Canadian Energy Trusts. There are about 35 oil and gas royalty trusts in Canada. But there are about 240 other high-yielding, non-energy trusts. They are called "Business Trusts", and are little known to American investors. These cover a fascinating and seemingly innumerable variety of industries, from cold storage to hothouse growers and hot water heaters; from soft things like yarns and bedding and peat moss to hard ones like nails and refined zinc; from fast food to pet food; from air cargo facilities to air miles programs.

For investors seeking high yield in areas outside of energy, we believe these Business Trusts are worth considering. An additional advantage is that they are denominated in Canadian Dollars, which many economists consider the world's premiere currency.

Here we profile three interesting Business Trusts - an ocean shipper, a forest seedling company, and a coffee decaffeinator. The first two are long-established and have proved their ability to manage cash flows and maintain their distributions. The third is a newer trust, only three years old. It stumbled, cut its distribution, and was taken down mercilessly by the market. The case is a reminder that the market can stumble too, sometimes overreacting to cuts in distributions and leaving recovery potential on the table for other investors to enjoy.

Trust #1
Distribution Yield 7.5%
This Trust carries half of Newfoundland's merchandise trade

This Trust's four ice-strengthened ships transport containers and new vehicles to Newfoundland from the Canadian mainland at Montreal and Nova Scotia. The Trust has to contend with arduous weather conditions, seasonality, and a shortage of backhaul cargo. It has coped so well that it carries half the merchandise trade of Newfoundland and Labrador. Admittedly, the province is home to only half a million people. On the other hand, it is Canada's fastest-growing province and last year was the nation's second-largest oil producer after Alberta.

Last May the Trust took delivery of a new ship, a state-of-the-art vessel built in Germany. The ship possesses a third of the fleet's container slots and is operating on the most profitable route, from Montreal to St. John's. The vessel is the fastest in the fleet, boasts the quickest port turnaround times, and is economical in both fuel and labor costs. The load factor has been building up, and the ship's performance in the approaching spring and summer peak seasons could give a boost to cash flow. It could even prompt an increase in the distribution rate for the first time since the IPO in 1997.

Financial Highlights

• The Trust has paid a constant distribution since its founding in 1997. It could have paid more, but it chose to maintain one of the lowest payout ratios of all business trusts - around 65% - and to reinvest the other third of its cash flow in growing the business.
• Thanks to reinvestment in the business, revenues have grown by 50% since 1998 without acquiring any other company and without having to raise any new equity capital.
• The average annual unit price has risen quite smoothly year-by-year by an average 8% a year.
• Growth should quicken this year, as Newfoundland steps up its economic growth rate from 2% to 5% and the Trust enjoys the benefits of its new ship for a full year. This could be the year in which the Trust decides to increase its distribution.

Trust #2
Distribution Yield 8.3%
This Trust plants a third of Canada's forest seedlings

The Trust is the largest forest seedling company in Canada. It is currently providing 200 million seedlings each year, or close to a third of nationwide plantings. The company was started in 1987 when a group of employees purchased several of the forest nurseries offered for sale by the Government of British Columbia. Their private company went public in 1997 as an income Trust. The Trust has a proven record of nurturing seeds efficiently and economically, insuring a high survival rate when seedlings are replanted in the wild. In recent years it has increased its sales in the United States and acquired nurseries in the states of Oregon and Nevada. The advantages of US acquisitions include: a longer growing season than in Canada, the possibility of growing seedlings in the field rather than in greenhouses, reduced need for heating fuels in the southern climate, and the matching of US dollar costs with revenues.

Forest companies that harvest trees generally have an obligation to plant seedlings in their place. During the last several years, however, the financial condition of western Canada's forest industries has been hurt by weak commodity pricing, forest fires, the softwood lumber dispute with the United States, and now the onslaught of the mountain pine beetle. As a result, the Government of British Columbia has allowed companies to defer their replanting obligations. The area of "not sufficiently restocked" lands exceeds six million acres - representing hundreds of millions of trees, or several years of the Trust's production. If US softwood lumber restrictions are removed, and the duties recovered by Canada, the improved financial health of the Canadian forest industry could lead to more vigorous replanting and prove a boon to the Trust.

Financial Highlights

• The narrowness of the Trust's price range is a mark of the stability of its business. Since its founding in 1997, the average of each year's High and Low prices has been within the range $10.38 - $8.60.
• The Trust delivered fewer than 100 million seedlings in 1998. Its current capacity is 220 million. Revenues have kept pace.
• The Trust makes a base distribution, then sometimes pays an extra "top-up" after the end of the year. Since timber companies' financial health is improving, there could be a meaningful "top-up" early next year.
• The large cut-over area that needs to be replanted represents large potential future business.

Trust #3
Distribution Yield 8.9%
The world's only consumer branded chemical-free coffee decaffeinator

A US multinational bought a leading Canadian coffee company in 1993. A mass marketer, it decided in 2000 to dispose of the division that decaffeinates coffee for the specialty trade. The division was bought by investment bankers and launched publicly in 2002 as an income Trust. The Trust's patented process uses only water and activated carbon to decaffeinate coffee. It is chemical-free, in contrast to other processes that employ carbon dioxide gas, methylene chloride, or ethyl acetate. It is also the only decaffeination process that has been certified organic by both Aurora Certified Organic and the Organic Crop Improvement Association. The Trust sells both services and products. Its services are to receive another company's green coffee beans, decaffeinate them, and return them for roasting and sale. Its products are high-quality Arabica beans that it purchases, decaffeinates, and sells via brokers to specialty retailers. Last year the Trust derived 57% of its revenues from the United States, 33% from Canada, and 10% from elsewhere.

Because of its organic orientation and specialty niche, the Trust thought it could maintain its Canadian dollar pricing through 2003 and 2004, let its prices in US dollars rise as that currency weakened, and still keep its customer base largely intact. Last year it became evident that selective price reductions were called for. The question was whether volume would respond more or less positively to easier prices, and thus whether revenues would rise or fall. To guard against possible cash flow weakness, the Trust reduced its distribution rate in December, and the market responded with a savage cut of more than a third in the unit price. The Trust is now in recovery mode, a vital feature of which is the recently-completed 65% capacity expansion. The new capacity will allow the Trust to cut its prices selectively, more than make up the difference in volume, and so increase both cash flow and market share.

Financial Highlights

• After the Trust cut its distribution in December, the price fell by 40%. This created a buying opportunity: the price has since recovered half the lost ground but remains 20% below its November level and 40% below its all-time high of 2004.
• The cut in distribution heralded a new policy of lower pricing in the US, motivated by the recent 65% capacity expansion. If it works, it will cause volume to expand substantially, perhaps sending cash flow and distributions to new highs.
• The capacity expansion was paid for by an equity issue in 2004. There is no long-term debt.
• Major contracts covering a quarter of total volume expire at the end of 2007. The policy of lower pricing will make it easier to obtain extensions.

RISKS

The yields are attractive, but there are risks. Four risks are especially important: (1) Most trusts are new, with little experience of having to sustain the business despite paying out most of their cash flow; (2) Many industries are quite technical, and the trusts are "one-of-a-kind," lacking analyst coverage and a peer group for comparison; (3) There are often middlemen - buyout firms or venture capitalists who may profit richly from leveraging the assets and then selling them off at high prices to the public; (4) One must beware of frequent capital-raising exercises, which are often intended purely to buy out sponsors' interests and may lead to confusion of operating cash flow with cash raised in the market.

Investing in foreign securities involves risks specific to international investing, such as currency 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.

As in our domestic market, the best performing stocks outside the U.S. are selected, little-known, hard-to-follow small capitalization companies. They will outperform major multinational companies.

Wee companies are ignored by indexes and the exchange-traded Trusts trying to track indexes. Indexes aim to cover most of a market average or segment while saving transaction and coverage expenses-by only buying its largest capitalization stocks.

International large company shares under-perform smaller ones by a wider margin than domestic large caps do domestic small caps. There really is only one global market where the biggest companies fight it out.

U.S.-based multinationals currently have an edge thanks to special factors. Some of the advantages may be illusory, but they make Wall Street companies look better, advantages like U.S. abundant liquidity and relatively cheap money making capital expansion easier here than overseas. Faster domestic growth rates mean, all other things being equal, that U.S. company profits grow faster than those of their competitors whose home market lags ours.

Then, too, a falling dollar gives U.S.-listed companies a gain when profits earned abroad are brought home. It may be an illusion, but U.S. shareholders think Dow Jones companies are increasing their profits when euros or Japanese yen translate into more dollars.

One of the classic arguments against drilling down into the world of small caps globally used to be that their accounting was lax, their shareholders were not well protected, their insiders and controlling shareholders cheated those who bought their stocks, their regulators and accountants were not as good as ours. But in the post-Enron post-Worldcom world, with late-trading by mutual Trusts revealed, after exposure of boardroom fixes at Disney and the New York Stock Exchange, after scandals of favoritism in the IPO market and lies by brokerage analysts, Americans have learned to be more humble about how much better regulated our corporations and markets are.

Because large foreign companies cannot compete well against large U.S. companies, you make money internationally by buying smaller company stocks. The problem is finding investment targets. Here are some rules for tracking down smaller stocks which will grow faster than any other part of the stock universe:

1. Look for a niche where growth can be forecast with confidence. Here are some obvious ones now. Shares in areas like alternative fuels and waterworks are going up. The fact that there aren't a host of options within the U.S. makes looking abroad even more compelling. So aim for-say-ethanol companies in Denmark or sewage plant operators in Sao Paulo or a solar cell maker in China. I'm pleased to say they exist.
2. This old trend is your friend. An aging U.S. population means enhanced demand for everything from leisure travel to pension plans, from Israeli skin-firming lasers to Canadian gambling software, from Australian biotech to Swiss or Italian hearing aids. And our red-white-and-blue baby-boomer retirees have cohorts abroad also ending their working life. There is a huge potential demand for goods and services from the me generation.
3. Growing demand for raw materials from the industrialization of China and India, and the general upgrading of lifestyle worldwide, mean available supply is running out. Most commodities are priced in dollars, but few are produced in the U.S.A. Find a company producing oil offshore India or gold in Bulgaria, preferably with GAAP accounts enforced by reliable regulators. Yes, such companies also exist.
4. Japan is reviving. But the top Niponnese stocks everyone knows about are the leading exporters. Their sales and profits will be nipped by the yen rising against our own Greenback. Japanese ETFs tracking the leading companies will also be nipped. Seek a Japanese niche player, with a largely domestic market, selling what Japanese people will buy more of now that they are spending again, mortgages or foreign travel, ringtones or blond hairdye, platform shoes or manga.
5. Outsourcing is hot and contentious. India will answer your phone and clean up your computer systems. North Africa and Latin America are where your calls to Dell are answered today. Hence the need for new leasehold factories and credit cards in south Asia, for better telephony in Turkey and Latin American airlines. Find the bottleneck and invest in the company which can fill it.
6. As Tom Friedman of the N.Y. Times has written, the world is getting flatter. Borders don't stop copycats any more. So think about owning a soft drink bottler in Bosnia and a supermarket complex in Hungary, a fastfood chain in the Philippines or Spain and an Israeli maker of generic drugs.