August 4, 2006

8 The Pause That Will Not Refresh
         Peter Schiff, President

8 Investing in Singapore
        Two Investment Recommendations

8 No Slow Down in China
        Tony Sagami, Guest Columnist

8 Euro Pacific In The News

8 Upcoming Appearances

8 Previous Editions of Our Newsletter

Despite growing evidence of surging inflation, the Fed has shown a greater concern for evidence of an economic slowdown, and as a result will likely pause in its rate tightening campaign following a quarter point rate hike next week. Global stocks, bonds, foreign currencies and gold will likely react positively to this development, at least initially. But in relatively short order, I expect U.S. markets to come under renewed selling pressure, particularly in the bond market, as increasing inflation fears and diminished demand for long-term, dollar-denominated debt undermine the rally.

For the last several years, a series of ¼ point rate hikes has, in my opinion, been the primary factor supporting both the U.S. dollar and the bond market. Once this prop is removed by a Fed pause, despite a knee-jerk bond rally, I expect both bonds and the dollar to be sold. It will appear ironic to most that when the Fed finally stops notching up short-term rates, the market will finally start pushing up long-term rates. This will frustrate the Fed and Wall Street bulls who had hoped that a pause might help breathe life into a stagnating economy. But what the Fed giveth on the short end, the market will likely taketh away on the long end.

A surge in long-term rates will immediately translate into higher mortgage rates, putting the final nail in real estate's coffin. The bubble is finally dead, may it rest in peace. Unfortunately the same can not be said for those who bought into it, and those who financed the speculation. For them, and for the entire nation for that matter, the real estate nightmare is just about to begin.

Despite the strong likelihood that the hoped for soft landing will be more of a crash and burn, consumer price increases will only accelerate. This will come as a shock to most economists and Wall Street strategists who naively expect slower growth to cool inflation. Unfortunately, when it comes to inflation's effects on consumer prices, they ain't seen nothing yet. When the stagflation scenario is finally embraced as fact, things will really start to unravel for the U.S. dollar, bonds, stocks, and real estate.

From mid-May to mid-June, there was a significant shake-out in some of the foreign markets, commodity related stocks, and precious metals. But, I believe that the shake-out has run its course, and has laid the foundation for a powerful rally in these sectors. The recent correction forced many of the weaker players, those either highly leveraged, with no real conviction, or mere Johnnies-come-lately, out of the market. Without all of that excess baggage weighing them down, these markets could easily blast off. If you are not on board you will likely miss one hell of a ride.

Oil, which weathered the shake-out better than any other commodity, could lead the way higher. Natural gas prices, which had been sliding since an unseasonably mild winter left excess supplies over-hanging the market, has finally reversed course, soaring over 60% in the last two weeks. Once again, in an example of having too much of a good thing, the catalyst for the move is warm weather; only this time it is a heat wave which has the nation's air conditioners working overtime. Look for this trend to continue right into the winter, then really pick up steam if it's a cold one. If there are any significant hurricane related supply disruptions in the meantime, the words "to the moon Alice" describe where prices are likely headed.

Those of you who followed my advice on buying beaten down, natural gas-related Canadian Energy Trusts can pat yourselves on the back for a great trade. If you are still on the side lines, the best prices are long gone, but these trusts are still cheap. Call and speak with one of my brokers at 1-800-727-7922 to find out which trusts still offer the best values.

Gold also looks quite good from a technical perspective, and I expect a significant break-out at any time. In fact, as I write this, gold prices have now risen for eight consecutive days. Perhaps it will finally overpower crude and emerge as the new leader in this commodity bull market -- if not gold, then silver, as its chart looks even more explosive than gold's. If you are not already invested, or only have a partial position, make sure to contact Danielle Dwyer, or any of my brokers that you have been working with, to find out about the Perth Mint Certificate program, by far the best way to buy gold and silver. To learn more about it visit this link www.goldyoucanfold.com or call Danielle at 1-800-993-8350.

Furthermore, the dollar is hanging on by a thread, which Bernanke is likely to cut with his highly anticipated pause. This week, in his first televised interview, Henry Paulson, responded to CNBC's Maria Bartiromo's question about the dollar, in robotic fashion, uttering the familiar phrase, almost verbatim from his predecessor, "A strong dollar is in our national interest, and its value should be set by the market." In fact, his answer was odd, as it did not really address Ms. Bartiromo's question. Rather it seemed like a well rehearsed, almost reflexive response to the mere utterance of the word "dollar." After a brief rally following Paulson's comments, the dollar reversed course and finished lower on the day; so much for the "strong dollar policy." I wish Maria had asked Paulson some follow-up questions, such as what he would actually do if the market produced a weak dollar, or the inconsistencies inherent in his advocating a strong dollar on the one hand, while simultaneously calling for it to weaken against the yuan on the other.

Stay tuned, and stay invested in non-dollar assets, as things are about to get really interesting. I am not sure if it was meant as a blessing or a curse, or if it was even an old Chinese proverb at all, but for better or worse, we will certainly be living in very interesting times. With the right investments at least they will be profitable times as well.

BACKGOUND

The Republic of Singapore is a truly remarkable place.

It is an island city-state, not much bigger than 3 and a half times the size of Washington, D.C. Location: abutting Malaysia, near the Straights of Malacca, in South-east Asia. Population: 4.25 million. Vast majority (more than three-quarters): Chinese; other include Malays (14%), and Indians (8%). Young: median age 37.3 years. Life expectancy: 81.71 years. The official language taught in schools: English. Literacy rate: 94%. Average annual GDP growth 1971-2004: a remarkable 7.4%. Natural resources: zero.

As in the case of Japan, the world's second-largest economy, the key to explaining this phenomenon, of course, is an understanding of the quality of its people. A little bit of history is in order. The island was a comparatively obscure backwater until the arrival in 1819 of Sir Thomas Raffles, an agent for the British East India Company. It became inexorably linked with British colonial history thereafter, becoming a British colony from 1867 until 1946. The Brits developed large deep-water ports, and Singapore became one of the world's most strategically important shipping and trans-shipping ports, routing rubber, tin, and other commodities from south-east Asia to the world at large. All this while developing a sophisticated, educated, and entrepreneurial workforce.

Modern Singapore emerged from the post-World War II tumult in several stages. Following a short-lived period as part of the Malaysian Federation, it became a wholly independent republic in 1965. The legendary Prime Minister Lee Kuan Yew --- now "Minister Mentor" --- stamped Singapore with the characteristics that have made it such a success story.

The Rosetta Stone holding the answer can be found in an annual study prepared by the Heritage Foundation, in conjunction with The Wall Street Journal, labeled the Index of Economic Freedom. The analysis establishes a clear-cut link between the degree of economic freedom and the level of prosperity (or lack thereof) in 161 countries. It measures individual countries' positions with respect to 10 key ingredients of economic freedom, such as: low tax rates, low tariffs, minimizing regulation, limiting government intervention, as well as monetary stability, protection of property rights, and, crucially, open capital markets. Implicit in these parameters is a culture that promotes intelligent risk-taking, self-reliance, entrepreneurship, growth, and prosperity. The annual study provides an excellent shortcut to an understanding of why certain societies are more economically successful than others.

Bottom line: out of 161 countries surveyed in the Index of Economic Freedom Singapore ranks second, after Hong Kong. The U.S. ranks number 9.

So how do these industrious Singaporeans keep themselves busy and prosperous?

Manufacturing accounts for 27% of GDP, with a strong emphasis on constantly moving up the value-added chain. Electronic and electrical products and components account for 40% of manufacturing output; the remainder includes petroleum products, machinery and metal, chemicals and pharmaceuticals, transport equipment, food and beverages, printing and publishing, and textiles. The bulk of economic activity involves the provision of services: shipping, world-wide trading, and a broad range of financial services. Agriculture is negligible.

The political system and institutions are strong, and stable --- perhaps unsurprisingly in light of economic success, the ruling People's Action Party has been in office since 1959. Relations with the U.S., a major ally, are very good. Its open system has attracted capital and know-how from more than 7,000 multinational corporations.

RISKS IN CONTEXT

As we have consistently stressed, as with all foreign investments, U.S.-based participants face risks when investing outside their border, in additional to the usual equity and financial risks. They include currency and political risk. In the case of an open system such as Singapore, while we are aware of these, we would be less concerned about them than about other potential forces external to Singapore itself, such as a global economic slowdown and hence deceleration, or even decline, in world trade. Therefore, individual investors need to personally determine the level of asset allocation and participation that is appropriate.

That said, we are positive on the two candidates suggested in this report. The recent drop in world equity markets has hit emerging markets disproportionately. Such reactions are often exaggerated, creating attractive opportunities among solid, well-managed companies.

SINGAPORE COMPANY #1
COMMERCIAL REAL ESTATE INVESTMENT TRUST

THE COMPANY

This commercial REIT is a leading and rapidly-growing REIT in Singapore, specializing in industrial properties, including business parks and high tech facilities. Analysts at Merrill Lynch estimate the portfolio to be worth about S$2.9 billion at the end of the fiscal year ended March 2006. They expect it to double over the next three years, notably through national and regional acquisitions. The dividend yield is approximately 6%.

REITS represent excellent participation in the growth of the underlying economy, in the manufacturing service and the retail sectors. This is especially true of Singapore, given the small size of the territory and the resulting space shortages and rising values, inexorably pushing activity away from the city center and towards suburban locations.

The long-term influences on the sector are primarily the direction of long-term interest rates, and the outlook for global economic activity.

RECENT DEVELOPMENTS AND OUTLOOK

Like their counterparts elsewhere in the world, share prices of Singapore REITS have been negatively affected in recent periods by the rise in global interest rates. In addition, they have also been hurt by the sharp correction in Emerging Markets equities.

In the case of this REIT, a further factor has been a company-specific issue: the prospect that its parent corporation may be sold, impacting the overall strategy of the company.

Currently, the yield gap is close to the high end of its 1 - 2% premium over the risk-free return provided by Singapore long-term (10-year) bonds. Therefore, we would expect the sector to attract increasing favorable investor attention if and as the recent global interest rate hikes come to an end.

SINGAPORE COMPANY #2
DELIVERY AND LOGISTICS PROVIDER

THE COMPANY

This company is the leading provider of domestic and international postal services in Singapore. It operates over 60 post offices, some 80 postal agencies, 200 automated postal machines, more than 660 stamp vendors, and 800 mailboxes spread throughout the country. As the company describes them, in effect the postal outlets "serve as one-stop convenience centers for postal, agency, and financial products and services", forming one of the most extensive networks of any retailer in Singapore. The company also provides electronic printing, dispatch services, warehousing, and inventory management, commitment centers, and a broad variety of logistical support services.

In short, the company's fortunes are intimately linked with those of the country itself; it is a play on the long-term growth of the economy.

RECENT DEVELOPMENTS AND OUTLOOK

Results for the fiscal year ended March 31, 2006 were solid: revenues increased by 10% and net profits by 12% (vs. 6% in the preceding fiscal year). New initiatives in the pipeline, particularly in personal financial services, and a tie-in with DHL, make management and analysts confident that the outlook remains bright. Estimated 2007 yield is approximately 6%. Note for yield-conscious prospective investors: a one-time special dividend paid in the last fiscal year is not expected to be repeated.

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.

"Six hours is for men, seven hours is for women, and eight hours is for fools."

I heard those words from my father's mouth several hundred times. He was talking about sleep. My father worked harder than anybody I have ever seen. He was out in the fields of our small vegetable farm before I ever got out of bed, and he came home after I was asleep. Our family took exactly two vacations during the 18 years I lived at home. My father even worked half-days on Thanksgiving, Christmas, and the Fourth of July.

He was a man of few words, but he made sure his sons grew up with a strong work ethic. He pushed me to excel in school and to complete all the requirements to become an Eagle Scout by the time I was 13. Admittedly, I didn't like the demands at the time, but that work ethic has paid off in spades as an adult. Today I own three businesses and consider myself both successful and very blessed. I regularly put in 80-hour workweeks, but I still feel lazy compared to my father.

Of course, my father isn't the only person who makes me feel lazy. Every time I go to Asia, I see entrepreneurs, business owners, and other regular-but-ambitious people working like dogs to get ahead in life.

They've watched MTV, Beverly Hills 90210, and Lifestyles of the Rich & Famous ... they're eager to grab their personal piece of the American dream ... and they're willing to work hard to get it.

I've said it many times before, but the Asian economic miracle isn't because of government policies, big corporations, or good luck - Asian economies are going gangbusters because of ambitious, hard-working citizens.

These collective efforts are propelling Asian economies higher and higher. The signs of explosive growth are everywhere. But nowhere is the growth more visible than in China. Here are just five recent signs:

Sign #1: Exports skyrocketing. China's General Administration of Customs reported that the value of the country's exports ballooned to $428.5 billion in the first six months of 2006. That's a 23.4% jump from the first six months of 2005!

Sign #2: Trade surplus exploding. In June, China's trade surplus increased to a record $14.5 billion - a 49% rise from the same month a year ago. For the first half of 2006, China's trade surplus was $61.4 billion. And for the full year, that surplus should expand to about $140 billion, easily surpassing last year's record-high $101.8 billion.

How does that stack up with growth back here in the U.S.? Based on the first five months of 2006, our trade deficit is running at an annual rate of $763 billion, higher than the record high deficit of $716 billion last year.

Sign #3: Bulging chest of reserves. You know what happens when you export more than you import? You end up with a big war chest of foreign currency reserves. Last Wednesday, state media reported that China's foreign currency reserves increased by another $30 billion to $925 billion as of the end of May.

In a matter of months, China's reserves could exceed $1 trillion!

What do you think happens to all those dollars? They end up as more fuel for China's growth engine. By the way, China - not Saudi Arabia or any OPEC member - is now the largest holder of foreign currency reserves.

Sign #4: Double-digit GDP growth. According to China's National Development and Reform Commission forecast, the Chinese economy expanded by 10.4% in the first six months of the year. For all of 2006, the NDRC expects GDP to rise 10.2%.This isn't an anomaly, either. China's GDP gained 10.3% in the first quarter of 2006 and more than 10% last year.

Sign #5: A cement foundation. Want concrete evidence of China's growth? The China Cement Association reported that China produced 429 millions tons of cement in the first five months of 2006. Not only is that a new record, it is a stunning 20.4% increase over last year, and the fastest increase in half a decade.

When an economy is healthy, all sorts of new construction sprouts up. That why it's often said that economies are built on a cement foundation. If cement sales are any indication, China's economy is rock solid.

All This Hard Work Is Paying off for Citizens and Investors

All of this growth will ultimately create a new class of successful Chinese citizens. In fact, a new survey from McKinsey & Company forecasts a dramatic increase in the number of urban successful, middle-class Chinese.

Right now, 77% of Chinese families make less than $3,128 a year. However, by 2025, McKinsey expects only 10% of Chinese families to live on incomes below that mark. And McKinsey estimates that, just five years from now, there will be 290 million lower-middle-class citizens, with $60 billion of purchasing power.

All this increased power will only further strengthen China's economy.

Don't get me wrong: I'm not saying Americans are lazy. I have many friends who work as hard as anybody in the world. I am saying that the most explosive growth is happening across the Pacific because an army of ambitious Asians are working like crazy to duplicate the American dream.

Another thing: I'm not saying you should completely avoid U.S. stocks. There are some fast-growing U.S. companies. Ironically, some of the fastest growing ones derive a significant part of their revenues from Asia. If you're worried about the domestic stock market, remember that one of the very best defenses is owning only companies that are growing so fast that even a difficult market can't hold them back.

Remember, earnings drive a stock's value. Show me a company that doubles its profits and I'll show you a company that will increase in value no matter what the market's doing.

Bottom line: Right now, your odds of finding companies capable of doubling their profits are much, much higher in Asia than they are in the U.S. That's not a knock against U.S. companies - it's just a testament to the rapid growth happening in China.

Tony Sagami has a rare firsthand knowledge of Asian culture, business, and government that makes him the perfect guide to help investors successfully navigate and invest in the Asian economic miracle. Tony is the editor of Asia Stock Alert. His newsletter specializes in the fast growing economies of Asia. Go to http://www.asiastockalert.com for subscription information.

This Newsletter is a service of Euro Pacific Capital Inc.