November 8, 2007

8 From Main Street to Wall Street
         Peter Schiff, President and Chief Global Strategist

8 Featured Investment Recommendations
         Natural Resource Opportunities

8 What's Wrong with the U.S. Dollar?
         Axel Merk, Guest Columnist

8 Euro Pacific In The News

8 Previous Editions of Our Newsletter

Recent reports of better than expected job growth and a 3.9% gain in 3rd quarter GDP have spawned much talk about how the resilience of the American consumer is enabling the country to weather the subprime storm. In reality, the unfolding financial crisis on Wall Street is in fact a direct result of the deteriorating economic conditions on Main Street.

The recent rosy GDP data was made possible only by reporting annualized inflation for the quarter at the absurdly low .8%. This historically low inflation rate makes nominal GDP gains appear to be substantive. Similarly, the October payroll report relied on significant job growth that the government claims took place in construction and financial services! Given all the job cuts in these two sectors, such assumptions are clearly absurd, and paint an unrealistically sunny picture of the U.S. employment landscape.

The problems for the major financial firms such as Citigroup and Merrill Lynch are rooted in Main Street's inability to repay mortgages, and the fact that too many homes are worth less than their underlying loans. With housing prices falling, adjustable rates resetting higher, lending standards tightening, credit card debt mounting, and wage growth failing to keep pace with living costs, the American consumer is finally reaching the end of his rope. Without the ability to take on additional debt, he simply can no longer keep spending.

As Wall Street is beginning to fess up to huge losses, similar "write-downs" are becoming evident on Main Street. Just like the big banks padded earnings by collecting large fees on securitized loans they knew were riskier than advertised, U.S. GDP has been padded by consumers spending based solely on borrowing. As the debts mount and servicing costs soar, there is simply no way for consumers to keep spending. Just like Wall Street's past profits sowed the seeds of today's losses, the boost to past GDP provided by excess consumption will lead to big declines in future GDP.

The dramatic collapse of the U.S. dollar, and the Fed's failure to respond, provides fresh evidence of American economic weakness. If the Fed believed that the economy was as strong as government statistics suggest, it would have the flexibility to reverse the dollar's decline. The only reason for their inaction is that the Fed is willing to accept higher inflation and a weaker dollar to contain the recessionary forces clearly building on Main Street.

The dollar's fall is now so pervasive that the world is walking away from it en masse. The story has even been given some sizzle with the announcement from Brazilian supermodel Gisele Bundchen that she will no longer accept modeling contracts in dollars. Never seeing a cloud attached to any silver lining, knee-jerk bulls such as Larry Kudlow have suggested that Bundchen's decision is a contrary indicator that the dollar has bottomed. In truth, the only notable bottom here belongs to Gisele herself.

Supermodels are not traders and her dollar bearishness should not be confused as a legitimate contrary indicator of market sentiment. Her demands simply reflect a rational decision not to be paid in a currency that's future value is in doubt. Gisele's lack of confidence in the dollar is symptomatic of a serious problem, especially since confidence is the only backing the dollar has. Should Gisele's concerns become the equivalent of a new fashion trend, the problems on Main Street are about to get a lot worse.

Despite the fact that my critics (such as Tobin Smith, on Fox News' Bulls and Bears last week) point to phony government statistics to discredit my economic predictions, the actions in the markets continue to validate every single one of my forecasts. For investors, the urgency to divest themselves of U.S. dollar denominated assets has never been greater. I have repeatedly warned about this in the past, and I will keep doing so until every last subscriber to this letter protects his wealth or the dollar loses so much value that those who have not done so will have no wealth left to protect. For now, the decision of which category you fall into is yours to make. If you do not choose wisely now, the market will decide for you, and I can assure you that you will not be happy with the outcome.

Our 2 new recommendations are both in the natural resource area. One is primarily a silver mining company in Mexico, the other a nickel mining company in Australia.

Company Number 1

Cortez and the Spaniards landed in what became Mexico in 1519 and found that the Aztecs had been mining gold. Some Mexican mining locations have been producing gold and silver for over 500 years. Mexico is rich in natural resources, particularly precious metals. The country produces its own miners and engineers, and has infrastructure in place to process, refine, and ship production.

The Mexican peso has been flat against the dollar since 2003 while most natural resource currencies (for example Norway's Krone) are up 30% since then. We are very bearish on the dollar and recommend clients move a significant part of their assets into non-dollar denominated investments. Mexico may be a nice addition for clients seeking natural resources, particularly gold and silver, in a currency that has not yet moved against the dollar.

Our first recommended company is the world's top producer of refined silver. They are a large mining group with integrated operations in smelting and refining non-ferrous metals, specifically lead and zinc, and producing chemicals, namely bismuth and sodium sulfate. The miner provides for its internal electrical needs with its own thermoelectric plant. It has a port for shipping chemical products and a railway line for carrying raw materials and finished products. The mines are located in Mexico.

This is an established miner with outstanding mining properties.They started mining in 1887, and have mined over 44 million ounces of silver and 330 thousand ounces of gold annually for the last 5 years. They are on target to mine that and more in 2007. Silver has been 34% of their sales revenue, gold 26%, zinc 16%, and lead 8%. Sales were Peso 39.8 billion (US$ 3.6 billion) in 2006. Sales revenue was about 25% higher in the first half of 2007 over that of the first half of 2006.

The stock trades on the Mexican exchange in board lots of 100. Its 52 week high was Peso 252 and its low was Peso 85. While the shares trade today near their all-time high, we are still eager buyers. Though we would rather buy things at a discount, and gold is up 200% since 2001, we think the bull market in precious metals has years to run. We like being a part of this bull market in silver with a proven producer.

As of June 2007 they reported a ROE of 29%. They pay a marginal dividend. Market cap about US$9 billion. US $ value about $24.

Company Number 2

The second company is a large miner producing nickel and cobalt from mines in Australia. This mining company first listed its shares in 1994. We also like buying companies selling raw materials to the Chinese. China continues its quality-of-life upgrade at break-neck speed, devouring all the natural resources it can. Our second pick sells two essential commodities to China from the safety of Australia.

Nickel is used for plating other metals, and in the production of steel. Cobalt is used in the production of wear-resistant, high-strength alloys.

From 2002 to May of 2007, nickel rose 6 times in price. Since then, it has dropped off 40% since then. Correspondingly, the stock price of the second company dropped by a similar percentage.

Jubilee Mines, another nickel mining company in Australia, recently announced that Xstrata PLC made an offer to buy all of its shares for cash. Xstrata sated that they were buying Jubilee, in part, to get a foothold in the Australia/Southern Asia area. Jubilee's Stock price was up approximately 300% since January 2004 to the date the takeover was announced. Meanwhile, our pick, which is very similar to Jubilee, was up only around 100% over the same period. Jubilee had produced a 45% return on equity from 2004 until its takeover, similar to the results our pick is seeing. Therefore, given the similarities between this company and Jubilee, we think there is similar upside to this new recommendation.

Resource companies, while having potential for substantial gains, also have the possibility of extreme volatility and risk of loss. Investments in mining companies, by definition, must be considered speculative. Much of the information above has been supplied by the company. Euro Pacific Capital is very familiar with this company and its officers, and feels confident in making this recommendation for suitable investors. However, Euro Pacific has not independently verified the information supplied by the company, and cannot 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, Euro Pacific cannot be held liable for errors, omissions or inaccuracies. This material is for private use of the subscriber; it may not be reprinted without permission.

© Euro Pacific Capital Inc. All rights reserved. 1-800-727-7922
10 Corbin Drive, Darien, CT 06840

The U.S. dollar has fallen almost 60% versus the euro this decade. We provide a macro framework why this trend may continue.

Nowadays, we hardly pay anything in cash; we purchase just about everything on credit. The Federal Reserve (Fed) loves this as it makes the economy more efficient: your wages drive more economic growth when you only spend $200 for a car lease payment, $20 on your mattress installment and have the remainder left for other expenses. However, that approach makes consumers far less "shock-resistant" if your stream of income is interrupted.

After the dot-com bubble burst, consumer spending was driven by low interest rates and taxes. But even as interest rates started to rise again, access to money was abundant. As the Fed allowed credit - and with it money supply - to balloon, economic growth continued. As much of the growth encouraged consumer spending and was based on borrowed money, the trade and current account deficits escalated. The current account deficit reflects the amount foreigners need to buy in U.S. dollar denominated assets to keep the dollar from falling, about $3 billion dollars every single business day. Note that foreigners do not need to sell the dollar for the currency to be under pressure.

Credit expansion was rampant, not just for consumers: as risk seemed absent, speculators took out ever more leverage in the markets. This summer proved that the "risk-free" environment was not sustainable. As fear returned to the markets, speculators needed to pare down their leverage; those who used unsuitable collateral for their leveraged bets had serious liquidity problems. But just as money was flowing into just about every asset class until this summer, this credit contraction extends to all areas of the economy and in particular also to the consumer.

As the U.S. economy slows and foreigners look for more attractive places to invest their money, it may add to the pressure on the dollar. The Fed is rather concerned about the slowdown induced by the credit contraction; yet, the Fed is less relevant these days. Because it allowed the markets to drive money supply out of control, it may not be powerful enough to print money quickly enough to keep the economy afloat. Worse, lowering interest rates does not provide credit to those who need it most. In this context, lowering interest rates does not help economic growth, but only makes the dollar less attractive.

Looking ahead, if the Fed and the Treasury follow through with their promises to fight market forces, a lot more trouble may be ahead for the dollar. This risk is exacerbated if a further dollar decline is in the Fed's interest. Fed Chairman Bernanke has made it clear in his discussions of the Great Depression, that a weaker currency would have alleviated the hardship on the people. He may intentionally use the weaker dollar in an effort to boost U.S. economic growth. Such growth may prove short-lived if inflationary fears and an absence of foreigners in the U.S. debt markets drive up long-term interest rates.

At the Merk Hard Currency Fund, we like Europe because it may prove to be the anchor of stability in the turmoil we see down the road. We also like Australia and Canada, as their resource-based economies may continue to benefit from the U.S. and Asian attitude to grow at any cost. We have stayed away from Asian currencies, including the yen, as we do not trust that central banks there won't engage in competitive devaluation practices. Cheap currencies have caused over-production in much of Asia; these economies are heavily dependent on exports to the U.S. They face a double whammy to their domestic growth as the U.S. economy slows down just as upward pressure on their currencies increases. This doesn't mean there is not a speculative potential in these currencies.

Euro Pacific Capital, Inc., offers the Merk Hard Currency Fund. To learn more about the Fund, please contact a Euro Pacific broker and visit the Fund's home page at www.merkfund.com. We also encourage you to sign up for Merk Insights, a free newsletter written by the Fund's portfolio manager Axel Merk.

Axel Merk
Manager of the Merk Hard Currency Fund, www.merkfund.com.

This Newsletter is a service of Euro Pacific Capital Inc.