There can be little doubt that 2008 was a nightmare for investors of all outlooks. In the midst of the carnage, it seemed to make little difference whether your portfolio rested on bedrock of sound economic principles or if it was based on nothing but hot air. However, as I pointed out at the time, the mad scramble of last fall was perhaps the largest head fake in market history. In a bizarre outcome, investors holding gold, commodities, foreign currencies, and foreign equities suffered the biggest short-term losses. Yet, the rally of recent months in those markets likely indicates that last year's violent downward move was simply a correction in ongoing long-term bull markets. But with the wounds so fresh, investors remain extremely cautious. The fear has created a 'wall of worry' that is difficult for these markets to scale.

When all asset classes fell simultaneously in 2008 (with the exception of U.S. Treasuries), most market strategists jumped to the erroneous conclusion that all asset classes were equally vulnerable and equally flawed. I was virtually alone in insisting that the selloffs in commodities, foreign stocks and foreign currencies were not justified by the unfolding financial crisis in the U.S. Recent market action confirms my thinking.

The most recent sharp selloff in stocks, particularly the near 200 point drop in the Dow Jones on September 1st, produced only a slight rise in the dollar and virtually no decline in the price of gold. However, many traders likely played the markets like we were still in 2008. They bought dollars, and sold precious metals and mining shares, in anticipation that both foreign currencies and gold would follow the equity markets lower. When these patterns did not emerge, shorts likely looked to cover their trades. The dollar quickly surrendered its small gains and within a few days made new lows for the year, while gold and silver prices surged, sending mining shares to their highest levels of the year.

Since most investors simply take their cue from whatever image is fading in the rear-view mirror, many expect that if the current 'green shoots' wither, the resulting 2009 sell off will look like the one we had in 2008. Nervous investors rightly concerned about the U.S. economy are hesitant to exchange their dollars for gold or foreign stocks for fear of a repeat of 2008. Therefore, the dollar will need to fall a lot further and gold and silver prices rise much higher before such investors regain the confidence of their prior convictions. This unwarranted 'fear premium' built into the dollar will likely work to the advantage of those still trying to get rid of their remaining dollar holdings.

It is comical to watch so-called experts on CNBC trying to rationalize gold's gain. With their nearly universally held conviction that here is no inflation anywhere in sight, and that economic recovery is already underway, they must seek out alternative explanations for gold's strength. As a result, they conclude that gold's rise must simply be a fluke and that it bears little significance for the U.S. economy or financial markets. Of course, since gold is a leading indicator of inflation, by the time inflation is evident in lagging indicators like the CPI, it will be much too late for these confused investors to do anything to protect their wealth.

I also find it laughable that most market pundits attribute the fall in the value of the dollar to an increasing appetite for risk. The theory is that as investors become more confident in growth, they are willing to assume more risk, so they sell the dollar and buy other currencies. However, this explanation has it backwards. The dollar is the risky currency, and investors who are dumping dollars are in search of safer havens.

These are the same pundits who first assured us that the economy was sound, just before it collapsed, and who subsequently proclaimed that the dollar would rise as the U.S. led the global recovery. Instead, the dollar has resumed its decline, and the U.S. lags the global recovery. In fact, the endless stimulus and bailouts enacted by Congress and the new Administration ensure that our economy will not recover anytime soon.

In the meantime, stock market bulls will continue to use the renewed strength in stocks to discredit the bears. They will likely accuse us of missing out on the rally in stocks. While such allegations may apply to a few misguided bears who are cowering in the perceived safety of U.S. dollars, or worse U.S. Treasuries, the smart bears are not missing out on anything, as they enjoy much stronger rallies in foreign stocks, mining stocks, precious metals, and commodities in general.

As investors we are indeed fortunate that so many others are so clueless regarding both the dollar and the U.S economy. As a result, assets such as gold, commodities, and foreign equities will continue to be under-priced. Though the ride will likely be bumpy, I believe the final destination will more than compensate for any discomfort.

In a volatile environment, it becomes very difficult to find investments that may offset volatility. To address this concern, we present you with two dividend-paying companies in the utilities sector. These companies would serve as part of a 'core portfolio' to help provide income. Since they are overseas, one in Hong Kong and the other in Australia, they should benefit from a falling U.S. dollar. At the same time, we expect their home economies to continue steady growth, while the U.S. economy stagnates under increasing taxes, regulation, and public debt. With current yields of approximately 3% and 14% respectively (Bloomberg, 09/18/09), these stocks are income-generators.

We believe U.S. securities don't offer the values we have found overseas. Our most defensive pick offers a lower yield than our second selection. If U.S. stocks were growing like they were in the 90's, then perhaps the lower yields domestically would make sense. But for the last decade, foreign stocks like those discussed below have outperformed their U.S. counterparts (Source: Bloomberg).Finally, the continuing decline in the US dollar, which is central to the investment strategy here at Euro Pacific, should add a third chapter to this story. Owning non-dollar assets should insulate you from inflation at home. So while we expect these companies to grow faster and yield more than their US counterparts, they are now also getting a boost from the strengthening Australian Dollar and Chinese Renminbi.

This is a difficult time for many investors. But the courageous and thoughtful have many opportunities to help preserve their wealth and build for the future. Start your search here.

Company #1

Company Description

This Company is a Hong Kong-listed investment company focusing primarily on infrastructure and real estate. The conglomerate has six business segments: water distribution, property investment and development, department stores, hotel operations and management, electric power generation, and toll roads and bridges. It is one of the largest listed water-supply operators in Asia, owns one of the largest water transmission systems in China, and provides around 55% of the water supply needs in Shenzhen and Dongguan on the mainland. As an important "'red-chip" company, it also has investment stakes in properties including a comprehensive shopping mall; office and hotel complex; four coal-fired power plants in the province; two toll roads and three toll bridges; as well as self-owned department stores and a hotel chain management business.

Investment Highlights

In a world seeing stress on global supplies of clean water, the water business would appear to be a good, long-term growth area, providing defensive earnings. This Company generates roughly 70% of its net profit from supplying water to Hong Kong, Shenzhen and Dongguan, which we believe is an excellent defensive business in an economic downturn. Due to the new pricing agreement approved by the Hong Kong Legislative Council, the fixed water fees from Hong Kong will increase by 18% in 2009 and over 6% annually in 2010 and 2011. Thus, we believe the Company's future earnings prospects are bright with limited downside risk.

The Company's others assets provide additional upside earnings potential. Besides the earnings from the Company's core water business, its real estate and infrastructure investments add further attractive potential to the overall mix. The properties are located at prime locations. A newly launched property has already achieved an impressive 80% occupancy rate with high-end tenants. We expect it to generate steady rental income, more than enough to offset a possible rental decline at the abovementioned mall complex in 2009.

Disposal of non-core assets could be a potential catalyst. Non-core assets represent about 13% of the value of the Company and could provide a catalyst for the stock if market conditions improve and the Company is able to dispose of these units. Management has expressed a desire to spin-off the hotel unit. We also would not be surprised to see the Company dispose of its department store business or restructure its power generation and road development businesses.

Payout ratio reduced to 33% as the Company channels cash into new investments. This Company cut its dividend payout to 33% in 2008 from 40% in 2007. We believe this reduction was a sensible move given today's difficult market condition. The Company now has increased funds available to make acquisitions at more favorable prices. We think this is a smart move.

Conclusion

The Company is expected to distribute about HK$0.12 in 2009, putting the stock on a dividend yield of about 3% (Bloomberg, 09/18/09). We believe this company is an excellent core position in a lower-risk portfolio. A good yield, which we expect to increase in the future, plus solid investments in water, infrastructure and real estate, gives this company a positive outlook.

Company #2

Company Description

This company holds a sizable interest in three electricity distribution service providers in Australia: one distributes electricity to the inner suburbs of Melbourne, another distributes electricity to regional Victoria and the western suburbs of Melbourne, and a third distributes electricity throughout South Australia.

Investment Highlights

We like this Australian utility for its earnings from stable, regulated assets as well as its attractive, cash-covered dividend yield of approximately 14% (Source: Bloomberg, 09/18/09). In the current environment, where earnings visibility is hard to find, we feel that the Company remains a good defensive offering.

The company has government-regulated pricing locked in until 2010, which we believe largely protects it from the GDP cycle and against rising debt costs. Additionally, we believe that most of the negative news regarding potential regulatory resets was priced into the market back in December 2008 when the Australia Energy Regulator issued its draft decision regarding setting the weighted-average cost of capital in the regulated revenue formula.

Additionally, the Company earns substantial revenue from so-called 'unregulated' activities. While a portion of this income is driven by the mining and infrastructure boom, much of it is actually regulated expenditure, one-step removed. The Company provides operations and maintenance services to other electricity transmission networks on long-term contracts, which is really just the regulated operating expense and capital expenditure of these two companies.

Conclusion

With a dividend yield of approximately 14%(Source: Bloomberg, 09/18/09), we believe this company is another good core foreign holding for investors looking for healthy yield in a lower-risk environment.

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

There's a lot of noise suggesting the U.S. economy has bottomed and the stock market is beginning a new bull move. But that's just what it is: noise and bull. The one asset that will likely perform well in any scenario, both in the short term and longer term, is gold, and it should be part of a portfolio now for every investor.

Gold is typically weak during the summer

Summer is traditionally a soft period for gold, with the metal peaking in May and then declining for the next couple of months. Gold recently peaked at $983, right on schedule, though the decline was modest, bottoming in the low $900s in early July before recovering to today's $1000+. Indeed, the action of the past month and a half is strong, with an upward channel of higher peaks and higher lows. The correction is over. Gold stocks also tend to be weak during the summer, but typically lag bullion in this seasonal cycle, with the juniors especially weak through the end of August.

There are reasons for these seasonal patterns: gold itself responds to the various major global holidays, with their associated heavy gift buying, from Ramadan beginning (this year) at the end of August through to the Chinese New Year in February. As for junior gold stocks, with families on vacation in August, retail buying in this sector dries up. This, of course, presents an opportunity.

Why hasn't gold performed better?

I am looking for a stronger-than-usual move starting in the fall, fuelled by the ongoing decline in the dollar and possible central bank accumulation of gold for reserves. Some people are wondering why gold has not already performed better. After all, we're in the midst of a global financial and economic collapse, and an unprecedented monetary expansion, against the background of ongoing geopolitical turmoil. Frankly, there are many unrealistic expectations surrounding gold and widespread misunderstanding of gold's role. Gold is primarily insurance and an asset preserver.

Whether you look over 10 or 50 or 100 years, gold performed that function very well indeed. And since last September, when Lehman went bust and the credit crisis blew wide open, gold has also performed well, moving up and outperforming U.S. stocks and foreign currencies.

Notwithstanding those caveats about gold's primary role, the metal still has a lot of catch-up to do for the last 30 years of money creation. I fully expect it to move significantly higher in the medium and long term, after a little more back and forth, though at higher levels. The $1,000 level is the big round number for gold, just as 10,000 was on the Dow, or 100 for the yen; markets frequently take a while to break through those big round numbers. Now that gold has broken through the $1,000 barrier convincingly, I believe that the next stop is $1,200.

Inflation ahead?

The price depends to some extent on what happens in the broader economy. Clearly, a decline in the dollar will, other things being equal, see the price of gold, and other assets priced in dollars, higher. Beyond that, strength in the economy, inflationary expectations and movement in interest rates, will determine when and how far gold moves.

If we've seen the lows in the U.S. economy and by the end of the year it is clearly recovering, then I am convinced that that recovery will be accompanied by accelerating inflation. In that scenario, both stocks and gold will perform well. Stocks frequently do well in an inflationary climate, at least in nominal terms if not necessarily in real terms.

But such a scenario is unlikely. More likely, is that the U.S. economy will slide backwards and remain very sluggish and U.S. stocks will respond to that. We'll likely see a declining dollar, low interest rates and accelerating inflation, though not imminently, in my view, and that is the ideal environment for gold.

But in either scenario, or indeed in a deflationary collapse, gold should outperform domestic stocks fairly significantly.