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August 18, 2003

August 18, 2003

We find ourselves in the August doldrums. Things are fairly quiet for US and European stocks. Many investors and traders are on vacation, yet there is plenty of action in other areas.

Where The Action Is

The action is in Asian markets and most especially, in the gold market. Gold has been acting very well. During a time of year when it is often seasonally weak, Gold has been rising steadily and the gold shares have been breaking out to new highs. In our last letter we mentioned our three favorite gold shares; Newmont Mining among the large capitalization stocks, Agnico Eagle Mines among the middle capitalization companies and Tan Range Exploration Corp among the small capitalization companies. Both Tan Range and Newmont have broken out to new highs. Agnico has not yet broken out but we continue to own and like it. We see gold and the gold shares moving much higher over the coming months and years. There will always be short-term fluctuations, especially during vacation months like August. Long term however, we are very optimistic about gold and gold shares.

In this area we are advised and mentored by two remarkable sources. Jim Sinclair, the brilliant economist and financial genius who, in our opinion, understands world finances as well as any man alive, and the equally brilliant Harry Shultz, the courageous, bold, and prescient thinker, writer and technician who has (via his Harry Schultz Letter) been a voice for rational economic and political thinking for many decades. I hold these two great minds in very high esteem and I am thrilled that we all agree that gold will move substantially higher in the coming years. Here, at Guild Investment Management, we have a plan to capitalize on this gold price rise for our clients.

Investors who want to get brilliant insights on world economics finance and technical advise and gold commentary can read Jim Sinclair’s www.JSMineset.com web site. For unparalleled info on the best gold shares to buy and how to find them investors can subscribe to Harry Schultz’ Gold Charts R Us chart service. We religiously read Jim’s web site and we subscribe to Harry’s HSL and his Gold Charts R Us services and use them extensively to develop our thinking. In addition, we speak to both of them and communicate via email. To subscribe to Harry Schultz’ services investors can visit www.hsletter.com.

Today’s Opportunities

The other area that excites me today is the prospect for Asian stocks. The current expansive monetary policy being pursued by Japan, the US, Europe and others is creating a liquidity bubble in Asia. A lot of this liquidity being injected into the world’s financial system is ending up in Asia when those countries export goods to the developed countries of Europe and North America. Further acceleration of Asian monetary growth is created by the foreign direct investment used to build new auto parts plants, consumer goods factories, and many other types of industrial plants in China and other parts of Asia.

This liquidity is finding its way into Asian stock markets creating a lot of price appreciation and could eventually create a bubble in Asian stock prices. However, there is still money to be made in Asian stocks now as their valuations are historically low and their growth rates appear to be accelerating. Much of the expansion in Asia will be a function of demand for technology equipment in the developed nations. When this demand appears it will stimulate the demand for financials, energy and raw materials.

We currently like Chinese internet service and content providers, including Sohu and Netease. Further, we like Indian software service providers like Satyam Computer Services, Chinese oil and refining companies PetroChina and China Petroleum and Chemical, a number of banks, brokers, technology and energy companies, especially in China, Taiwan, Korea, India and Thailand. There is also an opportunity for investors to participate in the current Asian boom by owning IShares which are participatory index funds which duplicate the market action in Korea, Taiwan, Japan, Hong Kong and other Asian countries. Aside from Poland and Turkey, which are doing well, much of Eastern Europe is not doing as well as Asia. It is apparent that the low costs in China and other areas are creating problems for the higher cost producers in Latin America and Eastern Europe.

Interest Rates

This is a period of rapid change for the world. The economic expansion appears to be just getting under way. Why is it then that interest rates and stocks like metals and energy, which usually rise late in the economic cycle, are rising now? Could this mean that 22 years of lower trending interest rates, and the effects of constant derivative writing focused on those downward trending rates, is being reversed? If so, this means that assets which have been hypothecated to allow borrowers to borrow at tiny interest rates must be purchased to repay creditors. Could this be the reason that interest rates are rising so early in the economic cycle and commodity prices have begun to rise? Do bond buyers fear defaults among derivative holders? Or do they see the need to bail out certain derivative holders and are thus asking for much higher interest rates?

Most people will be saying US interest rates, which have skyrocketed in the last few weeks, have risen because those who will purchase US bonds to finance the deficit are demanding higher interest rates in order to buy an ever increasing flow of bonds being issued to finance the immense US budget deficits. Undoubtedly, this is part of the reason for higher rates. However, we should hope, even pray that derivative problems are not a big part of the reason for the rapid run up in rates. It may well turn out that they are rising partially in response to problems in the derivative markets where, to put it mildly, many participants have unbalanced portfolios. If we are correct about this, we can expect much higher prices for precious metals and a much lower dollar over the long run.

Currencies

What about the dollar? In recent weeks it has risen a little versus the other major currencies, we see this as a normal consolidation pattern after a large decline. We believe that the dollar may well move sideways for a few more months. Longer term, in our opinion, there is no reason to believe that the dollar will not fall further. The problems surrounding the trade, the budget, and the balance of payments deficits, and continued economic dislocations will again come to global awareness and send the dollar lower.

The dollar has risen about 6% while interest rates on 10 year US Treasury paper have risen by a very large percentage. Ten year rates have gone from 3.15% to 4.5%, an increase of about 1.4% or over 40% higher than 3.15%. Why would a forty percent rise in 10-year rates lead to only a 6% rise in currency value? It is true that there are many other variables entering the valuation of a currency, but by any measure, the dollar has not done much rallying given the size of the interest rate increase. We expect a sideways dollar for a few more weeks or months and then another substantial decline in the US currency.

So this is what we think. Agree? Disagree? Please let us know if you wish to discuss anything in more detail.