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December 22, 2003

December 22, 2003

Well, everybody seems to be jumping on the bandwagons we mentioned in our letter of December 6, 2003. In predicting our outlook for 2004, we said that base metals will be a key area, along with precious metals, energy and foreign currencies as the best investment groups in 2004.

We still believe that the US dollar has a substantial amount of depreciation ahead of it. Saying this, we should also point out that many brokerage house strategists have jumped on the weak dollar bandwagon in recent weeks. When we first began to recommend that foreign currencies would outperform the dollar many months ago, it was not a popular position. Today, after a very substantial dollar decline it has become too popular for our taste.

Our contrarian nature, plus a number of unsettling negatives for one or two foreign currencies, have led us to expect a rally in the dollar that could start even before Jan 1, 2004. We believe that this rally will be temporary, but it could take the dollar up by four to six percent versus the Euro, Yen and Swiss currencies rather quickly.

Longer term, we see the dollar moving lower. We plan to use this dollar rally as an opportunity to take positions in investments which move contrary to the dollar.

ENERGY

We continue to be positive on energy. The natural gas area, which we have liked for a long time, could underperform other energy areas for a few months, as cold weather will be ending in 2 or 3 months and markets begin to discount future economic events. Coal, oil and natural gas continue to be excellent long-term themes for investment and we have commitments in all three areas.

As economic activity improves, demand for all three will rise. Meanwhile, the growth of China, India and neighboring countries has increased demand substantially in all three categories. Supplies continue to be tight as natural gas and oil are being consumed at a rate much faster than they are being discovered in North America.

It is more than obvious to the reasonable observer that the Saudis, and their fellow oil producers who export to the west, have not been thrilled to see the buying power of the dollars they receive for every barrel of oil fall by 25% in recent months. It is further obvious that they have set a new price band for oil between $28 and $35 per barrel up from $22 to $28. Political instability in Venezuela, and the power struggle between oil-based oligarchs and President Putin in Russia have conspired to make the reliability of existing oil supplies suspect.

Another opportunity related to the tightening of the energy markets that we have identified and participated, is the coal and grain transportation via railroads. We own stocks of some railroad companies that serve the high grade eastern US coal fields.

TRANSPORTATION

While we are on the transportation theme we should say that we have seen demand for trucking services and for heavy-duty trucks themselves ratchet upwards as economic growth has begun to rise. We own companies in both the trucking and the transportation equipment sectors.

PRECIOUS METALS

After rising for months, the precious metals prices continue to astonish naysayers and please believers with their steady price uptrend. If the dollar puts on a concerted rally, we could see some temporary modest correction in precious metals prices; but only if the dollar rises versus all currencies. If the dollar rises only against the Euro, and possibly the Yen, we expect gold to show very little weakness. We continue to hold both gold and silver mining shares and expect to sell our core positions at much higher prices.

BASE METALS

The base metals part of our portfolio has done astonishingly well in December 2003, and has caused us to enjoy portfolio appreciation for the month to date. We do not know how long this rapid rise in base metal shares will continue. We would prefer to see a slower steadier uptrend that lasts for years as opposed to a rocket ride that ends in a few weeks or months.

We anticipate that soon the base metals will have a minor correction, and that the correction will be followed by another move up. We continue to be very bullish on the prospects for base metals and own shares in the nickel, zinc, steel and copper mining areas.

SUMMARY

We are still enthusiastic about precious metals, base metals, energy and foreign currencies and we are still bullish on China and India. However, we think the enthusiasm for some of the areas we have been investing in has gotten overdone. For example, you can’t open a magazine or financial newspaper without hearing about how the dollar will decline or about how India and China are the wave of the economic future. We have been saying these things for years and we are a little concerned that too many latecomers are piling into these investment areas pushing prices up too fast for the fundamentals. We expect the dollar to rise for a short time and then begin to decline again. We continue to believe that if we are patient we will be able to add to our positions in all of our favorite areas on dips in coming months.

Please accept all of our warmest wishes for the happiest of holiday seasons.