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GLOBAL GEOPOLITICS WORSEN

GLOBAL GEOPOLITICS WORSEN

WHY WE LIKE ENERGY AND GOLD LONGER TERM AND NOT JUST FOR THE MOMENT

As we are fond of repeating, we have liked energy and gold for several years. As of today, we continue to like both of them as long-term investments.

ENERGY

On Monday May 1, 2006, the Wall Street Journal had an interview with an energy fund manager named Dan Rice. The article was entitled “Mr. Rice’s Wild [but energizing] Ride” and it was written by Gregory Zuckerman.

I liked the article because Mr. Rice agreed with many of my opinions. He and I both agree that currently the valuation of oil, oil service and natural gas stocks assume an oil price of about $45 per barrel, and a natural gas price of about $ 6.25 in the US.

The question an investor must ask oneself is: How much do I think oil and gas will average in the US for the next 5 years? I have been asking myself that question for several years, and my answer is oil will average about $ 65 per barrel over that period with a range of well over $100 at the top and a low of about $50. I can make a case for much higher prices, but I am being conservative.

If prices of energy develop as I expect, we will have oil company stock prices rising by 50%, and natural gas stocks rising by about 25%. Foreign gas stocks could double, as could some faster growing foreign oil companies. There is a glut of natural gas in the US and Canada, but it is in short supply in Europe and parts of Asia.

During the last couple of years, a pattern has developed whereby oil and gas stocks have two periods of decline during the year. During these corrections, the stocks have been declining about 20% or more each time. It is during these periods of correction, that we plan to add energy stocks to our portfolios.

COAL

As I have written in several letters, coal remains the best source of alternative fuel, and many new technologies are developing, to clean up the US and the world’s huge coal reserves.

We own coals stocks and are looking to add on price corrections. Coal remains an integral part of our energy portfolio.

THE SHIA – SUNNI FISTFIGHT

Lebanon and Bahrain have a Sunni-Shia rift. Much of the Iraq war is about the Shia-Sunni rift. Most of Mid East oil is on Shia occupied land, in countries where Sunnis are in control. Thanks to the wise Larry Jeddeloh of the Institutional Strategist, for this insight.
Now I notice that Lebanon and Bahrain, are both having flare ups of Sunni-Shia tension in last week. Will this spread to a series of Sunni-Shia wars in the Mideast. In our opinion, it is already happening.

DEMAND FOR CAPITAL GOODS BOOMS—– ESPECIALLY IN THE COUNTRIES WITH BIG PROFITS IN COMMODITIES

If you were Saudi Arabia, Chile or perhaps Bahrain, would you just sit there and pump up your natural resources, never thinking of the future? I doubt that you would be so shortsighted. Thus, it comes as no surprise that there is a worldwide boom in capital equipment demand, and most of it is originating from the countries that mine and produce energy and minerals for global demand.

They are buying new machinery to produce their existing products more effectively, and also to vertically integrate their production of those materials. On top of that, they are diversifying their activities into new areas to expand the scope of their economies, and to diversify away from an economy based on one or two industries.

IN LATIN AMERICA, HIGHER COMMODITY PRICES LEAD TO GREED—
THE DANCE OF THE NEW DICTATORS AND THE OLD PRESIDENTS

Poor President Lula da Silva of Brazil; he was recently stepped on by his former friend, President Evo Morales of Bolivia. One of President Morales’ first acts after becoming president of Bolivia was to nationalize the Bolivian petroleum industry, including the part owned by the Brazilian petroleum company Petrobras. Morales is also raising the price of the natural gas that he sells to his neighbors. The exact amount of the price increase has not yet been agreed upon.

Meanwhile, the new Bolivian President is busy following in the footsteps of Venezuela’s President Chavez. He is setting himself up as a dictator. He has forced four people to quit the Supreme Court after nationalizing the oil and gas fields. He also said this is just the beginning and that mining, forestry and the land are next.

The three amigos: Castro in Cuba, Chavez and Morales are going to keep South America in turmoil if they can. The effect upon the people of Venezuela and Bolivia will be similar to the effect of Castro on Cuba. Under Castro, Cuba has fallen deeper into poverty, suffering, and as much exit immigration as the government will allow.

By the way, what happened when Bolivia nationalized the tin industry decades ago? I’m sure that you can remember or guess, the results were not pretty for Bolivia.

It looks like the three amigos are setting up for a fight with their neighbors in South America. The US does not import much energy from Bolivia, but the rest of South America does. The US imports a lot of oil from Mexico and from Venezuela.

THE SUM OF ALL THIS, AND MUCH MORE WORLD TURMOIL IS, THAT GOLD WILL BE IN GREATER DEMAND.

THE MEDIA COVERAGE IS SAYING THAT CHINESE BANKS ARE A GOOD INVESTMENT

Our cynical side tells us that the PR campaign with all the media coverage is being engineered because major Chinese banks are coming public in Hong Kong soon. Mainland Chinese Banks, make politically motivated loans, and don’t collect enough interest and repayments of principal on time. However, they have been in demand, as foreign investors hope to get a foothold, and benefit from Chinese growth through investing in their banks.

It reminds me of the internet stocks in the late 1990’s. A bunch of people who know they are absurdly overvalued, buy them anyway because they think a greater fool may come along to buy them later at higher prices.

China is filled with people who do not understand the simplest concepts of capitalism, like repaying loans. Many Chinese, expect to be reimbursed if an investment that they choose to make, goes down. I’m afraid they will get a rude awakening, and I don’t want to be awakened with them. If you own any mainland Chinese banks, we recommend that you treat them as speculations and trade them, rather than invest.

SUMMARY

We own and continue to believe in gold and oil. Oil will be in demand for years for both political and economic reasons. We believe that we will see continued appreciation in energy stocks. That said, we suggest that investors wait to buy them on the two corrections, that they seem to have each year.

Gold will rise because three global trends will continue. One, global inflation will continue. Two, Middle Eastern military conflicts will continue. Finally, wealth will continue to be accrued in countries like China and India, where investors and hoarders want gold as a form of security and savings.