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THE NEW COLD WAR

THE NEW COLD WAR

GOLD AND COMMODITIES COOL OFF WHILE THE COLD WAR HEATS UP

We are pleased to see gold and energy getting a normal correction, and a bit of relief from the overheating that had been the case for the last couple of weeks. Corrections, like the one we are having in precious metals and energy, are a necessary and important component of a normal bull market.

I admit that it is scary to see the violent pull backs that sometimes occur during these normal correction periods. However, history has repeatedly shown that they are necessary, for bull markets to extend their lives and the magnitude of their moves.

When gold and energy were moving up rapidly we were concerned, because many companies that we wanted to buy ran up too fast, and we were unable to get in at reasonable prices. Now is our chance to buy at better prices, and we plan to do that over the next 2 or 3 weeks as prices back and fill. When the correction ends, we expect to see the stocks resume their up trends.

THE RETURN OF THE COLD WAR

We all remember the cold war. I believe that it may be resuming. The announcements last week by President Putin of Russia, and his actions of the last few months and years brings it all into focus. Obviously, a cold war, like a hot one is a factor arguing for higher gold prices.

A history of events:

1. Several years ago, Putin and Russian officials attacked the Russian oligarchs who had heavy energy holdings, and took those holdings away from them. Some were jailed and some went into exile. Russia gained control of most of its natural resources, and all of the natural resources needed to wage war. In the last few months Russia has taken over many privately held businesses in the truck and auto manufacturing, weapons, metals and many other strategically important businesses. Articles to this effect have appeared repeatedly in the world press.

2. Recently, Russia announced that women will be paid financial incentives if they have more children. Russia’s population is about 143 million and the birthrate is not replacing the death rate. Population could fall to 100 million by 2050 according to pessimists, so Putin works to encourage births.

3. Russia and China both are unhappy with the unilateral power of the U.S. In the last few years they have decided to work together to undermine that power. Alliances have been made, for the shipping of energy, the sale of resources, and the sharing of technologies.

4. In the last year, after Russian power in Ukraine was undermined, Russia has entered into a dispute with Ukraine over energy sales from Russia to Ukraine. (Ukraine was getting energy from Russia at a tiny fraction of the free market price). Russia canceled their relationship with Ukraine and sells to Europe at 5 or 10 times the price.

5. As reported in the press May 11, 2006, Russia announced unhappiness with U.S. criticism, and says they will resume the growth of their military.

6. A note for those who say that Russia does not have any money and that they are broke: Russia is under-pricing their sales of resources to former Soviet Republics like Ukraine. Inter-government sales of many goods within Russia are understated, and the consumer economy is ignored in government statistics. For all of these reasons and many others, the world’s view of the size of the Russian economy is way too low.

China has grown so fast in part, because the old Chinese government statistics understated, or ignored a lot of transactions. China grew very fast, in part because the data was understated. Once the Chinese began to count big sectors of the economy that had been ignored, growth accelerated. The exact same thing is true of Russia. When government statistics take all of the ignored sectors into account, the Russian GDP will be much higher.

7. Russia is the most resource rich nation in the world. Resources are their wealth. This is how they will grow.

8. Russia is run by a former KGB man. He is very tough, very intelligent and he does not have to consult with any parliament or Supreme Court in order to achieve his ambitions.

FOR ALL OF THESE REASONS, THE COLD WAR MAY BE STARTING ANEW.

Thanks for listening.