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MAINTAINING STABILITY DURING VOLATILITY

MAINTAINING STABILITY DURING VOLATILITY

In our last memo we mentioned that oil and gold were in a normal corrective period, which would lead to a buying opportunity. At the time we expected the buying opportunity to come within a few weeks. We still believe that the decline in gold and oil has pretty much run its course. The ultimate bottom for gold may have been reached and oil continues to stabilize in the high $60’s per barrel. There are many reasons why prices for both could rise dramatically in coming months.

ENERGY DEMAND CONTINUES STRONG AND SUPPLY IS NOT GROWING MUCH

Global oil demand remains strong, yet supply is not increasing. Serious instability in so many oil producing countries, U.S. unpopularity in the energy producing world, competition for resources from China, India and other developing nations are some of the reasons. Despite large exploration expenditures by Saudi Arabia and other producers, they have not yet increased production substantially.

Higher costs of discovering energy and bringing it to market, argue against plentiful cheap energy at any future date. The new major fields which have been identified, contain the heavy tar like oil which must be heated and blended after it is mined to be turned into crude oil that can be transported or refined. This is an expensive process, and the price of developing such fields rises every year.

Moreover, alternative fuel options, apart from coal, are political in nature and not very economically rational at current energy prices.

GOLD AND CURRENCIES

The U.S. dollar has many problems. It is our opinion, that over the longer term, the U.S. dollar must decline versus stronger currencies and gold. Rising U.S. interest rates, are only serving to keep the dollar from falling faster. We see gold’s future course to be strongly connected to the U.S. dollar. As the dollar falls, gold will rise accordingly. As we have said many times, gold is money. It is where people will go for security in times of economic hardship or turmoil.

MANY GREAT FORTUNES HAVE BEEN BUILT BY UNDERSTANDING THE FACTS, AND BUYING WHEN LACK OF KNOWLEDGE CREATED BUYING OPPORTUNITIES.

THE FEARED WORLD ECONOMIC SLOWDOWN WILL BE A SLOWDOWN ONLY — NOT THE END OF THE WORLD.

When one reads the media these days, it is easy to assume that they world economy is destined for a recession or worse in late 2006 and in 2007. We do not believe that this is probable. Many economists with a U.S. centric view of the world, think that if the U.S. GDP slips for one or two quarters, the rest of the world will follow. First, we are not convinced that the U.S. GDP will slip into recession, although the strong U.S. dependence on the consumer is worrisome.

Some economists are starting to call for a U.S. recession in 2007. These people are frightened because the U.S. Federal reserve is raising interest rates after the date which it was thought ready to peak.

This fear is becoming the conventional wisdom we believe that it is conventional but not wisdom.

We think that a U.S. centric world economic view is outdated and misses the point. In our minds, the point is that the mantle of world economic leadership is gradually slipping from the U.S. shoulders, and is being assumed by China, India and others.

U.S. ECONOMY IS NO LONGER THE SOLE ENGINE OF WORLD ECONOMIC GROWTH

In recent decades, everyone believed that the U.S. economy was the engine of the world. This was an accurate assumption. My argument is that over the last few years, it is no longer an accurate assumption.

Today, the strongest and fastest growing economies belong without question to China, India, Brazil and a handful of other fast growing countries mainly in Asia. Interestingly enough, it can be argued that Russia is very strong as they are almost debt free, and they have massive natural resources.

WHY A GLOBAL ECONOMIC GROWTH SLOWDOWN WILL NOT TURN INTO A RECESSION OR WORSE.

Our thesis is simple, global inflation has heated up due to the effect of higher commodity prices. Many nations have raised interest rates. This will lead to a global economic slowdown, it will be a slowdown not a global recession or depression, as some scaremongers in the press and elsewhere are exclaiming.

ECONOMISTS OFTEN SAY THINGS TO CREATE AN EFFECT

The nine Federal Reserve officials who have commented that inflation is at unacceptable levels have a purpose. Their purpose is to establish Chairman Bernanke’s, and the Fed’s inflation fighting credentials. For decades, each new Fed Chairman has been tested by the investment markets, and each one has responded by raising interest rates.

The question is, will they overdo it? Do they have to power to create slowing economic growth, or even a recession in the U.S. and in the world? Assuming that they do, will they make a mistake and create a recession?

Fear and controversy create TV viewers and newspaper readers; they also can create panic among the uninformed in the short run. In the long run they create opportunity for the experienced and wise.

THE GLOBAL ECONOMY MAY SLOW BUT IT WILL STILL BE GROWING

We view many of these calls for global meltdown to be overexcited. It is true that growth may slow. But we are talking about growth slowing from a very rapid rate to a more moderate but still respectable rate. U.S. growth may slow from an unsustainable rate of close to 6% in the first quarter on 2006 to 2 or 3 % in 2007. This rate would be more than acceptable in a long term context. Chinese growth may slow from well above 10% to 8%. India may grow at 7% down from 8%. In any other era these growth rates would be considered very attractive.

WHY ALL THE PANIC IF IT IS NOT SUPPORTED BY THE FUNDAMENTAL ECONOMIC REALITY?

The fear has its basis in the assumptions that the central bankers of the world are not good economists, and that they have no political influences impacting them.

First, they are good economists. For example, the U.S. Federal Reserve’s in house economic forecast of January 2006 projected the current U.S. inflation rate. They knew that the inflation was coming, and that it was unavoidable. They further know that their interest rate policy, and that of other central banks, will not have any immediate effect on inflation. They know that as the higher energy and commodity prices worked their way into the system, there would be a period of higher inflation. They also know that if they do not dampen inflationary psychology now, when the public at large first feels its effects, it will be much harder to dampen it later after the public starts to take inflation into consideration while making decisions.

Secondly, they are influenced by politics. Federal Reserve Board governors are appointed by the U.S. President. Many governors go to work for friends of the administration after their tenures. After retirement as governors of the Federal Reserve, they often work for the same major banks and investment banks which are very much impacted by their policies while in office. It is in the best interest of the nation, and in the individual governor’s best interest, to create steady, inflation free economic growth. They attempt to do this to the best of their abilities, using the tools that they have at their disposal. The economists from Wall Street who are complaining about future recessions have another objective. They want interest rates down so their business will pick up.

SUMMARY

We will have a volatile few months for world psychology and markets will be volatile. Oil, gold, and foreign currencies are our preferred vehicles. Stocks will be very volatile, stock markets often bottom in October, when mutual funds complete their tax balancing and liquidating. We expect stocks to bottom in October and oil, oil shares, gold, gold shares, and foreign currencies to be the most rewarding investments over the remainder of 2006.

GUILD INVESTMENT MANAGEMENT HAS MOVED

As many of you already know, on June 9, 2006 Guild Investment Management moved from Malibu to larger offices in Los Angeles. Our new address and phone numbers are:
Address: 12400 Wilshire Blvd., Suite 1080
Los Angeles, CA 90025
Phone: (310)826-8600
Fax: (310)826-8611