November 16, 2003

November 16, 2003


As you know we have been commenting recently about gold, energy and currencies in the context of new bull markets. China and India and their growth have been also been frequent topics of ours. Obviously, the rise to greater affluence of the 1.3 billion people of China and the 1 billion people of India over the next 40 years will lead to a large and continuing bull market for many commodities.

From a simplistic standpoint, the growing middle and upper classes in these and neighboring countries will be housed in better accommodations. They will have larger, more expensive diets. They will purchase newer and more sophisticated automobiles. New airplanes will be built to transport them longer distances. They will enjoy vacations in new vacation facilities or cruise on new ships. The goods that they export and import will need to be transported on new railroad cars and trucks. New electricity generating facilities and other utility and transportation infrastructure will need to be built for the nearly 40% of the world’s 6 billion people who live in these two countries.

Even though not all will rise to the middle or upper classes, this will be the biggest capital-spending program in the history of mankind and huge amounts of many commodities will be needed to accommodate it.

We have long thought that commodities move in multi year cycles maybe as long as 20+ years up, and then 20+ years down. For example, gold peaked in early 1980 and bottomed in 2001. Oil peaked in 1980 and bottomed in late 1998 while natural gas bottomed in 2001. Many other commodities have shown this type of long term trend. All commodities are driven by the direction of supply and demand. Clearly, demand is rising as people in Asia increase their standard of living, and engage in the biggest construction boom in the history of mankind.

It is also a simple truism that when commodity prices are falling (as they did for much of the last 20+ years) new capacity to mine produce and manufacture commodities is not built. People do not invest in new copper, iron, or other mines smelters and processing facilities. Supply does not increase. It may even decline as less efficient facilities produce progressively less. The subsequent decrease in or leveling off of production, eventually results in a stabilization of pricing as demand gradually meets and exceeds the supply produced.

Only when prices begin to rise are new facilities constructed. Once prices rise to the point where producers are profitable they begin to consider expansion of their facilities. There is always a time lag between this planning, eventual construction, and the additional capacity actually leading to increase in supply.

In the case of many types of commodities, especially minerals and energy, supply may be more expensive and/or even impossible to find at a commercially viable price. In those instances, substitute materials must be used.

Global monetary stimulus is also having an effect. As I have stated many times, inflation is the certain outcome of the repeated and extremely strong central bank money pumping activities in Japan, Europe and North America. In short, every major economic power block is spending lots of time, energy and printing press ink trying to assure that the world will come out of its economic malaise in time for the elections that will be taking place in many parts of the world over the next year.

Undoubtedly, it has been noticed by political functionaries worldwide that the Prime Minister of Japan has been reelected. This has happened in spite of the fact that his old line party lost votes to a new party which gives voters in Japan a choice for the first time ever for a party which is truly independent of the traditional political system in Japan. Why was Prime Minister Koizumi reelected?

He was presiding over modest economic growth rather than recession.
Outside investors were happy that he was cleaning up cronyism and political corruption by allowing banks to go broke and to be taken over by foreigners. Thus, investors had come in and bought Japanese stocks, sending the market up nicely in 2003. Japanese investors also jumped on the market and made some money. For the first time in 13 years, Japanese citizens were feeling that perhaps the long night has ended and new day may be dawning for Japanese equities.

All of this means that short and long term demand for commodities will increase. Since it’s inception in the early 1970’s, Guild Investment Management has based most of its investment strategy upon identifying global trends. The rising commodities trend of the 1970’s gave us our start. Now, we again find ourselves in the early stages of a rising trend in most commodities.

We will be cognizant that the wind is at our back and although we can expect commodities to be volatile for the next few months we know that in the long run they are trending upward.

Opportunities exist in purchasing the physical commodities themselves for clients or for our partnership accounts.
We will purchase related stocks or shares; gold, silver, steel, copper, aluminum, oil, natural gas, other metals. Companies which mine, drill for, process or hold inventory of the commodities are often traded on the public stock markets globally. These types of stocks can and have appreciated substantially in a rising market for their underlying commodity.
A rise in commodity prices means a rise in the price of goods in terms of US dollars. In other words they will rise in value versus the dollar. Another type of profit opportunity is to short the dollar and go long the currencies of the countries that produce the attractive goods metals, energy or other commodities. We have been long Canadian and Australian dollars recently and we undoubtedly will be long these currencies again many times in coming years. We also have been short the US dollar in favor of other currencies where the governments have been more conservative with their financial management.

What do rising commodity prices mean for stocks? In our opinion, because of a feedback mechanism, higher commodity prices are both a reaction to inflation and a creator of inflationary expectations. Higher commodity prices mean higher prices for goods and services now and thus an expectation of higher prices in the future. When an expectation of inflation embeds itself in the public psyche, people protect themselves from the expected inflation by buying assets which can grow in value faster than the anticipated inflation rate. Thus, bonds and conservative fixed income assets, with their lower, constant earnings streams are sold and growth stocks, physical commodities, real estate in fast growing areas are favored.


We are looking for companies in fast growing countries or in fast growing industries in the U. S. and abroad, as well as companies that mine, explore for, process or manage commodities.

Mining companies and energy exploration companies- Rare and precious metals, industrial metals, energy of all types, as well as companies that explore for or process, smelter, refine, inventory, distribute and/or market any or all of the above may be good candidates. Some examples are gold and silver miners, coal, oil and natural gas producers. Gold mining stocks have traditionally been a haven for those disappointed with governmental economic policies and those afraid of rising inflation. We believe that they will continue to provide security for investors with these types of concerns in the future.
Growth stocks of all types- Stocks in companies that are able to grow in excess of inflation, and are also able to finance their growth internally are good candidates. Often these companies are found in fast growing industries like technology medical devices, biotechnology and services.

We are also looking at opportunities in certain currencies of countries with certain characteristics.

Currencies of countries which produce and export large quantities of raw materials and which have positive balance of trade figures from the export of these goods.
Currencies of countries which manage their economic system to deal with an environment of rising inflation.

Some examples of commodity-rich currencies are the Australian Dollar and the Canadian Dollar. Examples of currencies that are better managed financially are the British Pound and the Japanese yen.

During the bear market from 2000 to 2002, commodities rose. During the stock market rally of 2003 commodities continued to rise. We know that at any time commodities and commodities stocks could correct and decline for weeks or even months. Yet, when we look out several years we are quite sanguine about the outlook for these classes of companies. We believe that they may rise regardless of world stock market trends.

There are many who doubt our thesis. We always welcome doubters. Doubters are often in abundance when stocks are cheap, and are often scarce when stocks are overpriced. For example, in the last few weeks and months we have owned four North American natural gas production companies: Ultra Petroleum, Chesapeake Energy, Comstock Resources and Niko Resources. The majority of natural gas analysts said not to own natural gas stocks because, barring a very cold November, there is an over supply of gas looming in the US. We disagreed and bought the stocks. Three of the four have gone up between 15% and 80% and the other is flat. We have taken profits in Ultra and Comstock and continue to hold and buy Niko and Chesapeake. We were advised on three of these stocks by our long time friend Barry Sahgal, who is an experienced and very skilled energy analyst. Barry was right. Rising production and new discoveries at these companies trumped market psychology.

Inflation may soon return and commodities will continue their bull market for years. If inflation returns, bonds will decline and value stocks will under perform. People will seek to insulate themselves from the rising prices by purchasing commodities and commodities related stocks and growth stocks that can grow earnings in excess of the rate of inflation. We see tremendous opportunity in this “new bull market”. That is why we believe the future looks bright.

We have temporarily decreased our exposure to China and Japan. We have sold all of our Chinese Internet companies. We hold no positions in Chinese technology companies at the present time. We continue to hold our Japanese smaller companies fund, but we have sold our individual positions in Japanese companies.

We continue to hold our gold shares occasionally taking partial profits when they run up rapidly with the idea that we will can purchase them when prices decline. Gold shares are very volatile, and we believe this policy helps to maximize the return on our gold shares. Now that gold is approaching $400 we are focusing new purchases on small mining companies like Tan Range Exploration or companies in specialty areas like Hecla Mining and Agnico Eagle Mines which have silver and copper production as well as gold production. We send our heartiest congratulations to Jim Sinclair and Harry Schultz who have consistently called for the current rally and have explained why it should occur. Jim especially has been subject to a great deal of criticism but the wisdom of their advice is irrefutable, and the education that Jim and Harry have provided to the investing public is priceless.

Global growth stocks continue to be a substantial part of our portfolios. Steve Emerson, our friend for many years, and an imminently successful investor has provided many insights to us in this area. We congratulate Steve on his success and thank him for his wise counsel.

Presently, our cash position is the largest that we have held for several months. We intend to use this cash to purchase currencies of Australia, Canada, Great Britain and Japan on dips. We also intend to add to our positions in US and global precious metals, energy and growth stocks as opportunities present themselves. We will continue to take partial profits on many of our positions as they rally and repurchase them on price declines.

We look forward to hearing from you should you have any questions or comments.