December 29, 2004

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The Best Investments—Onshore and Offshore—for 2005
by Mark Nestmann

Well, 2004 was that kind of year for us. The cornerstones of The Sovereign Society investment portfolio—precious metals and foreign currencies—had the best results in many years. Our recommendations in selected commodities, bonds, value funds and hedge funds also performed well.

However, all experienced investors realize that prices never move in a straight line. For instance, precious metals prices are at multi-year highs and the U.S. dollar is at a multi-year low. Our Council of Experts wouldn’t be surprised to see significant corrections in both in the months ahead. And, while we’re anticipating a major pullback in U.S. stocks this year, there’s one big “wild card” event that I’ll share with you on page10 that could completely change that perspective.

Our very best performers for the year were commodities and precious metals funds. Here are a few examples:

• Bonavista Energy Trust (BNP.UN, Toronto, TSI 3/04, up 58.9%)
• Oppenheimer Real Assets Fund Class A (QRAXX, TSI 4/04, up 22.8%). Since we first recommended QRAAX in TSI 8/03, it’s gained 42.1%.
• T. Rowe Price New Era Fund (PRNEX, TSI 2/04, up 31.8%)
• PrimeWest Energy Trust (PWI, TSI 3/04, up 22.1%)
• Merrill Lynch World Mining Fund Class A [U.S. dollar share class] (Luxembourg, LU0075056555, TSI 2/04, up 18.9%)
• Gold bullion (TSI 7/04, up 14.0%). Since we first recommended gold in TSI 11/99, it’s surged 54.2%.

Our longer term commodity plays have also performed superbly:

• Chicago Mercantile Exchange (CME, TSI 4/03, up 355.4%)
• Canadian General Investments, Ltd. (CGI, TSI 4/03, up 144.5%)
• ENI Spa (E, TSI 11/03, up 54.1%)

While we didn’t have any new picks in gold stocks this year, long-term gains in this part of our portfolio have been nothing short of breathtaking.

• Agnico Eagle (AEM, TSI 2/00, up 355.5%)
• Bema (BGO, TSI 8/02, up 270.0%)
• Merrill Lynch Mercury International Gold & General (ISIN LU0075056555, TSI 11/99, up 232.1%)
• ASA (ASA, TSI 2/00, up 169.0%)
• Glamis Gold (GLG, TSI 8/02, up 180.7%)
• Placer Dome (PDG, TSI 2/00, up 157.9%)
• Dundee Precious Metals, Inc. (DPM, TSI 4/03, Toronto, up 169.8%)
• Newmont (NEM, TSI 2/00, up 135.3%)

Bonds have been another solid performer for The Sovereign Society portfolio—but not just any bonds. We recommend bonds with exposure to solid but high-yielding emerging market economies, and to currencies outside the dollar. The results have been positive, although our portfolio took a hit in April, as bond prices dropped sharply on inflation fears. Since then, though, they’ve recovered nicely, and although we don’t have profits in all of our positions, you’ve been receiving a rock-steady yield of 7.5%–9.5%:

• Morgan Stanley Emerging Markets Bond Fund (MSD, TSI 3/04, no change, yield 7.58%)
• Northeast Investor Trust (NTHEX, TSI 3/04, up 2.5%, yield 8.2%)
• Templeton Emerging Markets Fund (TEI, TSI 3/04, up 1%, yield 7.45%)
• Thornburg Mortgage (TMA, TSI 3/04, down 1.45%, yield 9.5%)

Our portfolio of value funds and hedge funds—both onshore and offshore—were solid if undramatic performers. Here are a few examples of some of our favorite funds.

• Man-AHL Diversified PLC (IRAHD, Ireland, TSI 9/04, up 13.4%). This fund has gained 30.2% since we first recommended it in TSI 10/01.
• Momentum Emerald (Bermuda) (ISIN BMG6198G3123, TSI 9/04, up 2.2%). It’s gained a much more impressive 60.3% since we recommended it in TSI 11/98.
• Socgen International Sicav (Luxembourg, ISIN LU006857508, TSI 2/04, up 7.2%). Since we first recommended SocGen in TSI 7/02, it’s gained 19.9%.
• First Eagle Sogen Global Fund (SGENX, TSI 2/04, up 14.1%). Since we first recommended SGENX in TSI 7/02, it’s given us a return of 46.8%.

Our recommendations for selected foreign equities also did well in 2004, although we were significantly helped by the falling U.S. dollar in this regard. Here’s a sampling:

• Hansabank Group [Hansapank] (Frankfurt, ISIN EE0000001063, TSI 11/03, up 83.5%)
• Mengniu Dairy (Hong Kong, TSI 9/04, up 17.7%)

Finally, our recommendations for foreign currencies also returned profits in 2004. Our suggestion to buy Canadian dollars in TSI 4/04 led to a 9.8% profit. And our recommendation for British pounds (TSI 4/04, up 2.3%) was also profitable.

Of course, not everything we recommended has performed as we had hoped. Even Barry Bonds doesn’t hit a home run every time he steps up to the plate. In that regard, our worst pick of the year was for the U.S. stock market to take a nosedive with the sinking U.S. dollar. It just didn’t happen. In fact, as the dollar plummeted, stocks went the other direction. And our recommendation of long-term LEAP put options, which increase in value if stocks turn south, lost nearly two-thirds of its value as a result.

What are our top recommendations for 2005? You’ll find the answers in this issue. Michael Checkan reviews the outlook for gold and silver in 2005 on page 13. Eric Roseman explains how you can invest internationally without leaving home on page 12 and outlines the best strategies to protect yourself from portfolio losses (very important!) on page 6. Finally, if you’re looking for some “off-the-beaten path”—not to mention very private—investments that tend to be negatively correlated to the stock and bond market, you’ll want to look into our review of the opportunities we highlight in fine collectibles—rare coins and colored diamonds—beginning on page 18.

I hope that you enjoy this special expanded “all investment” issue of TSI. And, as always, if you have comments or suggestions in reference to our facts,

figures or commentary, I welcome your feedback. I’d also love to hear how these recommendations did for you. You can reach me at assetpro@nestmann.com or info@sovereignsociety.com.

(Note: For information on the best ways to purchase stocks, bonds and funds traded outside the United States, see the article beginning on page 16.)

Mark Nestmann is editorial director of The Sovereign Society. He is the author of numerous books on privacy, asset protection and taxation.

The Four Hidden Risks of an “All-Domestic” Investment Portfolio
by John Pugsley

Experienced investors are painfully aware that asset prices don’t always rise. Equities prices fluctuate as businesses struggle with fickle consumers, competition, and the economic roller-coaster of booms and recessions. Bond prices dance to the strings of inflation and recession. Commodities chase the uneven rhythms of the economy as raw-materials producers attempt to guess what industry will consume in the years ahead. These are market risks, an unavoidable part of investing.

Yet even if you divide your portfolio into the perfect balance of stocks, bonds, currencies, commodities and real estate, and succeed in choosing the winning assets among each asset class, you remain vulnerable to an equally unavoidable and less controllable menace—political risk.

There are many kinds of political risks, but I divide them into four primary categories:

Tax risk. It may appear odd to list taxes as a “political risk,” but this is, in fact, an accurate label. That’s because it’s impossible to predict with any accuracy the future tax treatment of any investment, except to observe that politicians will always seek to maximize tax revenues while minimizing the exodus of talent and capital.

That means tax laws are in endless flux, particularly in higher-tax jurisdictions. For instance, when in the 1980s the U.S. Congress searched for ways to increase tax revenues without overtly raising taxes, it chose to dismember real estate tax shelters. As a consequence, prices of previously tax-advantaged real estate fell by 50% or more.

More recently, in 2003, Congress passed a law that reduces the tax rate on long-term capital gains to 15%. What happens if a future Congress decides to increase this rate back to its former level, as presidential candidate Kerry promised to do? It’s quite likely that there would be a blizzard of selling of U.S. stocks, bonds and real estate, leading to a sharp drop in the value of all of these investments.

Regulatory risk. In the same way that taxes benefit certain constituents at the expense of others, regulations benefit favored industries and workers while putting others at a competitive or economic disadvantage. In the process, investment capital is put at risk.

Environmental restrictions are a perfect example. From what you read in the media, you might think environmental regulations spring from the desire of politicians to help address the societal problems of dirty air, polluted water, etc. But more often than not, they result from political pressure applied by special interest groups. For instance, some of America’s largest timber companies have lobbied in favor of maintaining the strictest possible interpretation of the Endangered Species Act, which restricts logging in areas where rare animal or plant species would supposedly be threatened by such activity. This attitude doesn’t stem from their concern about endangered species, but from the bottom-line realization that such restrictions drive up the price of timber in areas where endangered species don’t live.

But regulatory risk is hardly limited to the environment. Indeed, anytime you read a press release from a lobbyist pushing for some legislative change, ask yourself, “who benefits?” A great example is federal minimum wage legislation. Labor unions are some of the biggest supporters of increasing the federal minimum wage. Reading their press releases might make you think this is because they want to improve the lives of poor people. Hardly. Increasing the minimum wage raises costs to employers, which means that they won’t hire, or even dismiss, marginal workers who they just can’t justify paying a higher wage—the very poorest of the poor. That means less competition for labor unions and their relatively high-paying jobs. No wonder labor unions favor a higher minimum wage!

Multiply the reasoning of timber companies and labor unions across the spectrum of government regulation, and you’ll understand why lobbyists spend over US$1.5 billion each year in Washington, D.C. trying to influence its direction. In the case of tax law, however, safe today does not mean safe tomorrow. Another spotted owl or snail darter may be discovered in the underbrush tomorrow, making the property on which it is found virtually worthless for any kind of economic development, and lowering the value of any investment in that property, or of any securities issued by its owner. Regulatory risk can only become greater as time goes by, and inevitably impacts the value of your investments.

Monetary risk. The great shadow over all investments is monetary policy. In all nations, it’s controlled by the central bank, with the U.S. Federal Reserve in the lead as the 800-pound gorilla. The financial world hangs on every word and intonation of Federal Reserve Chairman Alan Greenspan, for each word hums with risk and opportunity.

The process by which central banks move investment values is far simpler than our complex economy would suggest. In the same way that astounding feats can be produced with computers starting with two simple digits, 0 and 1, the gyrations of national and international economies are manipulated by either creating or extinguishing money. When the Fed wants to stimulate economic activity it creates money. It does so by purchasing Treasury bills, notes and bonds from banks, resulting in an increase in bank reserves. When it wants to slow the economy, it sells Treasuries, thereby decreasing bank reserves. From these two simple acts, prices of everything from loans to consumer goods to assets scramble to adjust. Inflation, recession, investment manias, financial disasters, and even war erupt as individuals struggle with the rise and fall in bank reserves.

Legal risks. In addition to the risks posed by taxation, regulation, and monetary policy, your investments are threatened by laws such as the USA PATRIOT Act, which empowers government agencies to confiscate private property without the right to a judicial hearing. An even greater threat to domestic investments are lawsuits. The U.S. legal system has evolved into a stealing machine, with predatory lawyers openly advertising their ability to seize wealth from those with deep pockets, as well as the assets of businesses in which you invest. Put assets within view, and eventually someone will find a reason to sue.

How can you best defend yourself against these hidden political risks? The answer is international diversification. While these same political risks exist to different degrees outside the United States, they tend to cancel each other out in a sufficiently diversified portfolio.

How do you create such a portfolio? This issue of The Sovereign Individual outlines the rewards—and possible risks—of an international portfolio of stocks, bonds, commodities, precious metals and real estate. Yet, avoiding political risk also requires that you disburse those assets in the optimal combination of political jurisdictions and hold title to them through legal structures that provide maximum asset protection.

Showing our members how to best achieve these goals is The Sovereign Society’s raison d’être. Through this newsletter, our five-times weekly Sovereign Society Offshore A-Letter, our weekly investment services and our books and special reports, we provide access to investments, jurisdictions and legal structures that can not only withstand economic risks, but the insidious and largely overlooked political ones.

John Pugsley is Chairman of The Sovereign Society and the author of many books on economics, investing and politics.

Bush II—What It Means for Offshore
by Robert E. Bauman, JD

What can we expect in a second Bush administration? Will the Bush policies that impact offshore finance and foreign investment change for the better or worse?

We can start from the established premise that, during the last four years, President Bush’s government has been more than friendly to free trade and to offshore finance, including support for the important principle of global “tax competition.”

And we can stipulate that a win by Senator John Kerry, who spent much of his campaign trashing offshore jurisdictions, such as Bermuda and the Cayman Islands, would have meant disaster for offshore financial centers.

“Harmful Tax Competition” Derailed

As we have often described in TSI, bureaucrats at the European Union (EU) and Organization for Economic Cooperation and Development (OECD) have conducted a decade-long campaign on behalf of high-tax welfare states such as France and Germany, trying to end all tax competition. These bureaucracies argued that it was “harmful” when jobs and capital migrated from high-tax nations to low-tax jurisdictions, a natural process in any free market system. The EU/OECD definition of “harmful tax competition” from the beginning has meant a homogenized high level of taxes in all nations, abolition of tax breaks for foreigners and complete exchange of personal financial information between governments for tax enforcement purposes.

The OECD, in particular, has issued “blacklists” of countries it deems to engage in harmful tax competition, although it has pointedly refused to include any of the many OECD members, most notably the United States, which impose zero taxes on investments by non-residents.

President Bush’s election in 2000 disrupted the campaign for tax harmonization, which the previous Clinton administration had vigorously backed. The Bush administration quickly moved away from the OECD’s harmful tax competition proposals, a fatal blow to the Paris-based bureaucracy, since without the world’s largest economy, their plans were thwarted. Bush’s re-election, combined with Republican gains in the U.S. Congress, will hopefully be the death-knell of the EU/OECD campaign to impose high taxes worldwide.

Global Tax Collection Initiatives Rejected

The first term Bush administration also rejected the EU “savings tax directive,” another tax collection scheme that tried to force non-EU financial centers, including Switzerland and the United States, into collecting taxes for the EU’s high-tax welfare states. The Bush rejection made the EU scale back its proposal and the directive will come into effect in mid-2005 at the earliest—without U.S. participation. (Even so, the United Kingdom imposed these EU tax proposals on all of its overseas territories and Crown dependencies, leading to billions of dollars of capital flight out of these jurisdictions.)

Just as importantly, the Bush administration made plain its rejection of proposals for a global tax authority run by the United Nations. This agency, as envisioned by French President Jacques Chirac and other leftist visionaries, would help high-tax countries tax income earned outside their borders, and “take a lead role in restraining tax competition.” It would also have the authority to impose taxes globally to fund the programs of the United Nations, and to impose taxes on anyone who exercises their right to emigrate from their homeland. Finally, national governments would be required to collect private financial data on individual taxpayers and share it with other governments to prevent harmful tax competition.

Fortunately, the head of the U.S. delegation at a U.N. meeting last summer firmly stated the Bush administration position that “...global taxes are inherently undemocratic.” The Bush White House also has dismissed efforts for the creation of a global tax authority along the lines of the U.N. proposal.

Treasury Termites: Gnawing Away Your Right to Financial Privacy

Daniel J. Mitchell, PhD, senior fellow in political economy at the Heritage Foundation, Washington, D.C., and a leading expert on domestic and international tax policy, observes that while the Bush administration has been friendly to offshore finance, lower level bureaucrats in the U.S. Treasury cling to leftist pro-tax policies from the Clinton administration days.

These “termites” have tried to thwart free market tax competition. According to Mitchell, “There is an active contingent at Treasury and the Internal Revenue Service that supports tax harmonization because schemes like information exchange make it easier to enforce bad U.S. tax law. These bureaucrats do not care that the United States is also is a ‘tax haven’ and that global information sharing would mean significant capital flight from America.”

Mitchell refers specifically to a Clinton era IRS proposal that would require U.S. financial institutions to act as deputy tax collectors for foreign governments, notwithstanding more than 80 years of established law to the contrary. While the proposal is still pending, the Bush administration has never supported it. Hopefully, the second Bush term will see an end to this proposed rule.

A bright spot offering some improvement at Treasury is the housecleaning taking place in the Bush cabinet. As we go to press, former U.S. Senator Phil Gramm, a staunch economic conservative, is being mentioned to replace Treasury Secretary Snow. There is little doubt that Gramm, an economist with firm free market beliefs, would put an end to the influence of the pro-EU/OECD crowd at Treasury.

Indeed, one of the first indications of the change in Washington brought about by increased conservative votes in Congress is a spontaneous effort to eliminate U.S. funding for the OECD. While this effort faces stiff opposition by congressional liberals, it’s possible the OECD’s free ride on U.S. taxpayers’ money will be derailed in 2005.

Civil Liberties: Still at Risk

While we applaud the Bush administration’s longstanding efforts to promote economic freedom and tax competition, we cannot say the same with regard to its abysmal record on civil liberties. One area of grave concern is its continued push for expansion of the draconian powers provided the FBI and other police agencies in the USA PATRIOT Act.

U.S. courts have already voided several provisions of this Act as violating the U.S. Constitution, most notably the authority of federal agents to obtain customer records without a warrant from banks, Internet service providers, telephone companies and many other businesses. However, that hasn’t stopped the Bush administration from trying to enact even more invasive measures, such as the so-called PATRIOT Act II. Among other things, that bill calls for presumptively stripping U.S. citizens of their nationality if the Attorney General concludes that they have supported a “terrorist organization.”

Mounting opposition to such back-door attacks on civil liberties has led the Bush administration to secretly attach various provisions of PATRIOT II to other bills, generally without holding hearings. One of the most significant of these is a now-pending bill that, if enacted, would turn U.S. driver’s licenses into de facto national ID cards.

Those of us who consider ourselves conservatives can only hope that President Bush will redirect his policies to: 1) drastically cut the U.S. budget deficit and reduce the national debt; 2) reform the worst aspects of the PATRIOT Act; 3) uphold the rights of legitimate tax havens and world tax competition; and, 4) as he pledged in his victory statement, support drastic reform, even repeal, of the U.S. Internal Revenue Code. And while he’s at it, he might consider another strategic, early end to the war in Iraq.

With decisive majorities in the U.S. Congress, the President has a chance, at least for a while, to push through major changes. But in doing so he needs to show a far better understanding of the principles of constitutional freedom.

Robert Bauman is Legal Counsel for The Sovereign Society and editor of The Sovereign Society Offshore A-Letter. A former member of the U.S. House of Representatives from Maryland, he is a graduate of the Georgetown University Law Center (1964) and the School of Foreign Service (1959).

Reducing Investment Risks:
Don’t Be Wiped Out by a Bear Market…5 Strategies to Protect Yourself
by Eric Roseman

(Editor’s Note: As in 1999–2000, U.S. stocks are again trading at ridiculously high valuations. In the Internet sector, for instance, price-to-earnings ratios of 100:1 are common, and investors are still buying. But, just like it did five years ago, this will come to an end. Fortunately, as our investment editor Eric Roseman reminds us, it’s not difficult to protect yourself. Here’s a rundown of what you can do to survive, even profit, in a bear market, along with his current recommendations.)

A handful of influential “talking heads” like Morgan Stanley’s Mary Meeker and hedge fund manager Jim Cramer are once again touting tech stocks, and urging investors to “get in before it’s too late.”

I don’t think that’s very good advice. While absolute valuations are still well below those of the 1999–2000 “bubble market,” there are some disturbing parallels, most notably a lack of profits in many inflated stocks. Google, for instance, has a P/E over 200. In bear markets, P/Es of 8:1 or even 6:1 are common. At the height of a bull market, P/Es generally are 25:1, sometimes higher. But now we have Wall Street touting stocks with a P/E eight times higher than that.

Where will it all end? While I’m not predicting a crash like that of 2000–2002, I just don’t see much more “oomph” in U.S. stocks. I’ll be the first to admit, though, that when I made this prediction last spring in TSI, I was a bit ahead of myself. My advice to purchase defensive put options and bear market mutual funds in anticipation of a market decline was premature. Betting against stocks wasn’t a profitable strategy in 2004. But my recommendation then is just as apt today: every investor holding common stocks should maintain a defensive market hedge.

This decade has already proven extremely tumultuous for investors, with extreme market valuations, rising interest rates and global terrorism. None of these factors is going away. Indeed, if anything, they are becoming more severe.

From my global view on capital markets and trends, the post-2002 market rally is a cyclical rally in a long-term bear market. It is most assuredly not a “secular bull market.” This implies a major decline lies ahead over the next 12–24 months as a host of internal and external macroeconomic factors propel U.S. and foreign equities sharply lower, possibly breaching the October 2002 bear market lows.

Why this Rally is Dangerous

There’s a big difference between a cyclical bull market, such as the one we’re currently experiencing, and a secular bull market. It’s absolutely fundamental for you to understand the differences and asset allocate your portfolio accordingly.

A secular bull market is a major market advance, such as the one we enjoyed from 1982 to 2000. It was characterized and supported by significant policy changes in the United States, including dramatic tax cuts by Ronald Reagan, massive government spending, and a peak in interest rates and inflation in 1981. The S&P 500 Index, which bottomed in 1982 trading at just 8 times earnings and yielding over 6% in dividends, offered terrific values for the long-term investor. From 1982 to 1999, the S&P 500 Index gained an annualized 15% per annum.

The landscape, of course, changed dramatically in 2000, as U.S. equity markets peaked. Extreme valuations in technology stocks, which produced the greatest speculative frenzy on Wall Street since the 1920s, came to a crushing end in March 2000. By December 2002, the NASDAQ Composite Index had plunged an amazing 80% from its March 2000 peak. The broader market S&P 500 Index crashed 40% over this same period.

This collapse occurred even as the Federal Reserve frantically tried to revive a slowing economy with a series of interest rate reductions beginning in January 2001. Not only did these cuts fail to revive the economy, but stocks continued to plunge, suffering new lows through the end of 2002.

The clear lesson of the 2000–2002 bear market is that a massive monetary stimulus courtesy of the Fed does not guarantee future stock market gains. “Buying on the dips,” infamously advocated among Wall Street traders in the 1990s, proved disastrous the first three years of this decade. The reason is simple enough: The stock market bubble of the 1990s was so immense that it required time to deflate.

In every era of financial market speculation prices eventually revert to a level supported by economic fundamentals, and not mere speculation. We’ve seen this many times before, and it doesn’t matter if it’s stocks, bonds, real estate or commodities: technology and Internet stocks in the 1990s, emerging markets and the Asian “miracle” in the mid-1990s, the art market in the early 1990s and junk bonds in the mid-1980s. In each example, investors feverishly bid prices to manic levels until prices finally peaked and subsequently crashed.

This stock market rally since October 2002 is dangerous because it is NOT a secular bull market. If stocks were down over 50% from their highs, combined with low P/Es and rising dividend payouts, similar to the 1970s bear market, I would be screaming “buy the indexes!” But that’s not the case.

Previous cyclical bull markets during a secular bear market since 1929 point to big dangers ahead for investors.

The median U.S. cyclical bull market advance since 1929 lasted 19 months. From the lows of October 2002, the current advance has lasted 26 months. It’s long past time for a correction, and when it comes, it may take years, even decades, for investors to recover their capital. Indeed, an investor who purchased stocks in 1929 would have only broken even by 1956—a full 27 years later. More recently, an investor in stocks from 1966–1982 would have earned a negative rate of return, adjusted for inflation.

The current U.S. stock market rally is not a new era for equities because interest rates remain at historically low levels and are now rising. In addition, the ability of the government to stimulate economic growth with tax cuts has been exhausted and budget and trade deficits are enormous and getting bigger by the day. Plus, stock price to earnings multiples are at extreme levels and not representative of compelling values similar to market lows in 1982. I believe this rally will probably end during the first quarter of 2005.

The Five Best Ways to Reduce Your Risk

So, what’s the best way to reduce your risk? Here are five ideas to consider. And even if I’m wrong about the timing of a major decline in stocks, these ideas will help to protect the value of your overall portfolio when it finally occurs—as it always does.

1. Consider placing a trailing stop-loss on all the stocks in your portfolio. Where to set this stop loss depends on your risk tolerance, but it should be in the 15%–25% range. Most brokers, including discount brokers, can do this for your account. Unfortunately, it’s not possible to put trailing stops on mutual funds (other than through a few full-service brokers). You must monitor the prices yourself and sell when your fund breaches your downside target. I would suggest placing a “mental” 15%–25% stop-loss on your fund’s 52-week high.

2. Sell half of your stock position when it doubles in value. Now, you can ride the other half for free since you recovered your initial investment.

3. Consider investing in a reverse index mutual fund. For this purpose, I still like the no-load ProFunds UltraBear Fund (URPIX), although it’s lost about 10.6% since I first recommended it in June 2004. This fund is designed to move in the opposite direction as the S&P 500 Index. In 2002, UltraBear soared 38.1% as the S&P 500 Index plunged 26%. But in 2003, as stocks rallied, the fund declined 24.5%. You can purchase UltraBear directly from ProFunds or through your broker. The minimum investment is US$15,000, although it may be possible to make a smaller commitment through a broker. Link: http://www.profunds.com.

4. Consider intermediate-term (10-year) U.S. government bonds for a dollar-based portfolio or foreign currency government bonds for non-dollar-based investors. When equities decline sharply, money flows into bonds as a “safe-haven” alternative. You can buy Treasury bonds from any broker or no-load directly from the U.S. Treasury.

5. If you purchased the LEAP options I recommended in TSI 6/04, hold on. However, I’m not currently recommending them except to the most aggressive bears. The December 2005 105 LEAP puts (LSY-XA E) that I recommended have lost nearly two-thirds of their value. That’s typical if you make a wrong bet in options. Fortunately, these options don’t expire until December 2005, so that leaves plenty of time for the scenario I’m anticipating to unfold. If I’m right, these options will explode.

Don’t be fooled by the ongoing stock market rally. Stocks don’t begin secular bull markets with interest rates rising, inflation climbing off secular lows and multiples at extreme levels. Protect your investments now.

Eric Roseman is a member of The Sovereign Society’s Council of Experts and editor of Commodity Trend Alert, which focuses on winning investments in this red-hot investment sector. Indeed, in just the last six months, Eric’s closed out six investments for profits exceeding 100%! For more information on Commodity Trend Alert, please visit www.commoditytrendalert.com.

What You Need to Know Before Investing or Doing Business Offshore

While investing or doing business offshore is perfectly legal for U.S. citizens and residents, there are a few legal formalities you should keep in mind.

The most important of these is that you are responsible for paying taxes on your worldwide income. In addition, many types of offshore investments are subject to separate reporting requirements. Also, transfers of US$10,000 or more in cash or cash equivalents across U.S. borders must be reported, as well as the formation and funding of a foreign corporation, trust or partnership.

While it’s easy to comply with some of these requirements— such as the annual filing of the “foreign bank account reporting” (FBAR) Form TD F 90-22.1, other forms (such as those necessary to report a foreign trust relationship) are more complex. To assist you in complying with these more complex reporting requirements, we recommend the services of a qualified tax attorney.

For further details, please see “IRS and Treasury Reporting Requirements for U.S. Persons with Interests in Foreign Bank, Brokerage and Insurance Accounts or Ownership in Foreign Entities,” a Web page prepared by Sovereign Society Tax Advisor Vernon Jacobs, at http://www.offshorepress.com/AICPA.

What’s Hot for 2005…and What’s Not
by Mark Nestmann

Some very important changes in the international investment markets have occurred since 2000:

• Stocks ended their 19-year bull market. After peaking in 2000, the S&P 500 declined nearly 50%; the NASDAQ nearly 80%, through the end of 2002.

• Commodity prices ended a 20-year bear market. From their low point at the end of 1999, commodity prices have soared nearly 100%.

• The U.S. dollar ended its seven-year bull market. From its peak in January 2001, the U.S. dollar has declined more than 40% against the euro; 30% against the British pound; 25% against the Canadian dollar; and 12% against the Japanese yen.

• International real estate, particularly in the Caribbean and Europe, has exploded in price.

The Sovereign Society has put you at the forefront of these mega-trends. But for 2005, we’re advising caution. While our Council of Experts advises holding, and in some cases adding to, our profitable positions in precious metals, commodities, bonds and foreign currencies, all of these asset classes climbed sharply in 2004. We wouldn’t be surprised to see a sharp, if temporary, correction in 2005.

What to avoid? While there are individual exceptions, the U.S. stock market looks vulnerable. Another asset class we think is vulnerable is U.S. real estate, particularly REITS.

If you’re just now creating your portfolio, how should you begin? And if you’re an old hand at investing, what should you do now? This article gives you the answers.

Before You Speculate, Create a “Permanent Portfolio” to Protect Those Assets You Can’t Afford to Lose

No one can reliably predict the future. That’s the principal upon which author and investment advisor Harry Browne based his plan for a “permanent portfolio” when he began developing it in the 1970s.

The permanent portfolio is designed to grow in value regardless of economic conditions. Over the last 30 years, it’s gained an average of 9.2% annually with only four down years.

The idea behind the permanent portfolio is to create an investment strategy that can cope with any economic environment—inflation, deflation, recession or prosperity. And it turns out that a portfolio consisting of equal parts (25% each) of stocks, bonds, gold and cash does exactly that. Only simple adjustments are required, once a year—selling the outperforming investments and buying more of the underperforming ones to bring the portfolio back into balance.

For U.S. investors, these investments should consist of:

• Stocks: S&P 500 Index mutual funds, such as the Vanguard 500 Index Fund (VFINX). Reinvest all dividends.
• Cash: One-year U.S. Treasury bills. Purchase these directly from the U.S. Treasury (minimum: US$10,000) without paying a commission. Link: http://www.publicdebt.treas.gov/sec/secinvsr.htm.
• Bonds: 30-year U.S. Treasury bonds. These are no longer issued by the Treasury, so you’ll need to purchase them from a broker.
• Gold: One-ounce gold bullion coins, with no particular collector value. The U.S. eagle is suitable for this purpose. You can purchase these coins from any coin dealer.

The permanent portfolio should consist of whatever funds you can’t afford to lose. Only after you’ve financed the basics—living expenses, retirement, etc.—should you speculate on future price trends. For more information, see http://harrybrowne.org/PermanentPortfolioResults.htm.

Commodities: The Biggest Profits Are Yet to be Made

Commodities are hot. While stocks have experienced lackluster returns in recent years, commodities have exploded. After prices bottomed out in November 2001, the benchmark Goldman Sachs Commodity Index (GSCI) has surged nearly 100%.

Goldman Sachs Commodity Index 2001–2004

Source: Bloomberg L.P.

However, in the last few months we’ve seen some declines in commodities prices. First, it was the base metals, which started moving down mid-year. In October, it was oil. However, when oil started down, gold and silver exploded.

The Sovereign Society’s commodities expert is Eric Roseman, editor of Commodity Trend Alert. Eric thinks that the demand for commodities from rapidly developing countries such as China, with 1.5 billion inhabitants, will continue to place irresistible upward pressure on commodity prices. Eric predicts that the next uptrend in this long-term bull market will begin in 2005, and that it could become a mania as investors pour money into commodities.

One of the most undervalued commodities right now is palladium. This is the only member of the precious metals complex that hasn’t enjoyed a big price gain in the past two years. Indeed, spot palladium prices have actually fallen about 40% during this period, because Russia and South Africa, two of the largest palladium producers, are dumping excess production onto global markets. But that dumping won’t last forever, and when it ends, palladium will follow the precious metals complex higher, as it always has. And right now, it’s very cheap.

One way to purchase palladium is to buy bullion. But this means paying about a 10–15% premium over the spot price—much higher than for gold and silver bullion—and finding a place to store your metals.

For a leveraged play on palladium, consider an investment in Canada’s largest palladium company, North American Palladium (traded in Toronto under the symbol PDL, or PAL on the Amex). PAL is Canada’s only primary producer of palladium. It also produces platinum, gold, copper and nickel. When you buy PAL, you’re buying mostly a palladium producer, but with a little kick in other metals, too.

Offshore, Eric likes Merrill Lynch World Mining Class A (ISIN LU0075056555). It’s gained 18.8% from our recommendation in TSI 2/04. You can buy this fund through an offshore bank, but for tax reasons, U.S. investors should invest only through a retirement plan or other tax-sheltered structure. Link: www.mlim.ch.

Some of 2004’s best returns in commodities were by subscribers to Eric’s Commodity Trend Alert service. In just the past year, Eric chalked up gains of 338% on Chicago Mercantile Exchange Holdings, 261% on Fording Canadian Coal Trust, 299% on International Uranium Corporation, and 115% on ENI Spa, just to name a few. Of course, not all Eric’s recommendations are this profitable, but the average gain on his “buy” recommendations has been an amazing 56%! You can read more about CTA at http://www.agora-inc.com/reports/CTA/WCTAEC03.

Buy the Better Bonds

Most folks think bonds are pretty boring. But that’s not really true. Indeed, by buying 30-year U.S. Treasury Bonds every year from 1982 through 2000, you would have beaten the return on stocks—during one of the greatest bull markets in stocks in history. What’s more, unlike stocks, the profits would have continued in 2001 and 2002—terrible years for stocks, but not for bonds.

How could that be true? The reason is that bond prices move in the opposite direction of interest rates. If interest rates increase, bond prices fall—and if interest rates decrease, bond prices increase. From 1982 to 2000, interest rates on long-term T-bonds dropped from nearly 13% to 6%, leading to big profits. And from 2001 to 2002, they dropped again, although prices were volatile.

But in 2003 and 2004, the 22-year bull market in bonds seemed to end. April 2004 was particularly brutal, with prices falling 25% or more on most intermediate to long-maturity bonds. However, prices have now recovered for all categories of fixed-income investments—although in November, they fell a bit in response to concerns about the U.S. dollar.

These yields are now so low that it’s difficult to recommend buying them. Yet, we don’t believe that U.S. interest rates will increase much in 2005, because if the Fed raises rates too far, too fast, it will slow the economy and bring on a recession. Therefore, we continue to recommend the “better bonds” that Council of Experts member Neil George first wrote about in TSI 3/04:

• Pimco Strategic Global Fund (RCS). Yield: 7.9%. Loss since March 2004: -3.7%.
• Templeton Global Income Fund (GIM). Yield: 4.9%. Gain since March 2004: 13.7%.
• Templeton Emerging Markets Income Fund (TEI). Yield: 7.5%. Gain since March 2004: 1%.
• Morgan Stanley Global Opportunity Bond Fund (MGB Yield: 6.01%. Gain since March 2004: 2.9%.
• Thornburg Mortgage (TMA). Yield: 9.5%. Loss since March 2004: -1.5%.

Because prices can be volatile, establish your position in these picks a little at a time, over a period of several months. The best days to buy are when stocks are surging—which usually means bonds and income-generating stocks are falling.

(Editor’s Note: I am required to disclose the fact that I own shares of RCS, GIM, TEI and TMA. My purchases of these interests pre-date The Sovereign Society’s “no trading” policy, which went into effect in March 2004).

If you’re looking for higher profits, Scott Barrie, The Sovereign Society’s pre-eminent bond trader, has rung up some outstanding gains for subscribers to his Money Trader service, which he co-edits with currency expert Barbara Rockefeller. Following Scott’s recommendations, for instance, you could have multiplied your investment 15 times by buying a call option on the Emerging Markets Bond Index as bonds soared in Brazil and other emerging markets. Or bought an option on U.S. T-bonds and saw a US$400 investment grow over US$7,000 in just six weeks. While not all of his recommendations will be this profitable, Scott, a veteran of the raucous bond pits of the Chicago Board of Trade, can help position your bond portfolio for maximum profits. For more information on The Money Trader, the first currency and bond options trading service for individual investors, click on http://www.agora-inc.com/reports/MTR/WMTREC03.

Stocks: Headed for a Fall

In comparison, the global stocks performed much better than Wall Street in 2004. This year’s top performers handily beat anything Wall Street had to offer, topped by stellar performances in Egypt (up 101%), Colombia (up 82.4%) and Venezuela (up 60.2%), through the end of November.

Rising interest rates are never good for stocks. But that won’t be the problem for the U.S. stock market in 2005. It will be something much more basic: profits. Corporate earnings soared following the Bush tax cuts, but that money has now been spent and earnings will only go up if the economy comes roaring back in 2005. And that’s just not likely to happen given continuing U.S. economic weakness.

There is, however, one significant wild card. If the Bush administration stakes substantial political capital toward privatizing Social Security, U.S. stocks could soar. In that case, speculators will bid up prices in the expectation that baby boomers and other beneficiaries of a privatized Social Security system will buy stocks in droves. The problem is that if Bush doesn’t succeed, any gains the market experiences will quickly be given up. And make no mistake: there is enormous political opposition to Social Security privatization.

We hope that the Bush initiative succeeds, because it is the right thing to do—Social Security is, as we have pointed out many times, the world’s largest Ponzi Scheme. But we’re reluctant to invest in what may be a failing cause. The only exception would be if you want to participate in option trades via The Money Trader, which no doubt will seek to profit from any trends—up or down—in stocks.

For more conservative investors, Eric Roseman recommends global equity funds with a value bias which have been among the best performers this year. His top picks:

• First Eagle Sogen Global (SGENX). Up 14.1% in 2004, 46.8% since our first recommendation in TSI 7/02. First Eagle should be a core position in any stock portfolio.
• Tweedy, Browne Global Value Fund (TBGVX). Up 27.0% since our first recommendation in TSI 10/01.

If you are not a U.S. citizen, another great choice is the GAM Worldwide Fund. This offshore fund is up 18.3% year-to-date and an amazing 1,800% since inception in 1983, double the return of the benchmark MSCI World Index. U.S. investors can buy it through an offshore bank, but for tax reasons, should invest only through a retirement plan or other tax-sheltered structure. Most non-U.S. investors can purchase it directly from GAM. Link: http://www.gam.com.

The Dollar: Down in 2005, but NOT in a Straight Line

Foreign currencies have historically been one of The Sovereign Society’s strongest performers. Our long-term recommendations of Swiss francs, Australian dollars, New Zealand dollars and British pounds have all done well.

More importantly, our foreign currency recommendations have helped U.S. members protect their international purchasing power from the long-term decline of the dollar. And that decline resumed in earnest in the last three months of 2004. Since mid-September, the dollar has fallen more than 9% against the euro. It also set a nine-year low against the Swiss franc and a 16-year trough against the New Zealand dollar.

The question, of course, is whether that decline will continue in 2005. And to answer it, I turned to international economist and currency expert Barbara Rockefeller. Barbara points out that currency prices don’t move in a straight line indefinitely. While she believes the dollar could easily fall another 20% or more in 2005, she thinks the movements will be choppy, with sharp dollar rallies that will clear out excessive dollar shorts.

One thing that might change this are the policies of the Bush administration. Bush has pushed for Social Security privatization, a value-added tax and has promised to take measures to cut the federal deficit. If he follows through on these controversial plans, the dollar could turn around.

Another factor that might lead to renewed dollar strength is higher interest rates. But we don’t think that’s very likely, because of the softening economy we’ve already described, although it’s possible short-term rates may rise by another 0.5–1% in 2005.

Nor is there any sign that U.S. policymakers are defending the dollar. Quite the opposite—in recent weeks the U.S. Treasury Secretary has repeatedly warned U.S. trading partners not to intervene in currency markets to check the dollar’s decline.

Therefore, we agree with Barbara that the dollar could go down more. We believe the strongest currencies will be those tied to the soaring commodity markets, namely Canada, Norway and Australia; and also New Zealand. These units provide higher inflation-adjusted yields and represent good investments outside the U.S. dollar. The euro may rise a bit also, but it doesn’t have the bullish economic fundamentals behind it as do the natural resource currencies.

You can buy foreign currency CDs through a U.S. bank such as Everbank (http://www.everbank.com/sovereign/start.htm). For higher yields, invest through an offshore private bank. And for the highest yields, invest though local banks in the countries in which you want to purchase your CDs.

Another and potentially much more lucrative way to play the currency markets is to invest in foreign currency options. This is Barbara’s expertise, and she racked up big profits last autumn for subscribers to Money Trader, for which she serves as co-editor. When she finally cashed in on November 11, Money Trader readers made 178% in Swiss francs, 251% in Canadian dollars, 34% in euros, 42% in Australian dollars and 25% in British pounds. While not all her trades are this successful, this shows you the kinds of profits that can be made in the foreign currency markets with a pro’s guidance. For more information on Money Trader, click on http://www.agora-inc.com/reports/MTR/WMTREC03.

Real Estate: Be Selective

Investors have a love affair with U.S. and global real estate. And it’s obvious by the high valuations of investments such as U.S. real estate investment trusts (REITs), which have gained 50% or more in recent years.

But the REIT party may be about to end. Unless office building occupancy rates and rents pick up, REITS will be hard pressed to maintain their high dividends. That requires a strengthening economy. Yet, if growth does strengthen, interest rates will rise and REITs will be less attractive.

Residential real estate also looks vulnerable in selected areas, particularly those that have had double-digit annual appreciation in recent years—southern California being the most obvious example. Yet, if interest rates remain low, the bull market in residential real estate, particularly in relatively low-priced sunbelt cities like Phoenix could go on for a while longer.

Offshore, real estate has boomed as well. But this market also looks vulnerable. Prices in ultra-expensive London are already falling, and prime real estate in places like Spain’s Costa del Sol and Portugal’s Algarve is selling at increasingly ridiculous valuations.

The best real estate opportunities, according to Lief Simon, editor of Global Real Estate Investor, lie in central and South America, in countries like Nicaragua, Panama and Ecuador. Prices are rising, but remain inexpensive compared to the United States and other global markets. However, there are also unique opportunities in more developed markets, such as in Vienna, where real estate prices remain well below those in Paris, London, Rome and other major European cities. Yet Vienna’s proximity to the fast-growing economies of eastern Europe could make real estate investments there quite profitable in the next few years.

If you’re interested in exploring the investment opportunities in Austria and eastern Europe, you don’t want to miss The Sovereign Society’s eastern European tour from April 12 to 23, 2005. For more information, contact Patricia Goltry at pgoltry@sovereignsociety.com or call 1 (866) 381-8446 (toll free USA/Canada) or +1 (410) 230-1243. Link: http://www.sovereignsociety.com/ vmembers.php?nid=1022. And, to learn of some of the really exceptional opportunities in global real estate, I highly recommend Lief Simon’s Global Real Estate Investor service. For more information, see http://www.agora-inc.com/reports/REL/WRELEC03.

Diversification is Key

The bottom line for 2005 is to diversify your investments. By combining different asset classes, geographical regions and currencies in your portfolio, you’ll achieve higher returns and lower volatility. Plus, you’re much more likely to protect your capital in a bear market.

Mark Nestmann is editorial director of The Sovereign Society. He is the author of numerous books on privacy, asset protection and taxation.

Swiss Investments too Expensive? Then Rent a Swiss Cow!

Switzerland has some of the world’s most beautiful real estate. Trouble is, it’s not only beautiful, but very expensive, a consequence both of Switzerland’s popularity and the soaring value of the Swiss franc. At the same time, Switzerland’s farmers are in trouble—big trouble. Soaring costs, higher property taxes and increased foreign competition have resulted in more than 25% of Switzerland’s farmers going out of business just in the last decade.

But one enterprising Swiss farming family has come up with a creative way to generate extra revenue, and give foreign investors an inexpensive way to invest in Switzerland: it leases out its cows. For a modest fee, you receive a unique—and tasty—offshore investment: the right to buy 10 kilos of reduced price cheese. Plus, if you wish, you can travel to rural Switzerland for a personal visit with your cow. You can even choose your choice of cow colors: chocolate brown, dark brown, black with white spots, and black.

To learn more about how you can lease your own personal Swiss cow, see http://www.escapeartist.com/efam/62/Life_In_Switzerland.html.

Caution: Do Not Walk on Tracks

A Pennsylvania woman has sued Norfolk Southern Corp. for failing to warn her that trains travel on railroad tracks. Patricia M. Frankhouser is asking for $30,000 in damages after being struck by a train as she walked along railroad tracks near her home in Jeannette, Pa., a southeastern suburb of Pittsburgh. While she wasn’t seriously hurt, her attorney is claiming that Norfolk Southern was negligent in not posting warning signs advising pedestrians walking on railroad tracks that they might encounter a train.

Under the same reasoning, someone walking, say, in the carpool lane of I-94 in Chicago at rush hour could sue the city for not posting warning signs if they are run down by a car, as they almost certainly would be. Or that the heirs of persons jumping off the Empire State Building observation deck could sue for the lack of signs advising of the consequences of the laws of gravity.

If the officers and directors of Norfolk Southern Corp. don’t already have an asset protection plan in force, we hope that they become members of The Sovereign Society so that our experts can help put one in force.

Invest Offshore Without Leaving Home
The Overlooked Advantages of American Depository Receipts
By Eric Roseman

Some of the best investments for the remainder of this decade lie overseas. Marked by faster-growing economies, stronger currencies, superior earnings and generally more fiscal conservatism, foreign markets have outpaced Wall Street since 2000.

In the 1990s, the S&P 500 Index averaged a 15.6% annualized return. That was better than any other ten-year period for U.S. common stocks since the high-flying 1920s. But so far in the 2000s, the S&P 500 Index has lost a cumulative 7% as the technology bubble came to a crashing end in 2000 while the broader market imploded, particularly in 2002.

Some of the most compelling opportunities for 2005 and beyond lie in the oversold and undervalued health care, biotechnology and insurance sectors. Plus, the best earnings growth remain in commodities, driven by booming natural resource prices and growing profit margins for energy and mining companies.

But to invest in most of these companies, you must invest overseas. That’s where the big values are as we begin 2005. One of the easiest ways to do so is by purchasing ADRs, or American Depository Receipts.

ADRs: The Easiest Way to Invest Offshore

Essentially, an ADR is a foreign stock traded in the United States, in U.S. dollars. By investing in an ADR, you participate in the profits or losses for that foreign company, including any foreign currency gains or losses.

ADRs aren’t new. Nearly 80 years ago, the first ADR was a British company listed on the NYSE. Today, ADRs total over 2,000 issues representing over 70 countries.

For example, if you buy Switzerland’s Nestle ADR (NSRGY or NSRGY.PK), you’ll benefit if the stock rises on the Zurich exchange, plus you’ll share in the foreign currency gain should the Swiss franc continue to rise against the U.S. dollar. While trading Nestle in its home market undoubtedly makes sense for European investors, the Nestle ADR provides easier access for most U.S. retail investors. Additionally, there are no withholding taxes and in most cases, trading costs are usually much lower.

Tracking your ADRs is easy with two great websites providing daily information plus in-depth ADR research. These include The Bank of New York (http://www.adrbny. com) and J.P. Morgan (http://www.adr.com). Yahoo Finance (http://finance.yahoo.com) also can track most ADR prices.

When you purchase ADRs, one factor to bear in mind is liquidity—your ability to make transactions without too great a buy-sell spread. Most ADRs traded on the NYSE have good liquidity. This includes many large companies from the United Kingdom, France, Italy, Germany and even Brazil. But some OTC-listed ADRs of smaller companies might not have enough trading volume on a given day to buy without paying a significant premium to the bid price or sell without offering your shares at a big discount to the ask price. The key is to make sure you’re buying an ADR that is heavily traded so you’re always in a position to receive the best bid or ask price.

Tap Into Offshore Insurance and Gold for 2005

My favorite ADRs now include European insurance companies and gold stocks. The European insurance market has been plagued all year by rising insurance claims, mainly a series of disastrous hurricanes across Florida during the third quarter. Another blow has been New York Attorney General Elliott Spitzer’s attacks on U.S. and overseas insurance carriers for price collusion.

Some of the cheapest stocks on the globe right now are a handful of world-class insurance companies that trade at huge discounts to major market averages. The time to buy distressed securities is when the news is bad and stock prices very low. And that’s now.

For example, Holland’s Aegon NV (NYSE-AEG), one of the world’s largest insurance companies, currently trades at just 9.6 times trailing earnings and pays a 3.5% dividend. Compare that multiple to the MSCI World Index, which sells at 21 times trailing earnings and yields just 1.95%. Aegon’s ADR is now 23% off its 52-week high.

Gold mining also offers a very profitable opportunity. Gold prices bottomed three years ago and we are clearly in a bull market uptrend. And following two great years in 2002 and 2003, gold stocks barely moved at all in 2004, offering a good entry point for new investors.

Goldcorp (NYSE-GG), a Canadian producer, has one of the lowest cost mines in the world. Its Red Lake Mine produces gold at an average price of just $87 per ounce. Goldcorp, unlike other gold producers in the large-cap area, trades 20% off its 52-week high, sports no debt and has a clean balance sheet. None of its production is sold forward, or hedged, either, which means that shareholders will profit handsomely if gold prices continue to rise.

I’m all in favor of keeping a portion of your assets offshore and maintaining actual investments in foreign currencies. But ADRs provide a way to gain exposure to foreign markets and foreign currencies—without leaving home.

(Sovereign Society Council of Experts member Eric Roseman’s Renegade Investor service focuses on undervalued “contrarian” investments the mainstream financial media mostly ignore, many of them ADRs. Eric’s been covering global markets for 15 years, as a money manager and investment editor. During that time, his subscribers made 400% on The Singapore Fund and 330% on National Bank of Canada, to name a few. In the last four months, Renegade Investor subscribers have experienced double-digit gains in two of Europe’s biggest—but most overlooked—bank shares, both trading as ADRs. For more information, go to http:// www.agora-inc.com/reports/RGI/WRGIEC03.

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Part II

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