Wednesday, April 26, 2006 - Vol. 8 No. 83

In Today's Letter: Comment: Forget Bonds in 2006; Buy Precious Metals Offshore: Italy Not Likely to Return to Lira Wealth: Envy of the World: Canada Cancels Bond Auction Privacy & Rights: Microchips Under Your Skin?

Forget Bonds in 2006; Buy Precious Metals

Today's comment is by Eric Roseman, Investment Director of The Sovereign Society, and editor of The Sovereign Society's Commodity Trend Alert.   

Dear A-Letter Reader:

Unless you've been hiding under a rock this year, you've probably seen the investment headlines announcing precious metals have rocketed to fresh 25-year highs since late March. At the same time, fixed-income securities – including once high-flying emerging market bonds, have been declining in value as investors run for cover amid the threat of rising inflation. Bonds typically provide a negative correlation to hard assets because rising commodities prices foreshadow higher inflation. And the bull market for raw materials since late 2001 is now the greatest secular rally since the 1970s. On April 18, the Goldman Sachs Commodity Index (GSCI) hit an all-time high. 

Historically, surging precious metals prices have accurately forecasted rising inflation. This was the case back in the 1970s when gold and the rest of the precious metals went ballistic amid surging inflation, a plunging US dollar, soaring oil prices and geopolitical tensions. Military spending in Vietnam also led to inflation in the early 1970s, striking a similar parallel to Iraq spending today.

The 1970s inflation analogy is virtually being repeated in 2006 with the exception of the dollar, currently enjoying the last months of a cyclical bear market rally since January 2005.

Though most industrialized economies, including the United States, continue to harbor low inflation rates, other forces will cause metals to bust through important resistance levels in 2006.

The "Perfect Storm" is now in play for precious metals and paradoxically, the "Perfect Disaster," for fixed-income securities.

For gold and silver, the fundamentals have not looked this bullish in over 25 years. Rising tensions in the Persian Gulf, Middle East and Latin America continue to threaten oil supplies, driving flight-to-safety assets into gold. But the real thrust propelling the metals higher are the pervasive supply-side shortages now evident for gold, silver and platinum. Global gold production barely grew in 2005 while silver supplies remain in net deficit. The same goes for platinum. And with the race on to devalue currencies in the battle to remain export competitive, currencies are laced with unprecedented debt levels. The United States, Western Europe and Japan have alarmingly high budget deficits and don't want a strong currency. And following years of central bank dumping, several banks are now accumulating gold in the open market to diversify their foreign exchange reserves. Plus, just as the Vietnam War wrecked America's finances, the same path of destruction now lies with enormous spending devoted to stabilizing Iraq.  

As for bonds, they continue to represent a bet on low inflation and economic weakness. And that's a losing bet in 2006 as global economic growth is accelerating. With the exception of emerging market and high-yield bonds, all other fixed-income categories have posted poor returns since 2001. In fact, they're barely above the inflation rate and actually are posting negative returns adjusted for taxes. But since March, all bond sectors are feeling the heat from soaring raw materials as global economies are fully synchronized for the first time since the mid-1980s. 

Europe and Asia are running above their long-term growth trends while the U.S. continues to muscle along, defying the most bearish predictions. Bonds are terrified of above-trend growth rates. This explains why long-term interest rates are posting 4-year highs as the Federal Reserve continues to tighten monetary policy. Other central banks are just beginning to raise rates, including the European Central Bank, and later this year, The Bank of Japan.

In 2006, precious metals, not bonds, will earn big profits for investors. A secular theme has now evolved whereby no major economic bloc desires a strong currency. As inflationary pressures eventually surface this year, investors will increasingly scramble away from paper assets and into commodities – namely gold, silver and crude oil.

In many ways, the 1970s have returned. Only this time, events are likely to lend to even higher inflation-adjusted gains for commodities because supply deficits are becoming chronic. As for bonds, 90-day Treasury bills, now approaching 5%, look far safer as inflation masks its ugly head.
ERIC ROSEMAN, Investment Director
on behalf of The Sovereign Society 
EDITOR'S NOTE: Eric Roseman recently finished a brand new report on metals. Click here to see how you can receive a FREE copy. 

Your Retirement Plan is NOT Safe

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Italy Faces an Economic Crisis, But It's Not Likely to Return to the Lira
Italy faces an uphill battle to resurrect its economy. Romano Prodi, who might become Prime Minister for the second time since 1996 (Parliament won't confirm a victory April 28), narrowly beat Silvio Berlusconi's centre-right coalition. Over the last five years, Italian gross domestic product (GDP) has averaged less than 0.7% per annum, by far the slowest growth rate among large OECD countries. In 2005, Italy suffered an economic recession, defined as two consecutive quarters of negative growth. Competitiveness has also declined sharply since 1999 when the Euro was introduced. In comparison to European average unit labor costs have risen 10% in Italy. And Italy's public finances, notoriously high in the post-WW II period, have deteriorated as public debt surged to 106% of GDP. Italy also harbors the highest budget deficit in the Euro-zone at 4% of GDP.
Currency speculators have begun to forecast the possibility of devaluation whereby Italy would exit the Euro-zone to stimulate export growth. In 1992, Italy embarrassingly exited the Euro's predecessor, the European Exchange Rate Mechanism or ERM, along with the United Kingdom. The odds of Italy leaving the Euro are remote because the country's external borrowing costs would soar as rising debt burdens would compel the Italian Central Bank to raise interest rates to attract its funding requirements. Italy greatly benefits from its inclusion in the Euro-zone, attracting global investors to fund its budget deficit while maintaining historically low interest rates to spur economic growth.

Envy of the World: Canada Cancels Bond Auction
Canada cancelled two bond sales planned for 2006's fourth quarter after eight straight budget surpluses reduced the country's borrowing needs. The country has cut its annual debt sales by 44% in the past decade. Canada, which enjoys the best balance-sheet in the G-7 industrialized economies, continues to log record trade and budget surpluses. This balance sheet is largely credited to the natural resources boom since 2002. Alberta, Canada's fastest-growing economy and home to this decade's oil boom, recently issued "prosperity checks" to residents, returning C$400 (US$350) to each Albertan after wiping-out its entire debt obligations. The Canadian dollar has rallied to a 15-year high recently, closing just below US$0.87 cents and has surged 30% since hitting an all-time low almost four years ago. The benchmark Toronto S&P/TSX Composite Index has rallied 10% in 2006 and stands at an all-time high after more than doubling since 2003. 

Microchips under Your Skin?
Microchips imbedded under your skin: it sounds like something out of a futuristic horror film. Yet apparently, it's already happening. In Delray Beach, FL, VeriChip Corp. has already received federal approval to implant over 2,500 employees with tiny microchips in their forearms – all in the name of security, of course. But there is some good news: at least one state is trying to protect you from these microscopic invasions of privacy. Wisconsin Rep., Marlin Schneider, says in the future, U.S. companies can and will implant these microchips in their employees – unless this practice is stopped right now. Therefore, the Wisconsin state legislature just proposed a bill which will ensure no one can forcibly implant another resident with a microchip.  Violators would face a fine of up to $10,000. LINK: Please click here for more information.

Radical New Approach to Asset Protection & Privacy

In 2004, more than nine million Americans had their identity stolen and approximately 1.8 million were sued. And laws like the USA PATRIOT Act greatly expand warrantless searches and permit government property seizures without proof of wrongdoing.
Big Business and Big Brother want to keep you and your wealth in plain sight, to be profitably tracked and conveniently seized. However, you can still legally create international 'lifeboats' of wealth and privacy that are practically invulnerable to snooping or confiscation.
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LINK: http://www.isecureonline.com/reports/190SLIEC/W190G104/