I don’t know if any of you know the old blues song from the 1930’s that goes "Once I lived the life of a millionaire…spending my money...I didn’t care. Taking my friends out for a mighty good time...buying bootleg liquor, champagne and wine. But then ooh...I fell so low...Had no friends and had no place to go..."

Today, it is as if the same song is being sung by the U.S. dollar. The U.S. dollar is being deserted one friend after another. One would expect the dollar to rally after its big decline, but it doesn't. WHY?

More and more countries that have aligned their currencies to the U.S. dollar are re-examining the so called U.S. dollar peg.

China is being forced to do so by European and U.S. pressure. Hong Kong speculators are attacking the Hong Kong dollar peg to the U.S. dollar and forcing the Hong Kong government to defend it at great expense.

The six Middle East countries pegged to the U.S. dollar (Saudi Arabia, Kuwait, UAE, Bahrain, Oman and Qatar) that export a lot of oil and have historically tied their currencies to the U.S. dollar. This group has decided to institute a single currency by 2010.

Many other oil exporting nations have been interested in being paid Euros for their energy.

The new rich nations of the world that sell raw materials, or manufactured goods, are all wondering about the big buildup in dollars in their portfolios, and what they will do to diversify their risk. In addition to causing a decline in the value of their holdings, having too many dollars causes other problems.

When-non dollar nations accumulate large quantities of U.S. dollars, they must sterilize them to avert inflation (this is often done by buying U.S. dollar denominated debt). If the dollars are used to buy goods, it can end up importing inflation (especially if they buy goods from non dollar based countries that are rising in price).

Although the dollar can rally at any time, until the U.S. starts to face its fiscal and trade deficit problems, and the U.S. economy finds a bottom to the credit crisis...the currency will remain ‘Under Pressure’…(a popular 80’s pop song for those readers who may not be familiar with 1930’s blues tunes).

CHINA AND SOME OTHER SOVEREIGN WEALTH FUNDS ARE RAMPING UP THEIR STRATEGIC INVESTING IN METALS, ENERGY AND COMPANIES

Their focus is on acquiring mineral resources, energy resources and investments in private equity houses, where they can get big and cheap stakes in companies.

Today, it was announced that China is seeking to make major investments in a large number of private equity firms. This is logical, and it follows the pattern that they have set in the last few years. They have been accumulating MINERAL AND ENERGY assets in Africa and Latin America.

They do not mind investing in countries with corrupt governments or wars going on. They are more than happy to invest in stable African and Latin American countries like Tanzania, Kenya, Uganda, Brazil, Peru and others to secure raw materials. They are after nickel, coal, zinc, copper, iron ore, oil and precious metals.

Political risk is not their big concern. Their big concern is to get the raw materials to allow 300 million more Chinese (in the case of China), and countless more in other countries make the transition from countryside subsistence farming to urban dwelling and its blue and white collar jobs.

No wonder precious metals, base metals and energy continue to rise...the demand continues to grow. We estimate that there will be continued demand for years to come.

BETTER LATE THAN NEVER

The IEA (International Energy Agency) hints that its new crude oil forecast (to be announced soon) will be much higher than the previous price forecasts have been.

Failing to buy the peak oil thesis for a long time, the IEA has been making low-ball estimates of global energy prices for the whole five years we have been shouting about higher oil prices. This was because they believed what the oil producing countries told them. Of course, the oil producing countries had a vested interest in trying to sell the world that they could increase production and keep oil prices down so consumption would stay high.

Now even the IEA has seen through this paper thin argument, and will announce that oil prices can go much higher because the amount of oil which can be produced in the world has PEAKED.

OUR THEMES

We remain gratified that our themes have worked out so well, and we continue to see most of them working in future months.

Energy-We are certain that energy which we predicted years ago could go to $100 by 2008 will get there soon. What then? At this juncture we believe that alternative energy and foreign energy companies may be more attractive than U.S. energy providers. We have investments in energy companies operating in Australia, Canada, India, Africa, the North Sea, Norway, South America and the Mid East. We continue to own oil, natural gas, uranium and renewable energy investments in the energy sector.

Base Metals-Although we remain bullish on base metals long term, for the short term we are concerned that a weak U.S. economy will cause base metals stocks to move sideways. We will not emphasize base metals stocks for the next few months for this reason.

Precious Metals and Currencies-The weakness in the U.S. dollar mentioned above is extremely salutary for gold and non U.S. currencies, and we remain very positive on them for the coming months. We own both gold royalty companies and the metal itself. We own several non-U.S. currencies, including the Canadian Dollar, British Pound, among others.

India-India has recently changed the investment regime for foreign investors. This may cause a short-term decline in Indian stocks, which we would be delighted to see. We believe that India holds huge promise over the long-term and we would like a lower price at which to add to our Indian positions.

China-China is best played through Hong Kong, and this has been a very successful area for us. We will use any market corrections (which usually appear at least once a year) to add to our Hong Kong based positions in Chinese companies.

Singapore and other fast growing countries-Here again we plan to wait and add on market corrections.

We look forward to your comments and we thank you for listening.

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