As anticipated, oil inventories are swelling and natural gas stocks are being drawn down. As 2005 came to an end, crude oil inventories were 9% higher than a year earlier and 12% higher than during the past five years on average. Natural gas stocks, meanwhile, are only 1% above the five-year mean and 8% lower than a year ago. At the moment, analysts have convinced themselves that this will be a mild winter and that withdrawals from natural gas inventories will be modest. What if they’re wrong? I still believe the odds are strong for a natural gas shortage this winter, which is why I’d emphasize exploration and production companies with prominent natural gas exposure. Examples: Chesapeake Energy (symbol CHK), Devon Energy (DVN), Encana (ECA), Canadian Natural Resources (CNQ) and Daylight Energy Trust (DAY.UN). January 3, 2006


Hugo Chavez is at it again, this time with a tax increase for oil sands producers, whose income tax rate at the Orinoco properties will increase to 50% from 34% in 2006. If the Venezuelan government proceeds as promised, Canadian oil sands developers will further benefit. Several of the major oil companies participating in Orinoco developments will now have to consider high taxes in addition to rapidly growing political risk and may therefore turn their attention to Alberta. Key Venezuelan players that may do so are BP, Chevron, Conoco Phillips, Exxon Mobil and Total. January 3, 2006


A few weeks ago I singled out the Japanese currency as overdue for a rally. Shortly after, the Yen staged a convincing rebound, although its ascent has recently stalled. Where from here? I believe a prolonged period of Yen strength has only just started and will sporadically manifest itself throughout 2006. Why? Large speculative Yen short-positions still need to be unwound, the currency is inexpensive on a fundamental basis, and the Japanese will gradually regain confidence in their own economy and markets. January 3, 2006


At “analyst school”, I learned that gold and the dollar move counter-cyclically. That’s why the Midas metal’s rise during a year of mostly dollar strength was truly remarkable. Gold, along with other real assets, such as commodities and real estate gained in 2005 because liquidity was so abundant. This, in turn, raises the question what will happen in the year ahead, when the Fed is expected to complete its tightening cycle and the dollar is likely to swoon. To what extent will early-year rate hikes impair gold and how much will the prospect of a falling dollar help it? Because real interest rates (even after another two or three Fed adjustments) will still be at historically low levels, I believe the yellow metal will continue to do well. Even so, be prepared for some short-term volatility: gold has had a nice run and needs to consolidate its gains. Be particularly careful with gold shares, many of which are achieving only modestly better earnings results despite much higher bullion prices. A month ago, I advised that core holdings be maintained and some profits should be taken on trading positions. That recommendation still holds. January 3, 2006

Peter Cavelti’s background as a financial analyst and author spans 35 years and four continents. His grasp of global issues is extraordinary and his comments and books have been published internationally. He was president of Canada’s Guardian Trust and subsequently owned his own firm, which managed some of the best-performing natural resource mutual funds. Peter firmly believes that only an integrated understanding of geopolitical, demographic and economic events can lead to successful investing, and that is what his web service Perspectives is about. If you feel keeping on top of relevant global events takes too much time, Perspectives is for you. Whether it’s investment advice or political analysis, Peter offers his insights in concise and easy-to-read form. Best of all, Perspectives is free. Visit www.cavelti.com and sign up today!