Gold is closing in on the $500 level! Those of you who read Perspectives regularly know that I’ve advocated core holdings in gold shares for the past few years. My main reason for owning some of the Midas metal is that none of the major currencies can be trusted, that very low interest rates around the world encourage the hoarding of tangible assets, and that rapidly growing wealth in places like India and China will boost demand. Even so, given the backdrop of rapidly rising US interest rates and the resulting dollar strength, I’m stunned by gold’s current strength. What’s more, gold mining shares are generally overpriced, both in terms of the bullion price they discount and their premium to net asset value. My optimism for gold and gold mining shares remains high, which is why I’d keep existing core positions. However, if you own additional trading positions, you may want to take some profits.

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The new Polish government decided not to adopt the Euro as its currency. Nor did it set a target date for doing so. The question now arises what the other ten pending EU members will do. Upon joining the union, they are actually treaty-bound to join the common currency bloc, as long as they can achieve economic stability as defined by the EU’s existing members (who frequently don’t abide by the same rules). Intriguingly, there are no penalties if a nation fails to adopt the single Euro currency, but there are plenty of reasons why new members may not want to do so. Chief among them: by staying out they can maintain control over their own monetary and fiscal policy. Not to long ago, the consensus was that the dollar was “on its way out” and the Euro was the currency of the future. Europe’s dismal economic performance and the resounding defeat of the EU’s proposed constitution have radically changed that.

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Every few months, I try to determine which major currency is most undervalued. I believe right now it’s the Japanese Yen. Rapidly rising US interest rates have caused many Japanese to buy dollars, which has depressed the Yen. But now, increasingly many European and American money managers are buying Yen to take advantage of an attractively valued and promising Japanese stock market. The Yen is currently range-bound, as these two factors coincide. When will it recover? The central questions are when the Japanese regain confidence in their own economy and when the Bank of Japan, spurred on by a more robust business climate, starts raising interest rates. It’s still early in this game, but slowly accumulating the Yen now may pay off in a big way during 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!