ETERNAL VIGILANCE

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What We Now Know

Week of 11/10/03
(Content slightly edited)

We have once again made a special arrangement to present you with "What We Now Know" the fascinating weekly e-letter from the editors, researchers and world travelers of The Explorer's League. Hope you enjoy it as much as we did. Pass it along!

*** THE NEXT BIG THREAT ***

Some years ago savvy traders in the Egyptian souk came up with a rating scale for the dates they sell during the Muslim holy month of Ramadan. The dates on offer are named after public figures, with the highest quality dates named after the most popular individuals. This year the best and most expensive dates are named after French President Jacques Chirac and sell for $3.2 dollars a kilo, joining a best date alumni that includes none other than Osama bin Laden. The second best dates this year are the "Yassar Arafat" - which sell for up to $2.43 per kilo.

So, what names do you think would be assigned to the poorest quality dates? You'd be right if you guessed the "Bush," which sells for a lousy 24 cents per kilo, or the "Sharon," which comes in dead last at a near giveaway 16 cents per kilo.

Notice a trend here? We do, and it points to the next big headache for those in the U.S. government who seem addicted to meddling in the Middle East. The headache has a name, and it is Egypt. The place seems to be a powder keg nobody is looking at, like Iran was in the last days of the Shah.

For many years, we've liked to keep an eye on events in Egypt. There's not much about the country in the popular press; since they arrived at an accommodation with the Israelis years ago, most people figure the place is healthy, happy, and friendly. Out of the news, out of mind. Problem solved. But we suspect that Americans are about to learn quite bit more, like it or not. And, chances are, it will be yet another unpleasant and expensive education. With the right catalyst, Egypt may be about to boil over.

The place is an accident waiting to happen. It has an incredibly bureaucratic, centrally planned, stagnant, fascist economy. Since January, when the Egyptian pound was revalued, prices of even basic foodstuffs (including dates) have risen between 15% and 50%.

To make matters worse, the population of 70 million is growing at one of the fastest rates in the world, with massive unemployment among volatile young males (over 35% of the population is under 15). It is a hotbed of religious fervor. The average fellaheen is dirt poor, and totally ignorant.

Egypt's President Hosni Mubarak, like the Saud family across the Red Sea, is in an untenable position - trapped between the rock of a hostile, young and futureless populace that has been fed a steady diet of fundamentalism.... and the hard place represented by a desire to remain in power as a secular dictatorship.

In an attempt to satisfy the masses, Mubarak's government trots out the usual scapegoat, Israel, most recently pledging his support to Syria against what he termed "provocations" from that unwanted neighbor. Singing from the same song sheet, the Egyptian governmental daily al-Gumhuriya described a deadly October 4 Palestinian suicide attack in the northern Israeli city of Haifa as a "brave commando operation."

But there's a big difference between trash talking for the souk, and keeping in power by keeping the mullahs under control - something Mubarak no doubt had in mind when his security forces recently rounded up forty-three Islamists and accused them of planning attacks on Western interests in Egypt.

The tightrope that Mubarak and his thugs are walking on is fraying a little more each day and, within the decade, will almost certainly snap... making the mess that is the Middle East that much worse for whomever is named after bad dates at the time.

**** BE HAPPY - PART ONE ****

"What We Now Know" is the weekly look at the world we live in for members and guests of The Explorer's League, a new organization with the motto "Live Before You Die."

The League has been founded by a group of individuals with varied interests that range from playing polo to writing books... from extreme travel to the in-depth study of the human mind... from race car driving to analyzing technology trends and much, much more.

The core mission of The League is to provide like-minded individuals with the tools and resources to live more fulfilling lives. If you sometimes feel like your life is running down a rut and actually want to do something about it, The Explorer's League is perfect for you.

Start by subscribing to "What We Now Know".

As a charter subscriber you'll continue to receive this weekly e-letter for free. And, if you subscribe today, you'll get "The Fortune Cookie Play: Cashing in on the Chinese Economic Miracle," an interesting and useful 24 page white paper report we recently came across and liked. It provides a clear and concise look at the monumental impact China's remarkable economic expansion will have on the rest of the world, especially on those of us living in the U.S. (If you are already a subscriber, you'll be sent a separate email with a link to this report.) As a WWNK subscriber, you'll also be among the first to be notified when the virtual clubhouse of The Explorer's League, now under construction, is finished.

Back to the title of this section: In recent weeks, researchers at Ohio State University have confirmed the theory first postulated in 1884 by psychologist William James that your physical expressions dictate your attitude. To put it simply, smile more and your outlook on life will tend toward the upbeat and happy. Sound too easy? Put the research data to the test - make a concentrated effort at smiling more over the next week and see if it works for you.

In next week's edition, we'll tell you another, even more potent way to put life back into your life. As a bonus, it also happens to be one of the most important secrets to succeeding in business as well.

*** MAKE YOUR OWN CRUISE MISSLE ***

We attempt to keep up with advances in aviation technology and know that this field is on the same trend as computers, biotech and, indeed, most areas of technology: everything is becoming vastly cheaper, smaller, and more available.

This fact was recently hammered home by the October rocket attack on Iraq's Al Rasheed Hotel, temporary home to civilian and military personnel associated with the U.S.-led Coalition Provisional Authority and, at the time, deputy defense secretary Paul Wolfowitz. The rocket used with such global effect turns out to have been a homemade affair, described by officials on the scene as a "science project."

Which brings to mind Bruce Simpson, a resident of New Zealand we recently learned about who has decided he can make his own cruise missile for about US$5000... and is on his way to completing it-- including the manufacture of his own jet engine. Simpson has a web site, www.interestingprojects.com, where interested parties can monitor his progress, and we shudder to think who that may be.

The implications: in a world when absolutely anybody can launch a successful attack in retaliation - with low-tech weapons options that range from human bombs to, potentially, personal cruise missiles, governments are going to have to be far more careful when picking a fight.

*** GOLD BULL, NO BULL? ***

For years, no, make that decades, the gold bulls have prematurely exclaimed "gold is soaring, gold is soaring." This time around they may have it right. The reason is a trifecta of three factors that collectively create a seemingly perfect storm for gold. The first is the pending launch of Gold ETFs (Exchange Traded Funds): investment shares backed by 1/10th of an ounce of gold stored in a secure vault. Gold ETFs were supposed to be available in 2003 but, this being the U.S., a lawsuit arose that caused a delay. Now that the lawyers have been paid, Gold ETFs are again set to appear on the major U.S. stock exchanges in early 2004.

The intent of the Gold ETF is to facilitate the buying and selling of gold by eliminating the hassle of having to physically take delivery. While the retail market for Gold ETF shares will be interesting, it is the deep-pocketed institutional buyers, looking for non-correlated assets (def. investments that don't track the stock market) which could drive demand through the roof and, with it, provide a serious boost to the underlying gold price.

As a point of reference, a Gold ETF was launched on the Australian market earlier this year. Despite the gold price moving down in local currency terms, these have scraped 230,000 ounces off the table so far. Roughly extrapolating that number to the far larger U.S. market, the amount of gold removed from circulation could be roughly equivalent to all the new mine supply from Newmont, the world's largest producer. While this is not enough to cause supply shock, it is a significant development nonetheless.

Far more important is the symbolism that comes from turning gold into an easily tradable asset, as this marks the entry of gold into the world of modern global finance. Gold is money once more. This is especially relevant when considering the second factor in the gold trifecta, the decline of the U.S. dollar. Read on...






*** WHERE ARE YOU KEEPING YOUR BILLIONS? ***

Since the June 1986 creation of the Dollar Index-a basket made up of the currencies of six major trading partners-the data clearly shows that the value of the U.S. dollar has been eroding by a fairly steady rate of about 1% a year. And why not? Each year the U.S. Treasury Department prints money shamelessly to fund our out of control deficits. How shamelessly? If you were to place the physical currency notes printed by the U.S. Treasury each year end to end, they would circle the globe more than 30 times!

While the dollar trend is one of steady decline, there are periods embedded within that trend when the decline accelerates significantly. We are in such a period now. Beginning in February of 2002 the dollar has lost more than 23%. Importantly, once in motion, these dollar trends tend to remain in motion for periods of 5 to 9 years. As we are under the two year mark as you read this, we are still quite early on.

What does this have to do with gold? Everything.

Inflation Proof Money is now available at a discount from NORFED.

That's because of foreign investors, who collectively own securities and U.S. government bonds worth untold billions of eroding U.S. dollars. It is these investors who are poked in the chin most painfully by the dollar's fall. Put yourself in their shoes. If you had a billion or so dollars (and we hope you do!) in U.S. Treasury bonds that would lose big if U.S. interest rates rise... AND... the currency in which your bonds are denominated was eroding by ~10% a year, as they have been lately... AND you were only earning a paltry 2.01% yield to accept all this risk and pain - how long would YOU hang on?

We believe that the answer is fairly obvious. But where to invest? At least for some percentage of your billions, the answer may well be the "new" global currency, gold. It is the only currency that cannot be created willy nilly, but rather must be laboriously hacked from the earth.

Which delivers us nicely to the front door of the third factor in our trifecta... China. They are one of those foreign investors watching their considerable U.S. dollar assets erode.

*** THE DRAGON LIKES GOLD ***

Two developments in China catch our attention. The first is that, for the first time in 40 years, in December of last year it became legal for the 1.3 billion mainland Chinese to buy physical gold in bar form. As the Chinese have long viewed gold as a primary savings vehicle, this has the potential to open up a serious new source of demand. Case in point, a recent national survey showed that approximately 20% of the population was willing to invest between 10 and 30% of their savings in gold. The Dragon likes gold.

It is too early to properly gauge the impact, but we found the following data of interest: in 2002, due largely to the restrictions on private gold purchases, mainland Chinese purchases amounted to just .16 grams per person. In Hong Kong, however, the per capita purchases over the same period were approximately 2.7 grams - a better than 16 fold increase. We don't think the increase in demand from the mainland will be quite that dramatic in the near term - keep in mind that the Hong Kong Chinese are far wealthier than their mainland cousins - but a doubling or tripling from current levels is certainly a possibility.

The second development out of China is indicated by comments from a Bank of China executive who recently said that it would be "safe and feasible" for China to swap some foreign exchange reserves for gold. Confirming comments from another representative of the Chinese Central Bank came shortly thereafter, when he said "Reducing reliance on the dollar and maintaining greater diversification in foreign exchange reserves is the only way to reduce the risk... As a result, an increase in our country's gold reserves is necessary."

Of course, this could well be China's way of telling the U.S. to back off on its demands that China revalue it's currency, but the option of increasing the gold component of it's $400 billion in foreign reserves is not at all unlikely.

What does the gold trifecta add up to?

The estimates are all over the place, with one wild-eyed pundit calling for the gold market to lose as much as 31,000 tons from the market, about 14 years worth of global production. We think that is too optimistic by a multiple.

We do, however, believe in making the trend your friend: Get the trend right and your underlying investments are far more likely to work out. And, when it comes to gold, we believe the trend is decidedly up, with a break through the $500 per ounce level over the next 12 to 18 months likely. For the record, today's gold price is in the area of $383.

Whether you like your gold straight, in bullion or, soon, in a Gold ETF... or go for the leverage offered by the gold stocks, it should be a very interesting asset class over the next two years, and worth spending time learning about now, not later. One Web site you may find useful is www.kitco.com.

*** DOORBELL FROM HELL ***

Americans have been led to believe Iraqi insurgents use sophisticated devices to detonate their deadly roadside bombs when U.S. troops pass by. Not so. According to Powell, our technology correspondent, most such bombs are controlled by ordinary wireless doorbell kits which can be purchased in any hardware store for under $20. The buzzer unit is hooked up to the bomb which is subsequently triggered by the hidden attacker using a signal from the small door switch. Lengthened antennas are attached to the two devices which allow them to be located as much as 100 yards apart.

Word has it that the National Security Agency plans to cure the problem by blanketing Iraq with frequent doorbell signals sent from its overhead satellites. The signals will set off the wireless devices and blow the bombers up when they insert the batteries. In effect, Uncle Sam's message will be, "Ding Dong, You're Dead."

*** COMING NEXT WEEK ***

The following are stories we are working on, but we reserve the right to change our minds - and often do - based on developments within the week ahead. With that caveat, here's what we are working on.

Afghan Ugly... Money Mega-Trend... Be Happy - Part II... Credit, Credit Everywhere... Do YOU Know Where Hoffa is Buried?... Return of the Bounty Hunters... Book and web site recommendations... and more. Keep informed and (we hope) entertained ... Subscribe today, it's FREE!

*** END QUOTE ***

Regardless of your views on the current war in Iraq, you should find the following quote of interest - especially considering its source. We certainly did.

"Of course the people don't want war. But after all, it's the leaders of the country who determine the policy, and it's always a simple matter to drag the people along whether it's a democracy, a fascist dictatorship, or a parliament, or a communist dictatorship. Voice or no voice, the people can always be brought to the bidding of the leaders. That is easy. All you have to do is tell them they are being attacked, and denounce the pacifists for lack of patriotism, and exposing the country to greater danger."

-- Herman Goering at the Nuremberg trials