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Letter # 37

The latest news to keep you informed

to you all!

The resources boom reads like a VIAGRA ad: "STRONGER FOR LONGER". There is no doubt that we are in a super cycle which is fuelled by the awakening giant of China. And there's no turning back: the Chinese government has to keep pushing ahead and fulfil the ambitions of its hundreds of millions of people or risk revolt!

The Chinese economy is powering ahead which suggests this resources boom could still have 15 years to run. There are historical parallels between the emergence of China and that of Japan post World War II, and the emergence of the US in the late 1800s. The rise of Japan as an industrial power triggered a strong commodity upward price cycle between 1945 and 1980, the US between 1890 and 1920.

General consensus is that commodity prices will remain stronger for longer but at levels lower than present. However, sheer physical shortages are likely to continue to drive prices higher and it is very unlikely that prices will face a sizeable correction.

The International Monetary Fund recently revised its estimates of global gross domestic product growth for 2006 from 4.3 to 4.9 percent, and 2007 growth from 4.4 to 4.7. per cent. This means that producers of metals such as copper will struggle to meet the growing demand for industrial metals. Copper consumption of around 18 million tonnes per annum could rise to around 28mtpa in 10 years, requiring a massive expansion in the copper mining industry. While many mines have seen substantial expansion in recent years, this has barely been sufficient to meet current demand.

Marc Faber, aka Dr Doom, seems to agree: "Basically we had a bear market in commodities between 1980 and 2001, or 1998 and 2001, so we had more than 20 years bear market in commodities. By the late 1990s in real terms, in other words inflation-adjusted, commodity prices were at the lowest level in the history of capitalism in the last 200 years and now they have risen substantially - the price of copper from around 60 cents to over $3 a pound, the price of gold has more than doubled. But in real terms, commodities are still relatively low compared to equities and therefore, also given the length of the cycle - the cycle for commodities lasts usually 45 to 60 years peak to peak or trough to trough - in other words the upward wave in commodities lasts around 22 to 30 years and we are now in year 2006. The bull market started in 2001 so we are five years into the bull market. I do concede that the markets are overbought and there is a lot of speculation and I expect a correction but I think longer term from here onwards commodities will outperform the Dow Jones and financial assets." Read the full report.

So is BHP Billiton on the way to $50 a share or $15 a share? One Australian hedge fund manager commented last week, "I don't care if BHP Billiton falls back $5 or $10, it's going to $50 a share." Cheers to that!

Best wishes and from us all!
Peter & Padma & Malty& Rover
13 May 2006



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