Welcome to the June 2013 edition of Euro Pacific Capital's The Global Investor Newsletter. Our investment consultants are standing by to answer any questions you have. Call (800) 727-7922 today!

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Sock Puppet Kabuki; Nikkei Today Parallels Dot-Com Bust
By: Peter Schiff, CEO and Chief Global Strategist

The Global Economic Realignment

By: Peter Schiff, CEO and Chief Global Strategist


Good Environment for Utilities

Finding Value in real Estate

Be Part of the American Energy Resurgence
By: David Echeverria, Investment Consultant, Los Angeles

The Bitcoin Phoenix
By: Andrew Schiff, Director of Communications & Marketing, and A.J. Van Slyke, Communications & Marketing

The Global Investor Newsletter - June 2013

June 25, 2013

Sock Puppet Kabuki; Nikkei Today Parallels Dot-Com Bust
By: Peter Schiff, CEO and Chief Global Strategist 

The Japanese have a reputation for excessive courtesy. The current actions of the Japanese economic leadership, who are giving the world a free and timely lesson on the dangers of overly accommodative monetary policy, should confirm this stereotype. While their efforts should provide the rest of us with an invaluable benefit (provided we are alert enough to heed the clear warnings), the lesson will cost the Japanese dearly.

For now, observers around the world still believe Prime Minister Shinzo Abe has stumbled upon the magic elixir of economic revitalization. His commitment to pull Japan out of the mud by doubling the amount of yen in circulation, and raising the nation's official inflation rate to 2%, had conferred rock star status to the formerly bland career politician. In a typical response, at the SALT Hedge Fund Conference in early May, a leading hedge fund investor at Fortress Investment Group called the Japanese markets "the most exciting place in the world to invest." Abe had been heralded as an fearless samurai with the courage to take on the calcified thinking and failed moderation that had held the Japanese economy in stagnation for more than 20 years. As recently as last month, Paul Krugman himself described Abe's plan in heroic terms:

"The really remarkable thing about "Abenomics" is that nobody else in the advanced world is trying anything similar. In fact, the Western world seems overtaken by economic defeatism.... if Abenomics works, it will serve a dual purpose, giving Japan itself a much-needed boost and the rest of us an even more-needed antidote to policy lethargy"

But just one year after the first critical raves arrived, the audience is heading for the exits. As it turns out, the Japanese miracle is looking like a stirring overture that lacked even a convincing first act, let alone a decent second act plot twist or a feel good ending. More likely, we will get a simple tale of confidence easily gained and rapidly lost.

In many ways the 75% nine-month rally in the Nikkei 225 (that began when Abe was elected prime minister in September 2012), and the subsequent crash that began on May 22, is not all that different from the turbo charged rally, and spectacular crash, that occurred in the technology heavy Nasdaq more than a dozen years ago here in the United States. 

At the time that Pets.com (the company behind the iconic Sock Puppet) made its IPO, high flying stocks like Infospace were racking up a 1000% gains. While investors scratched their heads, pundits justified the ascent with cleverly thought out reasons why common sense no longer applied to the new economy. We were told that valuations, revenue and profits didn't matter. Some even suggested that profits were a negative sign that indicated that insufficient resources were being devoted to internet "land grabs." To an extent that now seems absurd, the investing establishment bought into the insanity. But then a funny thing happened, investors woke up and realized that they had nothing but a handful of magic beans that couldn't grow a beanstalk. When the fog lifted, stocks plummeted...Wile E. Coyote style.

This time around, investors in the Japanese market were similarly deluded by fairy tales. They were told by the world's leading economists that Japan could cheapen its currency to improve trade, use inflation to create real growth, increase prices to encourage spending, and drastically increase inflation without raising interest rates. In short, monetary policy was seen as a substitute for an actual economy.  As a result, investors both inside and outside of Japan flocked to what had become ground zero of the ultimate Keynesian experiment.

The interest increased when Abe took step after step to convince the world that he would actually deliver on his promises. His appointments to key economic posts and at the bank of Japan confirmed that commitment. This unleashed both a stock market rally and a currency sell off that were unprecedented for a major economy. The Nikkei rallied nearly 80% in less than 7 months. Such a steep rise is almost unheard of for a broad national average. The Nasdaq rally comes close, but during its heyday it was very heavily weighted towards technology, and was therefore not representative of the broader economy.

Based on these parallel delusions, the trajectory of the Nasdaq in 2000 and the Nikkei in 2013, makes for a neat comparison. During the 157 trading days between Abe's election and its high close on May 22, the Nikkei gained 75%. The Nasdaq rise in the 157 days before its closing high was a similar 91%. It then took the Nasdaq only another 205 trading days to lose 55% of that peak closing price. So far, in only 24 trading days, the Nikkei has lost 17% of its peak close. 

The sell-off must be deeply disappointing to those who believed that economic data had initially confirmed the success of Abe's program. The leading indicator was the yen itself, which dropped like a stone. Given the widely held view that a weak currency is the key to economic success, the 25% decline in the yen was welcomed by investors and seen as a sign that Abe had the right formula. After the yen started to decline, it was not long before national retailers began raising consumer prices. This was also seen as "good news."  The inflation that Abe so eagerly sought was beginning to materialize. When the Nikkei reacted positively to these developments, momentum traders began to take notice, thereby creating a self-fulfilling prophecy.

But it's no great trick to weaken a currency. Any two-bit economy could accomplish that objective.  And for a nation like Japan that imports nearly all of its raw materials, it was inevitable that a drastically cheaper yen would push up prices. However, the rest of the plan, the part about surging exports and growing economic activity, has been much harder to achieve. In fact, the data has been downright disheartening. The plunging Yen has failed to reverse Japan's weakening trade balance, which has declined for 28 straight months. The trend led Japan to post its second straight annual trade deficit in 2012, the first consecutive annual deficits since 1980. Internal capital spending by Japanese firms fell 3.9% y/y in Q1 2013, possibly on skepticism of Abe's revival plan.

However, while the broad economic data failed to impress, economists and investors were nevertheless hopeful that it was just a matter of time before Abenomics would really work its magic.  But then the bottom fell out in a way that should have surprised no one, but somehow managed to do just that.  Beginning in April, Japanese Government bonds began to sell off sharply. Previously, the Japanese government could borrow funds for 10 years at just 36 basis points.

While many would have liked to ignore it, the sub-40 basis point yield was the most important data point for the Japanese economy. At those levels, Japan needed to spend 25% of its tax revenue to service its outstanding debt. While that figure is high, most economists believe it is manageable given Japan's high savings rate. With a national debt that exceeds 200% of GDP, the Japanese government could become quickly insolvent in the face of higher debt service costs. Japan has always been, and continues to be, extremely susceptible to pain inflicted by higher interest rates. If rates were to ever hit the 2% rate on 10 year debt (to match its inflation target), more than half of total tax revenue would be needed to service debt payments.

The central premise of Abenomics seems to be that the Bank of Japan could succeed in pushing inflation up to 2% without raising the rates on long-term debt. To do this, one would have to assume that bond investors would accept negative interest rates, even while a falling yen was eating away at principle and returns on alternative investments would be expected to be more attractive.  Such an outcome is not consistent with demonstrable human behavior.  If the investors didn't play ball, it was assumed that the Bank of Japan could step up their quantitative easing and buy the bonds that investors were rationally selling. But the BoJ is already buying 70% of the new government debt issues, and increases from this level would reveal a blatant plan to monetize the debt.

As it turned out, the remaining investors would not tolerate such an outcome in Japan (even while they still seem to accept it for the United States). As a result, in late May, a strong sell off in Japanese government bonds began, which caused yields on Japanese bonds to nearly triple to almost 100 basis points on 10 year debt. And while one percent doesn't sound like much, it was the rapidity of the ascent that got everyone's attention.  Desired rises in inflation expectations threaten to make this continued debt financing impossible. Of course, lenders don't make loans just to break even.   If they expect 2% inflation, interest rates need to be higher than 2%, especially if they are paying taxes on their interest income.   If inflation expectations exceed 2%, interest rates must rise even higher to reflect that. Plus, if a falling yen causes investors to expect profits on foreign investments, bond yields will have to rise even more to remain competitive.

This grim, but very simple, reality seems to have hit Japanese stock investors with a panic unseen since Mechagodzilla took aim at Tokyo. Knowing that even moderately higher rates could counteract any economic gains made by stock market or export growth, the faith in Abenomics has seemed to evaporate. It's almost the same sensation we had 13 years ago when we realized that an online company that loses money with every delivery is a bad investment no matter how many "clicks" it gets. 

After just a few weeks of the sell-off, we are at a critical time. Any more rapid escalation in Japanese bond yields should tell us all that quantitative easing and growth through devaluation is a cul-de-sac that should be avoided. Japan should be our canary in the coal mine.

But if and when Abenomics comes completely undone look for Keynesian economists to come up with explanations as to why the experiment was inconclusive, inadequate, or perhaps sabotaged by the debt fear mongers.  Most in the media will go along with the explanation. But for those with a functioning cerebral cortex, the lessons should be clear: Stop printing and try to restore sound money.

In the meantime, investors should look for areas of the global economy that offer real yields and real growth opportunities that are not dependent on quantitative easing or active debasement.

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The Global Economic Realignment
By: Peter Schiff, CEO and Chief Global Strategist 

The drama unfolding in Japan has attracted much of the attention of international investors, and has caused many to miss the real story unfolding in Asia and the rest of the world. The global economy continues to realign itself to prepare for a new order that moves beyond the debt-fueled dominance of the West and the United States. While many assume that the bleak recent performance of Asian stock markets (ex-Japan) indicates an economic weakening of formerly dynamic emerging markets, the reality simply doesn't support this conclusion.

For much of the past century, the United States has been the world's largest importer and exporter. This is what you may have expected from the world's dominant economy. But our days of preeminence are fading fast. In 2009, China surpassed the United States as the world's leading export nation (America is currently in third, behind Germany). As a small consolation, the U.S. still leads the world in exports of government debt.  In February of this year, China became the world's largest trading nation (which is determined by combining imports and exports). And sometime in 2014, China is expected to overtake America as the world's biggest importer.

Over the past four years, China has posted a 15% average annual increase in imports. In the United States, this metric comes in at just 2%. A look at the projections show the import gap between China and the U.S. to widen significantly in the years ahead. This will have major global ramifications. We should expect other countries to orient their economic and trade policies accordingly.

It should not be overlooked that during his first trip to the Americas this month, China's newly installed President, Xi Jinping stopped at three other countries including Mexico (with whom China's trade has tripled since 2006), before setting foot on U.S. soil.  

But the fact that U.S. imports are not rising rapidly has not helped close our persistent trade deficit, which rose 8.5% in April to $40 billion. Despite our weak economy, we have consistently run annual trade deficits in the half trillion dollar range since the financial crisis began. U.S. trade balances would have been much worse were it not for the unexpected and unprecedented improvements in our energy sector. Since 2009 U.S. energy exports by volume have increased more than 64% while our imports have actually declined by 10%. The chart below illustrates the rapid increase of U.S. energy exports over the past few years.

The above chart also reveals another telling data point. Although current U.S. population is about 48% higher than it was in 1973 (314 million vs. 212 million), according to the EIA our energy production has only increased about 25% over that time. In other words we are producing about 16% less per capita than we did 40 years ago. Despite this, our exports over that time have increased 460%, with most of that coming in the last five years. In short, Americans are producing more energy for the rest of the world. (see article on opportunities in U.S. Energy Investing by David Echeverria). But the export of energy, or anything else for that matter, is not the hallmark of an improving economy. Increased consumption would be a far better gauge of prosperity (as long as it's not paid for with debt). Purchasing power and consumption are developing faster in other parts of the world and the energy is simply following it there. While some may say that we use less energy because of efficiency it may be equally likely that the declines result from diminished means.

Such a conclusion would be supported by a recent wave of U.S. economic data that continues to display domestic weakness. Revisions to first quarter 2013 GDP revealed that real disposable income declined by a 9.02% annualized rate and that the savings rate plunged to 2.3%. The Commerce Department reported that consumer spending dropped in April for the first time since last May, and that incomes had stagnated from the prior year. The Institute of Supply Management reported a drop in manufacturing activity in May after hitting a four year low. The slack industrial activity has occurred even as the fracking boom has significantly lowered the price of natural gas, which should be giving U.S. manufacturers a leg up on foreign competitors who need to pay much more for energy, which is a key input cost.

Bottom Line: U.S. GDP growth hovers around the anemic 2% level while GDP in China continues to grow at nearly 8%. But investors are behaving as if the opposite were true.

While the Dow Jones rose nearly 12% from the beginning of the year through late June, China's Shanghai Composite fell 5%, while Hong Kong's Hang Seng Index (which is very dependent on China) actually dropped 13%. But the surge in U.S. stocks continues to be largely dependent on continued Fed support. As has been the case for years, U.S. markets tend to rally when poor economic data convinces investors that the Fed will open up the monetary spigots, and to sell off when seemingly positive data raises concerns that QE will wind down sooner than expected. In short, our markets are not driven by fundamentals.

Rising stock prices have combined with rising real estate prices to convince many that the economy is recovering. As a result, Wall Street is engaged in spirited debate about when the Fed will begin bringing the current era of permanent quantitative easing to an end (forgetting for now that both markets have shown their deep dependence on QE). Most agree that the QE will eventually create an economy able to stand on its own, but there is disagreement on how long it will take. The "bullish" end of the spectrum is predicting that the Fed may begin to take its foot off the accelerator by the fourth quarter of this year. The "bears" feel that sluggish data will compel the Fed to keep pouring the money on throughout 2014. They don't understand that QE is the economy, and that any attempt to exit will be met by difficulty. The rising home prices and stock gains over the last few years are likely to vanish if the punch bowl is removed. Ironically, the Fed's own Advisory Council (a group of private sector banking CEOs) seems to understand this. However, the warnings contained in the minutes of its last meeting were thoroughly ignored by the media and the Fed itself.

The only difference between the policies practiced by Shinzo Abe and the Bank of Japan and those pursued by President Obama and Ben Bernanke is that the dollar's reserve status makes our debasement less efficient. The absurd and escalating currency war means that other countries need to buy the U.S. dollar to prevent their own currencies from appreciating. This need does not extend to the yen. So despite the permanent QE, the U.S. Dollar Index (DXY) is currently trading near a three year high. Paul Krugman might tell you that this proves that stimulus comes with no cost. All we believe it proves is that people can delude themselves for extended periods.

But the laws of economics apply to all currencies. Those with reserve status may defy gravity for longer, but they will ultimately succumb. Sadly, the extra time may simply grant us more rope with which to hang ourselves.

It is precisely because of this perverse sentiment that we now see real value in overseas markets that are not dependent on QE. We believe that it is more essential than ever to diversify wealth in currencies of fiscally prudent yet vibrant nations. While the illusion of recovery exists in many inflation-ridden, developed nations, economies that exhibit characteristics of sustainable growth through savings, production and capital investment should better preserve purchasing power during a real downturn. Such a preference would exist even without the strong fundamentals that underpin the markets and sectors that we find most attractive.  Fortunately, you don't have to scratch the surface too deeply to find data that should allow investors in overseas, non-dollar markets to diversify broadly. The good news is that the dollar's current strength temporarily confers Americans with a good deal of overseas purchasing power. It's a good time to go shopping.

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After clicking the ad above, you will  be directed to the website of Euro Pacific Precious Metals, LLC. Neither Euro Pacific Capital nor any of its affiliates are responsible for the content of such website. Euro Pacific Capital is not affiliated withthis company , however, Peter Schiff is CEO of Euro Pacific Capital, Inc. and CEO of Euro Pacific Precious Metals, LLC.

Precious metals are volatile, speculative, and high-risk investments. Physical ownership will not yield income. As with all investments, an investor should carefully consider his investment objectives and risk tolerance as well as any fees and/or expenses associated with such an investment before investing. The value of the investment will fall and rise. Investing in precious metals may not be suitable for all investors.

Good Environment for Utilities


At a time when reliable, high-yielding investments have become as scarce as water in the desert, global utilities have beckoned as potential oases. Part of their appeal stems from their secure market positions and their ability to profit from largely predictable patterns of consumer spending. People may or may not decide to buy a refrigerator or take a vacation, but they can generally be relied upon to place a high priority on consistently heating and powering their homes.

Utility companies in most markets around the world occupy a somewhat unique niche in the investment landscape. Most function as quasi-government sanctioned monopolies in a particular municipality or market segment. This means that they are largely protected from new competitors that may want to enter the marketplace. They are typically structured as dividend generation vehicles, and have oriented their finances toward paying out consistent dividends. But in return for state-protected market positions, they must deal with heavy regulation and frequent government-imposed limitations in pricing flexibility. And while the regulatory constraints limit upside potential, most utilities are allowed, to varying degrees, to pass higher input costs (like rising energy costs) on to consumers. The price increases may be used by utilities to maintain, or raise, dividends even while input costs weigh more heavily. In this regard, utilities may offer better protection against inflation than other fixed income investments (such as bonds).

Within the equity universe, utilities are considered to be relatively conservative, or "defensive" investments. And in fact, history has shown repeatedly that utilities outperform other market segments during periods of uncertainty. And while plagued as one of the more "boring" sectors of our economy, Warren Buffet's recent $5.6 billion purchase of Nevadan utility, NV Energy, illustrates excitement still exists in the utility space.

Good Environment for Utilities

Because utility investments exist in most developed equity markets, American investors, who are willing to bear the added currency and market risks, have many choices.  On a country by country basis, a few factors seem to be strongly determinative of relative performance. Countries that domestically produce a good portion of their own energy tend to be better situated. This is because large domestic fuel supplies minimize supply, transportation, political and pricing risks. A utility that must rely on a trans-border or trans-ocean supply line could be placed at a greater disadvantage under certain circumstances.

Another major consideration is the regulatory bias of local government. Some seem to be willing to ignore the business prerogatives of their utilities, and use restrictive utility policy as a means to get votes. This impulse subordinates the reasonable expectations of utilities and their investors to be able to generate predictable profit margins.  Although the United States is undoubtedly replete with resources (which should give investors confidence), many utilities are now struggling under the heel of stringent Environmental Protection Agency environmental policies.

But perhaps the single most important consideration is the secular trends in economic growth in a particular country. Nations with strong growth rates produce growing consumer and industrial demand for power. These trends can accrue directly to utilities which have secure market positions and fixed margins.   

Global Comparisons

A good way to get a quick read on the state of health between U.S. utilities and their overseas counterparts is to compare the S&P U.S. Utilities Index to a global utilities' Index comprised of companies from developed and emerging markets abroad. A good candidate for this comparison would be the Wisdom Tree Global ex-US Utilities Index , which includes many companies within Latin America and Emerging Asia. As shown in the chart below, that index currently trades at a 22 percent discount to its U.S. counterpart based on last year's earnings, and a 19% discount based on 12 month projected earnings.

In addition to being cheaper on a valuation basis, the foreign index currently offers a yield of 4.1%, which is 5% higher than the U.S. index.  But that is really just the start of the story. The countries in which the overseas utility index is based boast higher GDP than the United States. It should be no surprise then that the earnings per share growth rate is expected to be higher for the overseas index. However many may be surprised that based on expected 2014 earnings it is expected to be almost 4 times higher! This may be a function of the financial challenges created by U.S. regulators. See chart below.

Dividend yields change as stock prices change, and companies may change or cancel dividend payments in the future.

Many have argued the U.S. government's heavy handed requirements that utilities incorporate high cost energy sources like wind and solar, while disincentivizing established energy sources like oil, coal and gas have made the U.S. market less attractive from an investment standpoint.

The U.S. Energy Information Agency also notes that the majority of global energy usage growth will come from countries that are not subject to the Organization for Economic Co-operation and Development's jurisdictions (OECD).  Generally speaking, these countries are the emerging market economies.  They also noted that "oil consumption in the OECD countries actually declined in the decade between 2000 and 2010, whereas non-OECD consumption rose 40 percent during the same period." Brazil, Hong Kong and China are some of the major economies located outside of OECD regulations.

For these reasons we believe that non U.S. utilities should be considered by suitable investors looking for income and some growth. In addition, there may be some more timely market factors that have been weighing on utility investment. It is generally accepted that recent years have seen a strong rally in the bond market. Sovereign, municipal and corporate bonds are currently trading at near record valuations, which have pushed yields lower across the bond spectrum. Utilities are generally considered to be alternatives to bonds, and have suffered during this period of preference for government and corporate paper.

However, the recent jitters in the bond market may be an indication that investors have begun to unwind their heavy bond market exposure. Many assume that utilities will benefit from such a move as they are the stock alternatives that are considered bond substitutes.  For those who believe that the pressure in the bond market will continue, a timely allocation to utilities may be an alternative.

Lastly, the run up in bond yields, the failure of Fed policy to create a sustainable recovery, and the expectations that the Fed will be forced to begin "tapering" their QE policies have led many to conclude that a stock market correction is a possibility in the near to mid-term. In such a scenario, defensive market sectors may outperform. Utilities have long been a choice for those looking to ride out market turbulence. Fortunately, the global nature of today's marketplace offers many options.

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Finding Value in Real Estate

The roller coaster ride of the U.S. residential housing market over the last decade has obscured the fact that in past times real estate had been considered a good destination for those seeking a relatively modest and safe return on investment.

The credit crash of 2008 took much of the wind out of the sails in the residential real estate market in the U.S. In the wake of the destruction, many came to understand that the bubble had been enabled by financial innovation on Wall Street that was underwritten by government guarantees. After years of stagnation, however, residential real estate has regained the spotlight largely due to the recent improvement in home prices. Unfortunately, these latest increases have been fueled by a new wave of Wall Street involvement and, as a result, may be equally short-lived. The housing collapse five years ago forced millions of overstretched homeowners into foreclosure. At the same time, the cheap money from the Federal Reserve pushed down yields across the fixed-income spectrum and encouraged money managers to chase higher returns wherever they could be found. The hunt took them into areas of the market that were traditionally seen as more speculative, like the market for residential single-family homes. Well-financed private equity funds began to buy homes out of foreclosure in the hopes of renting them out for a decent rate of return.

Just during the past year, Invitation Homes, a realtor funded by hedge fund Blackstone, has spent $4.5 billion to purchase about 25,000 single-family homes, including 4,000 properties in the Phoenix area alone. There are many other firms following a similar playbook. In the first few years of the real estate crash, these funds focused on buying distressed properties straight out of foreclosure, typically with all cash. As the foreclosures dried up, many switched to buying houses directly from homebuilders and converting them into rental properties. This increased  demand may have helped drive national residential real estate up more than 10% in the last calendar year.

Because of these Fed-induced distortions in the market, ordinary American home buyers have been made to compete against financial speculators. This has allowed home prices to rise even while ownership rates have fallen. At the same time, personal incomes and savings have also stagnated, making home prices extremely sensitive to the declining affordability that would result from rising interest rates. In this light, the risks created by the rapid increase in mortgage rates over the past two months should not be overlooked. Higher rates will also induce many of the private equity funds to leave the residential market to pursue yields elsewhere. The combination may cause another significant leg-down in the market.

But that doesn't mean that investors should abandon the entire real estate sector. In contrast to the market for single-family homes, there may be relative stability in other sectors in the market, such as commercial and industrial real estate. Ownership of shopping centers, office properties, hotels, and apartment complexes, whose investment thesis is predicated on rent payments that produce stable returns, held up fairly well through the crash. Many of these types of investments have been made accessible to retail investors through structures called Real Estate Investment Trusts (REITS). Much like Master Limited Partnerships (MLPs) in energy, REITs are income-focused investments that are allowed to pass through earnings to unit holders, thus avoiding double taxation,  and are popular investment vehicles in financial markets around the world.

REITs allow investors to choose sectors selectively. For instance, healthcare REITs offer exposure to the companies that operate hospitals, elder care facilities, hospices, and related businesses. The performance of such a REIT depends not only on the real estate market, but also on the healthcare sector. Similarly, today's REIT investor can also choose to look at offshore destinations. As is the case with the other sectors we have seen, the metrics tell a tale of opportunities abroad.

A comparison of the dividend yield and earnings growth between the U.S. Select REIT Index and its direct international comparative, the Dow Jones Global ex-U.S. Select Real Estate Securities Index, sheds light on this topic. Both indices diversify their holdings in multiple sectors, but, as you may imagine, the U.S. index has a higher exposure to sectors like retail and healthcare, which correspond to the contours of the U.S. economy. The International index offers exposure to more than 17 developed countries, primarily in Europe and the Pacific Rim.

However, the two indices differ substantially in the three numbers that should matter most to investors: valuation, earnings growth, and dividend yield. The U.S. Index currently trades at 52 times its past twelve month earnings while its international counterpart trades at just 16 times. In other words, the U.S. REIT index is 228% more expensive. On a forward looking 12 month basis, the U.S. index is still 142% more expensive. As far as earnings growth is concerned, the Global Index projects 7.2% annual growth as opposed to 6.6% for the Domestic Index. While that contest is reasonably close, dividend yield is not. The Dow Jones Global Index provides a current yield more than twice as high (6.45%) as its American counterpart (2.84%).

Nations such as Hong Kong, Singapore, Australia, and Canada, which comprise roughly 46 percent of the Global Index, exhibit characteristics that we believe are more representative of a healthier economy. Not only do these nations have higher S&P credit ratings than the United States, but their economies show significantly lower unemployment rates (3.3%, 1.9%, 5.4%, and 7.2% respectively for Hong Kong, Singapore, Australia, and Canada). More significantly, benchmark interest rates are higher in a vast majority of the countries in the Global Index than they are in the United States. This means that U.S. firms have been delivering weaker results despite the leg-up that low rates provide. Real estate assets tend to be less leveraged in a higher rate environment and are, therefore, less vulnerable to unanticipated interest rate increases. Contrarily, when interest rates are near zero, companies are more likely to increase leverage, and therefore risk. For these and other reasons we feel that overseas REIT investments are more attractive for suitable investors seeking growth and income.

Discussion of tax treatments in this material is not intended as tax advice. Consult your tax professional for more information.

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Be Part of The American Energy Resurgence
By: David Echeverria, Investment Consultant, Los Angeles

Eureka! When gold was first discovered in California during the winter of 1848, it set off a massive migration of eager prospectors with ambitions of striking it rich. To this day, the lore of the so-called "Forty-niners" continues to fascinate students of history. Perhaps one day the exclamation "Bismarck" will convey the same sense of possibility.

Today's modern boom-towns are arising from the revolution in hydraulic fracking of shale oil and gas formations. Towns from Texas to North Dakota are seeing economic booms that stem from increased oil and natural gas production made possible by fracking. Oil giant BP recently reported that U.S.-based petroleum production increased 13.9% in 2012, the largest increase on record. North Dakota, the center of the shale boom, currently reports 3.3% unemployment, the lowest rate in the country. Partially based on this revolution, North America is expected to surpass Saudi Arabia as the largest oil producer by 2020 (International Energy Agency, 2013).

Despite the gains made by alternative fuels and the expected increase in the use of electric cars, global demand for oil and natural gas is expected to rise for years to come. According to IHS Global, the current energy boom is estimated to support double the number of jobs in the sector to over 3.5 million by 2035. Shale gas alone, which has quadrupled in production since 2007, is projected to support 870,000 jobs by 2015.

Political stability, infrastructure, skilled labor, and geological research make North America a more attractive energy investment target than the Middle East, Venezuela, or Nigeria. As a result, we are already seeing large multinational firms selling foreign assets to invest in US and Canada. ConocoPhillips, Hess, Devon, Marathon, Anadarko, and Murphy have all sold foreign assets so as to redirect investment back to North America. Based on America's development and early adoptions of these new techniques, U.S. energy companies are shaping up to be world leaders in the sector.

The boom is benefiting companies that are active in every area of the energy supply chain: upstream, midstream, and downstream. However the "upstream" players (those participating in exploration and production) will continue to deal with unpredictable global trends that affect the price of oil and regional factors affecting the price of natural gas. The downstream providers struggle with unpredictable demand for their products. Energy services, on the other hand, should increase as the sheer volume of production requires that more and more oil and natural gas be transported, stored, processed, and refined. This is where the "midstream" players come in. According to Natural Gas Association of America, an estimated 84 billion dollars is already scheduled to be invested in a range of midstream businesses across both the US and Canada. But midstream businesses may be the sweet spot.

Investment structures in the United States called Master Limited Partnerships (MLPs) offer a means for retail investors to participate in midstream energy businesses. MLPs, which trade on public exchanges, benefit from the tax advantages of limited partnerships and the liquidity typically associated with corporate stocks. The structure that defines MLPs is not available to all sectors of the economy. In order to qualify, a partnership must derive 90% of its cash flows from qualifying sources, such as activities related to the production, processing or transportation of oil, natural gas or coal. In fact, Congress specifically created the MLP parameters to direct investment flows to the energy sector. It is unlikely that the political wind will shift on this topic.

Like REITs in the real estate market, MLPs are not subject to corporate income taxes. Instead they pass through earnings directly to limited partners (the equivalent of shareholders for common stock), thereby avoiding double taxation.

In addition to paying out taxable income, distributions may be made as return of capital. This means that limited partners are not only entitled to a share of earnings, but also to a share of depreciation. The MLP structure offers investors an opportunity for current income and tax deferral.

As a result, North American MLPs may be an ideal choice for suitable investors looking for opportunities in the energy sector. Obviously, in order to maximize tax benefits, the MLP would have to be held outside a qualified plan and even then, all investors should consult with an accountant or tax expert ahead of time.

Generally speaking, MLPs produce a lot of cash, which translates into high levels of distributions. Current distributions in the sector tend to range from 4% to 10%. And because MLPs include pipelines and other midstream businesses, income tends to also be more consistent than other types of energy investments.

But MLPs can be growth vehicles as well. Because they avoid double taxation, they can have lower capital costs than non-MLP energy businesses. This makes it much easier to grow their operations organically or through acquisitions. Since inception in August 2010, an ETF tracking the performance of an energy infrastructure MLP Index has returned a little more than 14 percent cumulatively without factoring in distributions of more than 5 percent annually.

Although MLPs operate throughout the supply chain, for the reasons above we believe MLPs that focus on midstream activities such as storage, transportation, pipelines, and refineries may be more attractive. In particular, we believe pipelines, which are the fastest and most cost effective medium of transporting energy, merit particularly close attention. Other trends to consider may be the increasing levels of energy consumption abroad. Firms with capabilities to distribute internationally should be considered.

Contact a Euro Pacific broker to discuss options in this space.

Discussion of tax treatments in this material is not intended as tax advice. Consult your tax professional for more information.

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The Bitcoin Phoenix
By: Andrew Schiff, Director of Communications & Marketing, and A.J. Van Slyke, Communications & Marketing

"Reports of my death have been greatly exaggerated" - Mark Twain

Based on the recent revelations about the U.S. government's pervasive monitoring of billions of phone calls and e-mails, it may be no surprise that Washington has more than a casual interest in the financial activities of Americans. After all, how we spend our money reveals as much about our activities, associations and beliefs as our conversations do.

In light of this drift toward the surveillance state, the recent emergence of "digital currency" Bitcoin is very much against the current. Bitcoin, which was developed by a shadowy computer programmer using the pseudonym Satoshi Nakamoto, offers the potential for an independent monetary system that is not only far more efficient than established digital payment networks, but is insulated against the depreciation efforts of the world's central bankers and largely invisible to the prying eyes of the authorities.

As Bitcoin's popularity surged over the last year or two, not only did its price rise significantly, but scores of American businesses popped up to serve the growing market. These companies began building the infrastructure that would be needed to allow Bitcoin to become a viable option. Given the activity, many predicted that it was just a matter of time before the Federal government stepped in to squash the party.

In March of this year, uncertainty regarding the debt crisis in Cyprus may have been responsible for an unprecedented five-fold spike in the price of Bitcoin. But in April the price collapsed from a high of $266 to $54.25, in less than 48 hours. The 80% plunge unleashed a celebration by opponents of the currency who had been straining to figure out why it had gained popularity in the first place. Many wrote premature obituaries. These critics questioned why anyone but conspiracy theorists, money launderers, and criminals would prefer a digital currency to the U.S. Dollar.

But after the seismic ups and downs of what had been clearly a speculative mania, the price of Bitcoin stabilized at a level higher than it had been before the spike. Recent chart patterns have encouraged many Bitcoin advocates to take heart. But its failure to collapse after an episode of extreme volatility may have roused the U.S. authorities to finally take action.

In May, CFTC Commissioner Bart Chilton cited Bitcoin's erratic trading and anonymity as a reason for regulators to tighten control. Shortly thereafter, Mt. Gox, the largest Bitcoin Exchange in the world, had its account with U.S.-based money transfer site Dwolla seized by U.S. authorities for failing to register in the U.S. as a money transmitting company. Although Mt. Gox's global operations were unaffected, fund flows from the U.S dropped off. A few weeks later, authorities struck again when Liberty Reserve, a payment network site that included Bitcoin, was shut down and its owner arrested for not requiring its users to verify their identities. These events represent a serious potential risk for the future of the Bitcoin community. The full weight of the U.S. financial regulatory power now has its eyes trained on the young currency.

But that is not the end of the story. Bitcoin appears to enjoy much less hostility from governments around the world. In contrast to the critical reports about Bitcoin that have appeared in mainstream U.S. media,  Chinese newspapers regularly run positive stories. In early May, Chinese Central Television (the state-controlled broadcaster) even ran a sympathetic short documentary about Bitcoin use in China. Consequently, in 2013, China began to rival the U.S. in monthly downloads of the Bitcoin client software (see below). China finally surpassed the U.S. in May (84,538 vs. 63,844).

The trends make it clear that the new center of gravity in the Bitcoin universe may soon be China not America. Despite tightly controlled capital markets, China appears to be embracing the digital currency. Could it be that, unlike the U.S., China does not fear future attempts by its citizens to escape their currency or to disappear from its financial system?

Recently, a Forbes magazine article reported that it was impossible to live solely on Bitcoin in San Francisco because too few retailers in America's most technological city accepted the digital currency. In contrast, the Kreuzberg section of Berlin has become a hot spot for the virtual currency, boasting the highest density of Bitcoin retailers in the world. Bitcoin is catching on globally far faster than it is domestically.

For whatever its qualities as a means to avoid currency devaluation or financial surveillance, Bitcoin remains the most efficient way to quickly and securely transfer cash over long distances. Credit card companies charge merchants more than $30 billion annually. But Bitcoin transaction fees approach zero and the speed of confirmation is declining to compete with credit cards. As a result, many investors, entrepreneurs, and retailers have concluded that Bitcoin has a bright future. Chinese firm IDG Capital has funded San Francisco start-up Coinbase, a site which allows Bitcoin to be purchased from US bank accounts. Coinbase also grabbed $5 million in funding from Fred Wilson at Union Square Ventures, who has previously funded successes like Twitter, Zynga, and Kickstarter. But where others see opportunity, the U.S. government sees crime. This is unfortunate.

In recent weeks, Bitcoin's price has stabilized in the low one hundred dollars range. If asked a year ago, even the most wild-eyed Bitcoin enthusiast would have declared such a price ambitious. After taking it on the chin in the media, defending itself against the power of the U.S. Federal government, and surviving a massive rise and fall in price, Bitcoin doesn't look much worse for the wear.

As people across the globe continue to look for ways to take control of their own finances, avoid the costs and restrictions of a bloated financial sector, and escape the debasement of fiat currency, Bitcoin is positioned as a promising alternative. But its existence will continue to cause headaches for those interests that demand central control and that want to hide the effects of their own printing presses. But because of its unique, decentralized, and ingenious security structure, the Bitcoin network may be the one cyber nut that the U.S. government can't crack.

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Investing in foreign securities involves additional risks specific to international investing, such as currency fluctuation and political risks. Risks include an economic slowdown, or worse, which would adversely impact economic growth, profits, and investment flows; a terrorist attack; any developments impeding globalization (protectionism); and currency volatility/weakness. While every effort has been made to assure that the accuracy of the material contained in this report is correct, Euro Pacific cannot be held liable for errors, omissions or inaccuracies. This material is for private use of the subscriber; it may not be reprinted without permission. The opinions provided in these articles are not intended as individual investment advice.

This document has been prepared for the intended recipient only as an example of strategy consistent with our recommendations; it is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular investing strategy.  Dividend yields change as stock prices change, and companies may change or cancel dividend payments in the future.  All securities involve varying amounts of risk, and their values will fluctuate, and the fluctuation of foreign currency exchange rates will also impact your investment returns if measured in U.S. Dollars.  Past performance does not guarantee future returns, investments may increase or decrease in value and you may lose money.

Opinions expressed are those of the writer and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.

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