ASSET ALLOCATION MODEL
FOR THE SECOND HALF OF 2004
By Thomas G. Cloud – July 30, 2004

As we look at the size of government, everyone must realize that the spending to run the government since 1980 has increased from a budget of $500 billion to over $2.5 trillion per year. Since 2000 alone, federal spending has increased a massive 28.8% with spending by the Fed increasing 35.7%. Consequently, we now have the largest federal budget deficits along with the largest trade deficits in our country's history. It does not take a genius to quickly figure out exactly why the dollar has lost nearly 50% of its purchasing power over the past five years. In our opinion, we are seeing only the “tip of the iceberg”. Recently Senator John Kerry was calling for higher taxes and more federal spending to help the economy. He would like to increase spending on agriculture, education, Medicare, energy, and transportation. At the same time, he was knocking President Bush for being the first full term president since John Quincy Adams (1825-1829) not to veto one single bill. So really no matter who is elected as resident in the fall, government spending, federal budget deficits, and trade deficits are headed in a direction that cannot be turned around for quite some time. During this period, the dollar will continue to fall and will eventually lose its status as the reserve currency of the world. With that in mind, below is our hypothetical asset allocation model for the second half of 2004. It is probably more important than ever before that each investor adopt a strategy that includes stretching one's assets over many different investments and investment categories.

• Stocks ( U.S. , foreign, and hedge funds only) – 10% to 20%
• Gold Mining Stocks - 5% to 10%
• Fixed Income (bonds and annuities) - 10% to 20%
• Foreign Currency (foreign bonds and physical currency) - 25% to 30%
• Tangible Assets (precious metals, gemstones, rare coins and historical documents) - 25% to 33%
• Cash - 25% to 30%
• Real Estate - 5% to 15%

*While the above asset allocation model is designed to help balance risk and give investors security, we strongly recommend consulting with your own personal financial advisor before making any type of change to your personal, retirement, or profit sharing portfolios.

FURTHER CLARIFICATION

•  Stocks – We are decreasing the recommended percentage in stocks because of several factors. First, the early months of 2004 should have been a bonanza for stocks based on the liquidity that was pouring into the market. However, the scare of potential interest rate hikes has kept the stock market flat to slightly down. It is hard to believe we are now four and one-half years into this decade and stocks have yet to rise. They are almost exactly where they were four and one-half years ago. Many advisors including Harry Schultz has cut his stock recommendations considerably. Currently he is recommending 7% for the next quarter. We believe there are still opportunities out there in foreign stocks including the Israeli stocks that have reached new highs. We also continue to recommend the Rydex funds (www.rydexfunds.com). In particular, we like the Rydex Ursa and Juno as hedge funds for the remaining months of the year. With the probability of rising interest rates and a falling dollar, caution is the key for the stock market for the rest of 2004.

•  Gold Mining Stocks - We have cut by 5% our recommendation in this investment area. The opinions and articles of many gold experts have led me to believe that the leverage we once had with gold mining stocks is simply no longer there. With environmental problems increasing, with gold being found at larger depths and with higher mining costs, this area should be cut back. The balance of this area should be placed into physical gold which will be addressed in more detail below. We continue to recommend the same three gold funs as before. They are: American Century's global gold fund at (800) 331-8331, Invesco Strategic Gold Fund at (800) 525-8085, and Franklin 's Gold Fund at (800) 342-5236.

•  Fixed Income – We are leaving our recommended percentages the same; but we urge caution if interest rates begin to rise quickly at any point over the next few months. All bonds should be either short or medium term and your annuities should not be bought for more than five or six years as interest rates will probably be higher and rates will be rising.

•  Foreign Currency -Almost every advisor that I know is recommending a percentage increase for this particular area. Mr. Schultz has just issued an increase to 20% to 35% of one's portfolio for foreign currency. I am happy to discuss the different options with you on a one-on-one basis. Mostly, I continue to recommend American Century's International Bond fund. To secure a prospectus, phone 800-345-2021. The other areas that might be of interest include CD's in foreign currencies, physical foreign currencies and two-day call deposits in foreign currencies. Special attention should also be paid to the Sweden , Denmark and Norway kroner for the last half of the year.

•  Tangible Assets - We have now seen gold rise 56% over the past four and a half years while the stock market has not moved. In January 2000, I predicted we had entered the decade of tangible assets. We are now poised to see the huge move that has been building over the past four and a half years. While demand is increasing in large rates, the dollar is falling. The only piece of the puzzle that remains so that gold can make those larger jumps is the intervention of the Federal Reserve and the Gold Cartel banks. One can read thousands of pages proving past interventions by the Fed and Gold Cartel banks, but many people just do not want to believe the facts. It is hard to believe after an audit on our gold reserves every other year until 1992 that we have not had one audit under Bill Clinton or George Bush. What will drive the explosion in gold will be the inability of these banks to cover their positions. When the Europeans return to work in mid August, we expect another increase in gold like we have had the past three years during the September to December time frame. With gold down a bit this year, watch for a very quick recovery of 5% to 7% over the next two months. I would be happy to discuss with you how you can buy gold commission free and take delivery or have it stored at no cost in a fungible storage program. The key here is to make a move before gold takes off.

Silver is also a metal that rose from $5 per ounce in November 2003 to over $8 per ounce in April. With the price now back around $6.50 per ounce, watch for a strong increase perhaps up to $7.50 to $8 per ounce by year-end. This is another market that has been manipulated that does not have the reserves to cover many of the contracts that are out there. Watch this metal for volatility, but it should rise steadily and may indeed be the biggest winner of all metals over the next six-month period.

Palladium made a large move right after our buy signal rising from $242 per ounce to over $330 in less than six weeks. The market has now pulled back to $230 per ounce and this continues to be a screaming buy. Please review my buy signal at www.turamali.com . You will find it under the “market update” icon. Over the next year, palladium will rise a minimum of 30% and as much as 50% from where it is right now. Every portfolio should have palladium in it. Hopefully, many of you got out over $900 on the platinum sell signal that can also be reviewed by visiting our website. While platinum is making a rally after falling to $750 per ounce, we feel it will be a good time to sell if you have not done so already.

Additionally, we are recommending that approximately 5% of one's total holdings be placed into EGL and/or GIA certified diamonds and colored gemstones. The larger the carat weight of the particular stone, the greater its appreciation potential. We continue to see better appreciation in the larger sized stones than in the commercial or lower carat weight stones. An overwhelming majority of the gemstone dealers with whom we have worked for many years have consistently predicted that 2004 will be the best year in over a decade for particular stones. If you have an interest in this area, please give us a call to discuss the choices. For out of state residents, please phone (800) 247-2812.

•  Cash - With all the uncertainty, your cash holdings should be increased until a more clear direction is seen in interest rates, stocks, and bonds. As we mentioned in January, one should not use standard commercial paper money markets to get higher rates than are generally offered by Treasury bill money markets. Again, keep that cash basket a little higher for the next six months and be ready to take advantage of any market opportunities.

•  Real Estate - While real estate is not climbing at the rates of the past several years, there are still opportunities in REITS, select rental properties along with standard duplex investments and triple net leases. This basket should be purchased only with cash. This will give the investor higher yields than money markets plus equity build-up.

Allocation Model - 2003

Allocation Model - 2002