By Thomas G. Cloud – July 21, 2005

In adjusting our asset allocation model for the second half of 2005, it is very important that we visit what has happened in the first half of the year. It is also important to examine the factors that will drive all investments – not just for the remaining months of 2005, but perhaps for the next two to three years. Prior getting into that analysis, it is important that you re-read the following introduction to my February 7, 2005 update:

In adjusting our asset allocation model for the first half of 2005, it is very important that you, the investor, be willing to carefully monitor and watch your portfolio closer than you have done in many years. There will be many opportunities during ’05 to make money, but trends that have been developing over the last several years will become quite prevalent by the third and fourth quarter. As these indicators become clearer, you will see changes that will occur swiftly. As the year wears on, we expect interest rates to rise, the value of the dollar to take a big hit, and equities to start off strong yet turn down sharply by the end of the year. Inflation will also increase during 2005 and the secular bull markets that are now four years old in precious metals, oil, and commodities will once again be the major movers. Bankruptcies in both governmental agencies and private businesses will also be more prevalent than at any other time over the past five years.

As you will notice from the above, there is one item that at this point is very clearly wrong. The value of the dollar has actually shot up over 11% since its low in February. This has been the major factor in calming the currency markets and also helping us attract foreign money keeping inflation lower than expected. But the real question that should be addressed is: Where will the dollar go from here?

The big jump in the dollar started when France and Holland made a surprising act voting no on the constitutional unification of the European Union. While this appears to be negative for the short term, it could be viewed that people are “standing up” so that the EU does not become a political union rather than the advertised economic union. The free trade zone in Europe that was pushed (and advertised) looked good on paper, but has never reached the grand scale that was expected. The world was initially enthralled with the prospect that the EU would have a larger economy than the United States. Unfortunately, politics became an issue and the EU turned its back on the people.

Tony Blair recently gave a brilliant speech saying, “The EU will fail on a grand scale if it doesn’t face up to globalization and competition. Only by change will the EU recover its strength, its relevance, idealism, and thus public support.” He further cited that “approximately 20 million people are jobless and that 40% of the EU budget is being spent on welfare while spending very little on research and development”.

Along those same lines, Turkey is expected to join the EU in 2006 bringing another 37 million people and enough economic clout to raise the EU above the US in GDP. However, there is the uncertainty as to whether they will meet the guidelines and there is the uncertainty as to how long it will take the French and Dutch to ratify a changed constitution. These factors will impact Europe, and of course, ultimately the dollar.

On the home front and as the dollar gains strength, it has pushed our trade deficit over $55 billion per month. We are now annualizing back to the $650 to $700 billion a year that we are sending off shore so that countries like China can come back and buy up our assets. We saw this in the early 80’s with the Japanese and we are now seeing it with the Chinese.

The other issue that we haven’t seen much about since the fall of 2004 is the continual capital needs of the United States government. Recently the government announced that their deficits for fiscal 2005 (which ends 9/1/05) could actually be $100 billion less than originally forecasted. Of course, we all realize the numbers are forecasted high so they can claim they did a good job. In actuality, we still need to attract 80% of the world’s export capital just to finance our ever increasing deficit.

There is still an issue that came up at the G8 Summit meeting in Scotland recently. Discussion ensued as to whether or not the United States should devalue its currency 20% to help rebalance the global economy. This is now twice in two years that this subject has been broached and the discussion will most likely continue to gain momentum.

While the US dollar index has hit 90 up from 80.50 in February, it does seem to have hit heavy resistance. The dollar certainly looks over-bought on every index. Therefore, we believe the dollar will drop in the last half of 2005. You should look for it to drop back to the 85 to 86 range representing a 5% to 6% drop.

While there are many other factors that will affect our economy, certainly the dollar value is the one to watch. It will affect equity, bond, and gold markets as well as currency markets. Looking at the dollar and assuming it will fall 5% or more the last half of the year, the asset allocation model that follows represents our recommendations for the last six months of 2005. As you review our recommendations, please keep in mind that it is probably more important than ever before to adopt a strategy of stretching your assets over as many investments and investment categories as you feel comfortable.

Stocks (U.S., foreign, and hedge funds only) – 15% to 25%
Gold Mining Stocks - 5%
Fixed Income (bonds and annuities) - 5% to 10%
Foreign Currency (foreign bonds and physical currency) - 15% to 20%
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: While we are leaving stocks at the same recommendation level as we had for the first half of ’05, investors should watch the value of the dollar very closely. While the economy has improved due to the strength of the dollar and with some earnings improvement, the market has still not risen in five years. We continue to recommend RYDEX funds (www.rydexfunds.com). In particular, we like the URSA fund and their Juno funds as hedge funds in case the market moves lower over the next several months.

Gold Mining Stocks: At present, we recommend that 5% of one’s assets be positioned into gold mining stocks. 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 funds 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 the fixed income section the same as the initial thrusts in interest rates earlier in the year has calmed down. We still suggest staying away from long term positions in bonds and annuities over ten years. There still remains a strong possibility that interest rates will rise later in the year and a higher probability that rates will rise in 2006.

Foreign Currency: In February we cut our recommendation here as we felt there was a possibility the dollar would rise the first half of the year. As you realize, it did. Currently we suggest that the foreign currency basket should remain “as is” since the losses that accumulated with the rise of the dollar should be recaptured during the last half of the year while the dollar falls. While we do not expect the dollar to go to 80.50 where it was in February, we do think it will return to the 85 range between now and the end of the year. Given that 5% to 6% drop, it is possible to see a jump in some of the international bond funds of 5% to 8%. We continue to recommend American Century’s International Bond Fund. To secure a prospectus, phone (800) 345-2001. Other areas of interest in foreign currencies include CD’s, physical currencies, and two-day call deposits.

Tangible Assets:

GOLD – Gold made a big jump earlier in the year reaching $450 per ounce when the dollar bottomed in late February. Since then the dollar has risen 11.5% while gold has fallen 5%. There are many reasons for this which include that Saudi Arabia has taken payment in gold for the first time in many years (and perhaps the first time ever). With the uncertainty of the Euro and the dollar, they believe gold is a safer haven. If the dollar drops back to the 85 range we anticipate, gold should go to $464 to $470 per ounce between now and the end of the year. Currently gold is trading at $423 per ounce. As demand continues to expand and if the Chinese clear commercial banks to sell gold, this may increase world demand up to 10% according to some top gold experts. This demand alone is enough to impact the price of gold in the coming months. There are many ways to own gold from physical coins, bars, to fungible and non-fungible storage programs. I would be happy to discuss the pros and cons of each of these options.

SILVER – This is the metal that we continue to believe will be the first to explode. The shortage of above ground silver has been well documented by many writers including Ted Butler and David Morgan. Silver should make a move from the $7 level where it is today to around $8 per ounce by year end. As is the case with gold, silver can also be purchased in many different ways including certificates so you don’t have to deal with the heavy weights. Once again, I will be happy to discuss your options for silver with you.

PALLADIUM – It appears that palladium will be quiet between now and the end of mining season in Siberia. The price is expected to stay between $170-$190 per ounce. Fundamentally, this metal continues to be a screaming buy. Even though its price has not moved up as we anticipated, we remain positive that palladium will make a big move in ’06-’07 resulting in a nice profit. We continue to recommend palladium at these low prices to cost average down for those who purchased at higher prices.

GEMSTONES and DIAMONDS - Five percent is once again our recommendation for colored stones and diamonds. 2005 witnessed the biggest jump in diamonds in over twenty years. We have seen prices rise in double digits in GIA and EGL certified diamonds. Larger three carat (plus) stones continue to be in short supply and these have increased in value just about every month this year. Even with man-made diamonds available, they have captured only a very small part of the market as I had predicted. Additionally, we are seeing DeBeers enter the retail market with plans to open 150 to 170 stores over the next five years. All this is positive for demand and will continue to drive diamond prices much higher. Remember, diamonds are the only investment that I know of other than Treasury bills that have not had one down year in twenty-five years.

Colored gemstones continue to increase and make the biggest moves in over twenty years. The new stones from Africa which include rubellite, green and blue-green tourmaline, spessertine and mandarin garnet, and finally the Pakistan peridot have been increasing in value and demand ever since they were discovered about two years ago. We are now seeing “suites” of stones being marketed worldwide. A suite includes a stone for a ring with two matching stones for earrings. These can be acquired for jewelry, while still escalating in value. The different colors that are available are absolutely stunning. New techniques and equipment for cutters have enhanced the beauty of these exquisite jewels.

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 was mentioned in July, 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 few years, there are still opportunities in REITS, select rental properties along with standard duplex investments and triple net leases. Real estate should be purchased only with cash. This gives the investor higher yields than money markets plus equity build-up.

As always for questions or assistance with your asset allocation model, please do not hesitate to phone us at (800) 247-2812

or send us a reply via e-mail. Thanks!

Turamali, Inc.

5805 State Bridge Road

Suite G-336

Duluth, GA 30097

Telephone: (770) 441-1550

Fax (770) 416-8450