By Dr. Russell McDougal

When many investors think of Canada, the first thing that comes to mind is the abundance of natural resources. Canada has natural resources like Florida has grains of sand and Texas has oil. It’s no surprise that the Canadian economy is largely resource based.

Canada has developed and nurtured an entire exploration and production infrastructure over the centuries. They have schools, institutions, markets and vast financial resources all dedicated to take advantage of their resource heritage. It is nothing short of phenomenal. What you may be surprised to learn is that they have taken this resource expertise to a global level.

Our northern neighbors haven’t been content to stay home and ply their trades only in their own country. They are more adventuresome than that. “Canadian know-how” has left few areas of the earth unexplored. They search for silver in Mexico and South America, gold in China, platinum in South Africa, diamonds in Namibia, oil in Indonesia, Iron in Sweden… well, you get the picture.

These guys are beyond good! Quite frankly, the Canadians are the world’s experts in the field of resource exploration and your opportunity lies alongside theirs.

The global economy is expanding rapidly and putting strains on most commodity supplies. Get used to it. Trees don’t grow to the sky, but they certainly can grow very big (check out the Redwoods of Western Canada). As an intelligent investor, you will want to have exposure to this secular bull market trend over the coming years.

If you want leveraged speculation in exploration you will want to delve into the arena of Canadian micro-cap companies. You may be surprised to learn that it is the talented, mobile and efficient junior mining companies that make the most resource discoveries, not the majors like Newmont or Barrick that most people are more familiar with.

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You needn’t look for these companies on the NYSE because they’re not there. Their home typically starts out on the Toronto Venture Exchange or the Toronto Exchange itself. As success comes their way they will seek listings on the NASDAQ Pink Sheets, the NASDAQ or the American Exchange.

The goal is to invest in the most promising companies when they are quite small. A trusted source long ago said, ”Give some money to good people and very often they will discover something.” This sounds simple but it is actually quite profound. You stack the deck in your favor when you can tap into the talent pool of ‘good people’. That’s the key, not the size of the company.

Don’t make the mistake of thinking relative smallness in a company is a bad thing. There are innumerable thriving businesses with world class expertise that are too small for the big funds or institutional investors to get involved with. These are the companies with the potential to multiply in price once they start plying their trade and have exploration success. Of course, that’s the point when we’ll gladly sell shares to the ‘big boys’.

There is another reason for buying Canadian: dollar diversification. No matter how widely diversified your investments are in different sectors of the economy, you are not truly diversified if everything you own is based on the US dollar. Please don’t learn this lesson the hard way over the next 5 to 10 years.

Canadian stocks that were purchased in 2003 were bought with an exchange rate of 69 cents US for each Canadian dollar (called the ‘loonie’). Presently, it takes 90 cents US to purchase one Canadian Dollar. In other words, even if your investments were flat during this period you would have still made around 30% in three years on currency appreciation alone. Not bad considering that would not have been the primary reason for buying the stocks.

I am convinced that the US Dollar has trouble baked deeply into its cake. On the other hand, countries with treasure troves of natural resources ordinarily experience currency appreciation during commodity bull markets. I believe the dollar and the loonie will likely see parity before tool long. And considering the commodities supercycle we are currently in, I suggest the bull market in Canadian dollars still has many years to run.

You might be surprised how easy it is to set up a brokerage account that can efficiently buy Canadian stocks. I receive no consideration whatsoever for these recommendations, but I did want to pass along three brokerages that I have found to be exemplary:

1. Global Resource Investments 800-477-7853. (Full service brokerage house specializing in resources. Ask for Luke Smith or Ben Miller).

2. Charles Schwab & Co. 800-435-4000 (They have an efficient international investing department).

3. Pennaluna & Co. 800-535-5329 (Long established discount brokerage out of Idaho, with a special place in their hearts for mining stocks).

The bottom line... If you want to speculate in resource exploration, Canada is truly a speculator’s paradise.

Good Investing,

Rusty

Market Watch

The One Thing China and Hedge Funds Agree On Can Make You Rich

By Andrew Gordon

China and private-equity funds have something in common: They are both sitting on obscene amounts of cash. It’s a luxury neither can afford anymore, and they know it. Following this money can lead you to substantial payoffs.

China just passed the $1 trillion mark in foreign currency reserves. And since just 2005, private-equity funds have raised over $200 billion.

It looks like both are ready to do some spending. China is slowly, but steadily growing more aggressive in its foreign investment strategy. Private equity funds have to get off their collective duff. They’ve only spent $56 billion of the $200 billion, according to Thomson Financial.

Any market that receives just a little piece of this action will get a huge shot in the arm. Likewise, the stockowners of individual companies will make out big-time, whether it’s China or private-equity firms that offer the typical price premium to win takeover bids.

Private equity funds chase all kinds of companies all over the world. When they buy one, they often use leveraged buyouts (LBOs) – borrowing money to make the purchase with the bought-out company assuming the debt. For LBOs to work, the company being taken over should have a healthy cash flow (to make the debt payments), a small debt to begin with, and strong growth prospects.

While private-equity funds are prospecting the world for companies to buy, China is desperately trying to pare down its enormous purchases of raw materials to feed its huge and rapidly expanding economy. The Chinese have taken two approaches: they have emphasized the development of their own mining industry, and they are buying more natural resource companies outside China. The failed bid for Conoco last year was very much part of this strategy.

Natural resource companies also fit the profile of companies that private-equity companies like – they’re in high-growth markets, and with commodity prices soaring many sport strong cash flows and reasonable debts.

When you have nearly $1.2 trillion chasing after the same companies in the same sectors, watch out. Investing in value plays in energy and natural resources, both US and abroad should make you huge profits down the road.