The following is an excerpt from our Letter of 31 December.

Everybody wants to know what the coming year will bring in terms of the markets - nobody knows. There are so many variables and so many geopolitical unknowns that it becomes a sort of miraculous guessing game contemplated by many market observers. We have always stated that we do not want to participate in that game but would rather simply watch on a weekly basis as to what happens in the markets - that seems a more reasonable approach. Yet, many niggle and wiggle as to what could happen. Ok, so let's look at some esoterics and cycles - that's about all anybody has to go with on historical data aside from sheer common sense about what the short term looks like, e.g. inverted yield curves, or housing data or whatever. Honestly, we do look at some esoteric indicators; some analysts use sun-spots, some astrology, some consumer preferences, etc. We certainly don't feel qualified to report on them regularly - let's just say - we review them and keep them in our grab-bag of possible indicators.

The Year of the Pig, 2007, is a twelve year cycle based on chinese astrology. We quote:

"This year marks the end of the cycle and is a year in which to concentrate on endings rather than beginnings. Affairs should be put in order, ready for the new cycle. There will be a decided sense of optimism in the air, with the economy taking an upswing. There should be a feel-good factor, and the Pig year is a time for conspicuous consumption, having a good time, eating, drinking, and enjoying ourselves. The leisure industry and trade in luxury goods both do well, gambling flourishes and records are broken in the world of sports."

Going back to 1899, Pig years have all been positive for the Dow Jones Industrial Average except one.

By the way, the most striking year seems to be the Year of the Snake: 1929: world stock market crash; 1941: WWII raging in full strength; 1989: fall of Communism in Europe; 2001: Tech market crash; 2013: ?? And we keep in mind that many esoterics hold that the 2012-2013 timeframe is the "end of time" according to the ancient Mayan calendar and will mark a rebirth in the world order and an upheaval in the global economic order. Don't cringe - I'm just reporting what we read. Another interesting fact that we have been researching for many years now and which has not been reported anywhere else, as far as I know, is the fact that many market relationships seem to evolve around the 3-6-9 vibrational characteristics based on numerology. We have been developing a chart which goes back to 1850 which will boggle the mind of any stock market and gold watcher. For example 1971 = 1+9+7+1 = 18 = 1+8 = 9. That was the year when Bretton Woods fell apart and US President Nixon went off the Gold Standard and the gold price was thrown open. Nine years later in 1980 = 1+9+8+0 = 18 = 1+ 8 = 9 it reached a high. A trine of nines. 1998 marked a market low in the commodities complex. 1998 = 1+9+9+8 = 27 = 2 + 7 = 9. From 1980 to 1998 is 18 years or 2 nines. From 1998 to 2007 is a single nine period and note that 2007 also equals 9. These are not coincidences. The open question remains whether this has any meaning in the larger cycle or is it bound to be a mid-term high or low price? Our long range cyclical gold high is to occur in 2016 which also equals 9 and note that the high of 1980 to 2016 is a delta of 36 years or 3+6 = 9 and 4 x 9 (4 cycles of nine). Numbers do have meaning. The "why" is far too complex for this publication. We observe and calculate and report. Only you can decide if this has any meaning for you. Just this morning I spoke with another financial astrologer and he predicts a sort of "gold crash" in the September 2007 timeframe due to planetary movements just as he interpreted that due to planetary constellations in 2001 the precious metals would start to move erratically higher. Nobody is infallible - again, we are just reporting. Just to note, he is a successful currency trader based on financial astrology, so one should at least keep an open mind, I feel. Personally, I put more trust in universal numerology than, for example, US presidential cycles or the likes thereof. If you are interested in obtaining the full numerology cycles work we have done, then please drop me an email at editor@dinl.net with "num cycles" as subject line. When it is complete - I don't know when that will be - (beta version 1.0) then we will issue it to you - we are still fine tuning some things and require a few more charts. Note: cycles are not "perfect" but they are supportive.

Moving on, without observing any of these esoteric indicators our forecast for world markets is a benign to positive-tendency year. Liquidity will remain intact. The world economies remain imbalanced and fragile - as they have been for many years and yet all are intertwined. It will be interesting to hear what the upcoming World Economic Forum in Switzerland has to report on - most likely only positive spin. Just to note, China has only 1.5% of its reserves in gold whereas most countries maintain a 3% level. If China were to diversify more of its US Dollar reserves into gold, this would certainly be supportive of higher gold prices. Likewise, a number of countries, Russia, UAE, China are diversifying out of the US Dollar and this could give impetus to a further weakened US Dollar and Euro strength. With US manufacturing at only 12% of GDP it seems nearly impossible that the US could ever export its way back to a healthy and balanced economy. The Pentagon has now asked for another $100 billion for Iraq, Afghanistan and new military equipment. New accounting measures now passed in the US will make pension commitments more transparent and may reveal larger holes in company and government finances than reported previously. The follow on to the sad story of world imbalances is that the recent US election resulting in a democratic controlled Congress may now start to implement protectionist legislation against China on imports. In 2006 the Congress tabled 26 pieces of anti-China laws. If the Democratic Congress passes some of these it will signal a new low in the world economy and could trigger devastating economic dominoes and hurt egos. Strangely, the US with the most to lose is seemingly playing with economic fire. Weak manufacturing, heavy imbalanced consumption, a weakening currency and asset imbalances (housing). China won't be fooled with - they are gathering resources, moving into high technology and broadening their reach and diplomatic influence.

The trickiest picture for us is the interest rate outlook. From OEF -

In the Fed's last statement they acknowledged the economy's recent weakness, adding the word 'substantial' to the description of the cooling of the housing market over the past year and describing recent indicators as 'mixed'. However, the remainder of the statement, assessing the inflation outlook and risks was unchanged. The Fed expects that recent elevated levels of core inflation will moderate, thanks to reduced pressure from energy prices, contained inflation expectations, the lagged effect of past rate increases, and slow growth in demand. But, and it's a big but, the Fed still believes that some inflation risk remains and that additional policy firming may be needed to deal with that risk.

That suggests that the chances of a near-term rate cut are very low, and in fact, still below the chances of a near-term rate hike, which we also view as low. The latest batch of indicators support the view that the Fed need take no action for an extended period. The surge in retail sales in November, the improvement in the trade balance in October, and the calming of unemployment claims after a late-November spike suggest that the economy may be stronger than the Fed expects, and so encourage a rate hike in the near future. But the unexpectedly mild CPI inflation report for November suggests that core inflation is easing, perhaps more quickly than the Fed expects, and that makes a hike less necessary. Reduced inflation will, however, ease the way for a rate cut should one prove necessary, but if the economy is really set to post higher growth, then that is increasingly unlikely.

Despite the above, the US Fed now has a tough landscape ahead; is the US housing market as bad as many think (full implosion) or is the soft landing now programmed in? Will energy prices remain low? What about the US Dollar? With foreign asset holders buying $3 billion USD per business day when does that stop or will it go on forever? Hint: nothing goes on forever. Do US trade sanctions against China start the downward tipping? Big things further accumulate against the US: Russia and China in the resources department, no clear military exit or diplomatic strategy in the Middle East, a suspicious world of US hegemony, a weakened currency. Empires cannot stand on military strength alone. What does the Fed do in the case of creditor nations offloading the US Dollar - how far does it go to defend the USD with interest rate rises? What is the risk premium for the US Dollar in terms of rates? The US current accounts deficit is now over 7%. We do not see any "robust stand-alone" strength in Euroland; Japan seems also weak. Canada would be wiped out on a hard US recession. Meanwhile money supplies by Central Banks are continuing upward - a crazy world. Even experts (economists) are totally confused : are we in a deflationary wage spiral due to globalization while in an inflationary price spiral as the Central Banks pump liquidity? That, I believe, is exactly what we are in. It will continue.

Some of the most fascinating reading I have done over the last 8 weeks has been about the squeezed and disappearing middle classes everywhere - personal bankruptcies are up, a recent study showed Germans have now "caught" the US sickness - 2 or 3 jobs just to keep status quo - forget about saving or getting ahead. And this while taxes are raised. And the politicians in Euroland complain that we, the squeezed consumers, are not spending enough to sustain business growth and hence job security even as the bureacrats will not reform or relax business conditions or give tax incentives. How schizophrenic and absurd and immoral.