Last Friday, the sovereign debt of nine European nations was downgraded by S&P. Now, there are only four European nations whose sovereign bonds carry the highest AAA rating: Finland, Germany, Luxemburg and the Netherlands. Since the sovereign debt refinancing and potential default problem still goes unsolved, we foresee the markets having to keep digesting more waves of bad news. Yet the fear created by such news is diminishingnot because of a shortage of negative news headlinesbut because European banks are more protected by the many lifelines that central banks keep throwing them.

In 2011, financial news was dominated by the turmoil in Europe. Looking ahead, the ongoing crisis will be addressed by a global money printing jamboree and coordinated funding from central banks in the developed world, including the Fed. When the money starts rolling off the presses, the liquidity infusion will create some genuine buying opportunities for American, European, and Asian stocks, as well as selected commodities. Liquidity infusions are like a rising tide of money available to buy assets. Buy stocks, commodities, and primarily gold to protect the buying power of their assets.

The British government has set in motion this week a future overhaul in the way that individual banks do business. British banks will be required to separate their basic lending and deposit operations from investment activities involving trading and speculation on behalf of clients and the banks themselves. This should mean that the deposits of retail customers will be shielded and protected from bank investment and trading ventures.

Developments in Europe have dominated the worlds economic headlines in recent days and have obscured some good news from China. In this weeks newsletter, we will cover the background of these important events and their meaning to global investors. We are recommending using the gold market decline to add to gold positions, we continue to hold other long term positions.

During the last two weeks, global markets have moved their way to higher ground and indications point to a healthier finish than expected to an otherwise sickly 2011. We see several developments supporting a continued equity market rally. They have to do with measures taken in China, Europe, and by central bankers around the globe. The Canadian and Singapore dollars are well-managed currencies in countries with conservative banking systems. They are good candidates for continued long- term appreciation versus the Euro and U.S. dollar.

After the ECB announced late last week that they had bought bonds to create demand for the bond auctions of this week, they further stated that they had not sterilized all of those purchases. Some viewed this as a bearish event, but it made us become more bullish and we began to buy stocks on Monday 11/28. Europes bond buying without sterilization is QE, or money creation. New data came out yesterday saying that the ECB and Euro zones 17 national central banks balance sheets have grown to an all-time high of 2.4 trillion Euros. Some see this as a bad thingwe disagree.

In our opinion, global stock markets are beginning to price in a breakup of the Euro-Zone currency.Some will quit under pressure or be forced out and possibly some will quit because they do not want to pay part of the bill to bail out less conservative more spending oriented sister states. We anticipate that Greece will be the first to leave the Euro. The Greeks are perceived to be thumbing their nose at their European neighbors, and the Euro community could use Greece as an object lesson for other countries who might consider the role of non-cooperation.

German Chancellor Merkel has a new plan to reduce sovereignty for certain European nations. This will be a long involved political process and the fight over its implementation will be bad for Emerging Markets and for U.S. Markets.

U.S. presidential elections are a year away, while France and many other countries will be staging elections within the next twelve months. We can expect continued volatility as politicians around the globe say things to benefit their re-election chances which can have a negative impact on stock prices globally over the short run. This has made and will continue to make the tried and true method of buying and holding specific stocks for the long term a difficult road to travel anywhere in the world.

The events of the past few days have proved our case that more QE will be coming. In Europe, they will not let their banking system fail and will provide the necessary liquidity to backstop their banks. They can either nationalize banks or recapitalize the banking system with new capital from several countries. The bottom line is that liquidity will be added and central banks balance sheets will expand. Growing use of QE is bullish in the short to intermediate term for stocks in the U.S. and emerging markets, and it is bullish for gold, oil, wheat, and the currencies we have recommended.

For several years we have been pointing out that the U.S. is experiencing a banking system contraction much like Japan has experienced for two decades. Now, we are seeing the same phenomenon happening in Europe. A credit contraction is another name for a banking system contraction. Credit contractions lead to declining business activity. To put it another way, as our friend Larry Jeddeloh of the Institutional Strategist likes to say, we are in a credit cycle not a business cycle, and that is why the traditional stimulus measures are not having much of an effect.

The rally in European and world stock markets that began on October 5th appears to be continuing for several practical reasons. Many stocks just got too cheap. Europes policymakers have expressed language the markets want to hear. Ans Chancellor Merkel and President Sarkozy have given the world reason to believe that Europe will gradually implement a comprehensive program to recapitalize European banks. The combination of these factors has made us feel more constructive about markets. Don't forget gold, our advice continues to be buy the dips and take some profits on spikes.

If the optimists are to be believed, Europe will come to grips with its critical financial problems and conduct a massive restructuring of the banking system and bail out the irresponsible countries that overspent. If the pessimists are correct, the world is a mess and will stay that way. We are moving toward the optimistic side. We see that Europe is finally recognizing that the all-is-well charade is no longer working. Investors are too smart and more cynical than in the past. European banks need capital. If they get it, investors may see a sizeable stock market rally in much of the world.

Last week, five important central banks offered one-time funding lines to large commercial banks. Why? Access to capital from money markets was drying up and liquid first aid was needed. The commercial banks were having a hard time borrowing dollars needed to repay loans in U.S. currency made by U.S. money market funds that decided not to renew the loans. U.S. money market funds had been huge lenders to large European banks. Now, bad news about Europes sovereign debt situation is scaring U.S. money market institutions away. The greater fear is trumping higher returns.

The world markets have clearly stated that they want growth, and through growth, balanced budgets. Unfortunately, growth is not in the economic cards for Europe or the U.S. over the next few months. Rather, both regions will have stagnation, inflation, fear, turmoil, and two deeply opposed world views will be bandied about in political pronouncements. It does not matter what political view you have. If one wishes to survive and prosper, one must be very alert.

As we have been saying for some time, U.S. economic growth is stuck in the slow lane.We have seen a serious slide in the American standard of living over the past three years, since the beginning of the recession.The slide can be measured in many ways.Food stamps recipients have increased by 48 percent and the cost of the program ballooned by 80 percent.Medicaid recipients are up 17 percent and programcosts are up36 percent.Welfare recipients are up 18 percent, and program costs up24 percent. That isnt the kind of growth thats good for any economy!

Heading into April 2011, we thought it timely to hoist up for consideration a point in stock market lore that says sell in May and go away. According to the Stock Traders Almanac, the market has been strongest over the years from November 1 to April 30. That stretch of time has seen average returns of 9.2 percent from the Dow Jones Industrial Index since 1950 compared to an average loss of 1.2 percent from May through October. By this standard, the current surge in the markets that took off at the beginning of September 2010 is a good bit ahead of schedule.

Nine of the eleven nations sharing land or water borders with Saudi Arabia (SA0 have had demonstrations. Trouble is likely to surface in SA because much of the country?s wealth is located under lands where Shia Muslims are in the majority. The ruling House of Saud is Sunni Muslim. The distrust and bad blood between the two sects predates oil discovery and is not likely to be solved with oil money. The political events are about freedom from repression but also represent a basic struggle between these two Muslim groups for control of revenues from the huge oil fields in that part of the world.

Economy watchers see its growing presence in official government statistics. Yet you won?t hear government officials admitting it. It?s too politically unpleasant ? and threatening ? to do so. Official spin and fantasy aside, the reality is that inflation is here and here to stay for quite a while. That means the buying power of the dollar is declining and being experienced on a daily basis.

We are bullish for commodities, stock markets, and for income-earning real estate. It will be most felt in those countries where governments are stable and democratic. For stock investments throughout the world, we base our recommendations on careful study of individual companies and industries, always keeping in mind that companies and sectors are at differing stages of growth. We recommend continuing to hold shares of growing companies in Canada, South Korea, and the U.S. We favor technology, metals, auto and auto-related, agriculture-related, and energy, including oil and coal.

Investors are moving from bonds to stocks and the huge cash balances at money market funds will likely find their way into stock and commodity markets in 2011. This means inflation and commodities prices are likely to rise faster than wages, and those living on fixed incomes or bond interest will be affected the most, due to the fact that their money buys them less of everything; both luxuries and necessities. However, the ramifications of this inflationary trend are also serious for wage-earners. In every inflationary period in recorded history, wages have risen more slowly than inflation.

There are two major trends in place that set the stage for world economics in 2011. The first is China?s continued rise. Although the U.S. remains the most powerful economic force on earth, China will soon be replacing Europe as the second most powerful economic force. China?s power is not built on sheer size alone: indeed, China?s statesman-like behavior during the current economic crisis in U.S. and Europe has highlighted its maturity and greatly enhanced its image. The second major trend going into 2011 is the rise of inflation.

Investors should continue to hold gold for long-term investment. Food and food-related shares remain a favorite of ours and we believe that oil-related investments have promise. For long-term investment, we do not like the U.S. dollar, Japanese yen, British pound, or the Euro.As we mentioned in our September 14th letter, we like the Singapore, Thai, Canadian, Swiss, Brazilian, Chinese, and Australian currencies. In summary, investors should continue to hold shares of growing companies in India, China, and Colombia. We believe U.S. stocks can rally further.

The tax breaks will mean even more QE?and the bond market seems to agree with us. This weeks? poorly bid U.S. Treasury auctions says that while investors agree that tax breaks are good for encouraging economic growth, they also drive government deficits higher. Bond offerings from the U.S. Treasury are going to go up, and the Fed had better buy the Treasury?s bonds, because it is apparent investors don?t want them. QE is here to stay.

Investors should keep gold for long-term investment, as well as oil-related holdings. The U.S. dollar, Japanese yen, British pound and the euro are poor long-term prospects. Investors should continue to hold shares of growing companies in India, China, Singapore, Malaysia, Thailand, Indonesia, Colombia, Chile and Peru, as well as food-related shares such as grains, wheat, corn, soybeans and farm suppliers. Finally, investors should continue to hold U.S. stocks for a further rally.

Investors should continue to hold U.S. stocks for a further rally. Long-term U.S. liquidity formation through QE will create demand for many assets, including U.S. stocks. Short-term U.S. stock market indices are near resistance areas, and so traders can consider taking profits. Investors should also continue to hold gold for long-term investment, as well as oil, and food-related shares such as grains, wheat, corn, soybeans, and farm suppliers. The U.S. dollar, Japanese yen, British pound and the euro are all poor long-term prospects.

Investors should continue to hold U.S. stocks for a further rally. U.S. liquidity formation through QE will create demand for many assets, including U.S. stocks. Long-term Treasury bonds have also become less bearish. Another round of QE, as well as fear of another depression will create strong demand for bonds; it is thus too early to sell them short. Meanwhile, investors should short the Japanese yen. The Japanese have neither the resources nor the political willpower to fight protect their currency's value.

Historically, it has taken about four or five years of capital inflows into emerging markets to create an investment bubble. Thus far, we are only one year into a significant capital inflow into emerging markets, and we probably have another three or four more years to go before these markets become so popular that it is time to move on to other pastures.

Inflation, which has heated up in countries like Brazil, India, Indonesia and many others, will eventually make its way to the U.S. and Europe. Attractive areas for investment include Chinese consumer stocks and currencies, stocks and bonds of growing countries in Asia and Latin America, U.S. stocks and gold. The Japanese yen is a short. Japan's quantitative easing, when combined with the QE going on elsewhere, provides a strong impetus for price increases in commodities, gold and stocks.

Liquidity will flow into the Asian region raising consumer spending, stock prices and currency values. In the following countries: India, Indonesia, Malaysia, Thailand, Singapore, and China much new liquidity will enter. It will be in the form of foreign direct investment and investment money moving into stocks and bonds. With the exception of China, which is being singled out for a trade battle by the U.S. Congress, all of these countries will see their currencies rise and their economies grow.

The U.S. stock market is rallying, and the U.S. dollar is slowly declining in value relative to a basket of other currencies. Although inflation may not occur for another six to 12 months, it will eventually increase demand for assets with growth potential, such as income-producing real estate, gold, global growth stocks, and the world's better-managed currencies. Meanwhile, it is possible that we will see a small rally in bonds during late 2010. Many are expecting a slowdown in U.S. economic activity in early 2011.

The November U.S. congressional election is likely to bring in more pro-business and anti-tax legislators and the U.S. stock market is already beginning to discount this news. The fact that political gridlock is the most likely prospect for the next two years is music to the market's ears. This is because investors are nervous and unsettled by some political rhetoric that has been circulating, which portrays them as bad and even dangerous to the economic wellbeing of the nation. Guild also comments on strong performance by gold and silver, and demand pull in emerging markets.

Monty Guild and Tony Danaher strongly recommend that investors sell long- and intermediate-term U.S. bonds, including U.S. Treasury bonds, U.S. government agency securities, municipal bonds and corporate bonds. It would be very unwise to bet that interest rates will stay down. Guild and Danaher also comment on the rising risk of inflation, the drug war in Mexico, the rise of the Japanese currency and bullish prospects for gold.

It is not just the Wall Street banks and large public companies who have used financial trickery in their balance sheets. After years of fiscal manipulation, many states, counties, municipalities, school districts and public utilities are going to have trouble refinancing their debts. Some municipal bond investors, underwriters and issuers are now hoping that the federal government money-printing machine will come to the rescue of insolvent states, counties and municipalities. Hope, however, is not a valid investment strategy.

The world is awash in fear: fear of war in Middle East, fear of a double-dip economic recession in the U.S. and Europe and fear of inflation in China and India, as well as many other potential problems. Gold and oil appear to be two of the wisest investment categories. India, Singapore, Malaysia, Thailand, China and Brazil also have strong potential for continued growth. Although it is less certain, we will probably see continued growth in Canada, Australia, Taiwan, and Korea. Europe, Japan and the U.S., meanwhile, appear to be set on low growth trajectories for the next few years.

High cash balances are warranted as volatility leads to market dislocations and good buying opportunities. Gold is approaching attractive prices for additions to portfolios. Some high-yielding oil-related shares will also be attractive on price declines. Longer term, China, India, Malaysia, Thailand, Singapore and Brazil continue to be attractive destinations for investment capital.

Even with all the problems currently experienced in Japan, Europe, and the U.S., some parts of the world continue to grow vigorously. Guild's focus will be on the countries above which have strong prospects for growth. They will also focus on high-yielding income stocks which earn cash flows from the production of oil, and from gold, which will provide an anchor to windward in the current turbulent economic times. Today's markets will continue to produce those opportunities in the form of price weakness if we remain patient.

The Macondo well blowout may indicate that these Gulf of Mexico fields, located in deep water about 50 miles offshore and under another 20,000 to 35,000 of rock below the seabed, represent a massive oil discovery. The costs of exploitation will be huge (and already are), and it will probably be decades before the oil can be brought to the surface, but they may do a great deal to help the U.S. attain energy independence. Despite the ongoing tragedy of the Gulf oil spill, the reality is that these resources are likely to eventually make it to market.

Inflation can occur in either an economic expansion or a depression. In either case gold, currencies of countries with conservative financial management and stable banking systems, real estate, and other real assets can do well. In an inflationary expansion fast growing companies and producers of commodities will also do well. During deflation, bonds will do well if the issuer can make the payments. Gold often holds its value in terms of buying power even in a depression.

Some investors believe that deflationary influences will lead to an immense slowdown in world economic activity, and thus thus are selling stocks, buying bonds and short-selling commodities. Others think government action to forestall the deflation will end up creating inflation, and are buying commodities, buying stocks and avoiding bonds As the two sides pull markets back and forth, volatility will continue. To deal with the volatility, Guild is holding a large percentage of client assets in cash and gold, which can rise in either an inflationary or a deflationary situation.

There is too much debt throughout the developed countries, and not enough growth to service that debt. The first phase of the current deleveraging cycle began about 20 years ago, when Japan's giant real estate and stock market bubble began to deflate. The second began in 2007, when the U.S. real estate lending bubble burst. The third began this year, with the European sovereign debt crisis. U.S. investors should buy only on dips, be selective, and look for good income, strong balance sheets, and strong earnings growth generated from internal cash flow.

The developed world is deleveraging and Europe is moving toward deflation and depression. Meanwhile, the Chinese, Southeast Asian, and Indian-led developing world is growing and experiencing inflation. Guild?s portfolios are largely in cash and, and they will spend it as bargains appear. Investors should consider buying gold and begin looking at China?s market, which is becoming attractively priced. In the case of oil, Brazil, India, Korea, and Singapore Guild plans to wait until the fear subsides and use the correction as an opportunity to buy into these markets.

Why is oil falling while gold is rising during the European sovereign debt crisis? Gold is rising because quantitative easing in Europe will be highly inflationary in the long term and destructive to the standard of living of every citizen of the developed world, especially in Europe. Oil is falling as investors fear the austerity measures that are required in Europe will shrink economic demand. The other parts of Europe and the U.S. will all have their 'Greece Moment' in the coming months and years. When that happens, investors will be grateful for their gold holdings.

The European sovereign debt crisis will continue to wax and wane, but will stay with us until European governments take much stronger actions to reign in excessive outlays of all types, including social and military spending. The euro and British pound will continue to fall in value versus the U.S. dollar and other better-managed currencies such as the Australian, Canadian and Singapore dollars, the Chinese yuan and the Brazilian real. Guild remains bullish on the strong currencies mentioned above, oil, gold, several Asian markets and exporting companies around the globe.

Election years often bring wild political actions as politicians defend their poor records by blaming anything that comes to mind. If the rhetoric against banks is not too strong, the rally could continue. If the rhetoric gets out of hand, we will see a market correction for a few weeks with a resumption of stock price increases later in the year. Guild continues to invest in Asian growth countries, oil, gold, and export driven companies who can grow earnings while shipping products worldwide.

China will not melt down in the near future, as some fear. Chinese exports have fallen in recent years, but infrastructure building and consumer spending will help pick up the slack. While bad real estate loans may become a problem in China, the problem should be well-contained. And provinces can raise taxes in order to pay off loans. Guild and Danaher also comment on instability in Mexico, Alan Greenspan's recent Congressional testimony and global markets.

Smart investors will buy stocks on dips, sell their long term bonds denominated in the euro and the U.S. dollar, and shift into shorter maturity bonds or into stocks that can grow. Investors should consider selling all long term bonds of any type. Guild and Danaher favor foreign stocks in Singapore, Thailand, Indonesia, and Malaysia. They also favor export-driven companies in developed countries, and commodity producers globally, especially oil companies that are increasing their production. Gold is in a trading range, and should be bought for below $1090 per ounce.

Investors should focus on exporting companies, food-related companies, raw materials producers, iron ore, oil, coal, technology, and on stocks of other countries, especially countries that can export to fast-growing areas such as India, China and Southeast Asia. Even U.S. financial stocks are enjoying a rally as uncertainty ends. Japanese, European and U.S. stocks that produce products for domestic consumption offer poor prospects. Gold is in a trading range, and investors may want to acquire gold shares as it approaches the bottom of that range.

It is clear from China's pronouncements that the government is willing to raise the value of its currency, but that it will delay doing so if the U.S. or any other major nation threatens the country or pressures it to take action. If Western politicians keep their mouths shut, China probably will raise the value of the Yuan. Guild and Danaher also comment on recent gold purchases by the Chinese and Indian governments amidst inflation fears, as well as market conditions in China, Brazil, Russia, India, Europe and the U.S.

The Icelandic and Greek financial crises can be seen as the second stage of the larger global banking crisis. This second stage, which centers on European sovereign debt, was caused by years of over-borrowing and now deleveraging. Many countries will print money to help ease the crisis, and this will keep developed economies and their currencies under pressure for years. Guild and Danaher also comment on rising demand for oil and gold, the U.S. stock market rally, rising interest rates and the continued rise of China and India.