That means tackling a wide range of political challenges in a rising tide of resource nationalism. In some countries, the problem is simple kleptocracy. In others, it’s a well meaning attempt to jumpstart long moribund economies. Whatever the motivation, however, it means higher production costs and constant uncertainty about how much output a company will be able to bring to market profitably.

Two resource treasure houses that remain notable exceptions: Canada and Australia. In sharp contrast to most resource-rich countries, the each has a long history of market economies and stable, elected governments. They also boast global resource giants with far-flung interests that need foreign capital and have thousands of foreign investors. They encourage direct foreign investment as well and, although there are limitations, infrastructure for getting product to market is also established.

Australia boasts major reserves of alumina, bauxite (a vital resource used in making aluminum), coal (both low and metallurgical grade), iron ore (the key element of steel), copper, tin, gold, silver, uranium, nickel, tungsten, lead, zinc, diamonds, oil and natural gas. It’s also a major producer of agricultural products from grains to livestock.

Needless to say, all of these vital resources have been in a powerful bull market for the past few years, due in large part to robust Asian demand. And the country is in prime position geographically to serve those markets. Shipping costs from Australia to India and China are a fraction of what it costs to ship resources from other markets such as Brazil and sub-Saharan Africa.

Deep reserves, developed infrastructure, stable government and nearby lucrative markets adds up to a prime place to do business for vital resource companies. And not surprising, the Vital Resource Investor Portfolio is strongly focused on the country. The map “Digging in the Down Under” shows our portfolio companies’ major projects throughout the country.

Source: Australian Atlas of Minerals Resources, Mines and Processing Centres

Being invested in a stable country such as Australia, of course, doesn’t ensure a company’s success. In the nature of mining, unexpected costs often pop up, and seemingly promising lodes prove fallow. And, as this year’s floods and last year’s train woes proved, the country isn’t immune from infrastructure challenges either.

That’s why Australia’s largest miners Rio Tinto (NYSE: RTP) and BHP Billiton (NYSE: BHP) have extensive investments outside the country. And it’s why the VRI Portfolio is also global in scope.

Nonetheless, in such a volatile and politically charged sector, it’s nice to be able to factor out at least some of the risk. Moreover, the country is also on sound economic footing and its currency is uptrending. That’s an added lift to share prices of companies based there, such as the uranium miner we added to the Portfolio last issue: Paladin Energy (Australia: PDN, OTC: PALAF).

Elsewhere around the world, rising costs, labor shortages and poor infrastructure are making it increasingly difficult to bring new mining projects on stream. We expect this trend to continue for at least a couple years, providing a major support for commodity prices. See VRI, 7 February 2008, The Great Game.

Here’s a taste of recent related news in the industry. BHP Billiton has delayed its USD6 billion expansion of the Olympic Dam (uranium, copper and gold) mine because of labor and equipment shortages.

Rio Tinto has delayed an aluminum mining joint venture until 2012. Moreover, it now projects the plant will cost 50 percent more than previously estimated. Meanwhile, an expansion of its Dalrymple Bay Coal Terminal will be delayed by three months.

Elsewhere, one of Colombia’s main coal rail lines was bombed. Meanwhile, workers in zinc mines in Namibia have been on strike for 20 days, delaying production plans.

Gold has been losing ground over the past couple months. That appears to have convinced a lot of investors that the yellow metal’s bull market has run its course. However, we see it as a pause to refresh.

As we’ve noted in prior issues, gold’s weakness is primarily a result of the US dollar’s attempt to mount a comeback. That may continue for a while because many countries with currencies pegged to the dollar are pushing for it to help control their rising inflation rates.

Ultimately, however, gold remains the ultimate hedge during both deflationary and inflationary times. Inflation in Asia is still rising, and it will do so for quite sometime. The economic woes of the West’s financial system can lead to a deflationary outcome as consumers pay down debt. In addition, South African supply has been curtailed because of high costs and safety issues that are usurping time–and money–to be resolved.

We’ve been recommending gold bullion as the main play for gaining a position in the yellow metal. Alternatively, you can use the SPDR Gold Trust (NYSE: GLD), formerly known as streetTRACKS Gold Trust, which is a security reflecting the performance of gold bullion’s price.

Lihir Gold (Australia: LGL, NSDQ: LIHR) is our preferred leveraged gold recommendation. Lihir is a pure gold producer with a large reserve base of 23.6 million ounces for a mine life of more than 20 years. The company has also been actively exploring the use of geothermal power as an energy source in an effort to reduce energy costs.

From the majors, Goldcorp (NYSE: GG) is our favorite play. That’s because of its rising production profile as well as the fact that the majority of its mines are in politically stable territories such as its home country, Canada.

We’re still bullish on steel and its raw material inputs–iron ore, metallurgical coal and molybdenum–as prices continue to rise and companies are still able to pass costs onto end users. See VRI, 15 May 2008, Metal Stocks to Buy Now.

Molybdenum, a silvery white flexible metal with an exceptionally high melting point–2,625 degrees Celsius–is used principally as an alloying agent in steel, cast iron and super alloys to enhance hardness, strength, toughness and resistance to wear and corrosion. It’s also used in the oil and gas industry for removing sulfur. See VRI, 14 February 2008, Another Undiscovered Metal.

Our favorite play in the sector is VRI Portfolio holding China Molybdenum (Hong Kong: 3993, OTC: CMCLF).

The company is a low-cost producer with a cash cost totaling USD4 per pound. Molybdenum prices are currently at USD30 per pound, securing higher margins and strong profits as the company increases production. The company has plans to continue its acquisition process of more molybdenum and gold mines in China, ensuring its long-term viability. A slow mover so far this year, China Molybdenum remains a bargain buy at current prices.

One of our long-term investing themes, forest plantations in China, continues to play out as we originally envisioned. See VRI, 28 February 2008, The Boom Continues. Imported wood prices continue to rise, surging 25 percent year-to-date, a major positive for the domestic producers.

Sino-Forest (Toronto: TRE, OTC: SNOFF) is our favorite play on the theme. The company is one of the biggest foreign forest operators in China and has plantations located in the eastern and southern regions of the country. As China’s first foreign and private forestry concern, Canada-based Sino-Forest has been in the country since 1994 and controls 6 percent of China’s industrial wood fiber market with operations in 10 provinces.

The company recently reported solid first quarter earnings. China’s demand for wood is expected to remain well supported. Industry experts expect earnings to grow by 30 percent annually for the next five years.

Because the company controls just 1 percent of China’s plantation forestry, the opportunity for growth is obvious as wood prices increase and the Chinese authorities continue to encourage professionally-managed forest operators. Buy Sino-Forest at current prices.

Be sure to wear a flower in your hair when you venture west to San Francisco. I’ll be heading to “The City” with Neil George and Elliott Gue Aug. 7-10, 2008, for the San Francisco Money Show.

Neil, Elliott and I will discuss infrastructure, partnerships, utilities, resources and energy, and tell you what to buy and what to sell in 2008.

Click here or call 800-970-4355 and refer to priority code 011362 to attend as our guest.