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Striking Portfolio Balance with Gold Stocks
Back on August 22, I wrote that gold was due for a correction and that it would be a non-event to see a 10 percent drop in gold. I wrote, This would actually be a healthy development for markets by shaking out the short-term speculators. This mornings gold price of $1,590 is about 15 percent from the high, which is a little greater than predicted, but a non-event just the same. I believe the long-term story remains on solid ground.
Eastern Europe Financial House Stronger than Debt-Ridden Neighbors
For some Eastern European investors the geographic proximity to the eurozone has been too close for comfort, with the Russian MICEX Index declining about 20 % year-to-date. However, stronger fiscal and monetary stances in Eastern Europe compared with its western neighbors warrant a 2nd look. Eastern European countries generally have experienced higher GDP growth along with less debt, so financing costs have less of a negative effect on GDP than in Western Europe. In most of Eastern Europe, every one percent increase in the cost of funding only detracts about 0.5 percentage points from GDP.
Building Wisdom with Our Boots on the Ground
Analysts at U.S. Global Investors scrutinize research reports and study Bloomberg data to help our investment team gain first-mover advantage. Today, I asked research analyst and Shanghai-native Xian Liang to share how he combines analyses from third-party reports with boots-on-the-ground observations to find the best opportunities Asian markets have to offer.
You Can't Print More Gold
As central banks print money and increase supply, currencies become devalued. Whereas in the recent past, one currency may be reduced in value compared with other currencies, this time there is global competitive devaluation as excess liquidity is put into the system. Historically, this excess liquidity has made its way to riskier assets, i.e. stocks and commodities. Gold is generally a benefactor of this flight to riskier assets as many investors see it as a store of value. This chart illustrates the interconnectivity of gold and global money supply growth.
Significant Growth Potential for Indonesias Middle Class
Indonesias workforce is growing 7,000 people stronger each day. This is second only to India as Asias fastest growing workforce. CLSA says this growth has given birth to a burgeoning middle class willing to spend money on durable goods such as clothing, personal-care items, home appliances and electronics. Currently, domestic consumption accounts for two-thirds of Indonesias GDP. Weve already seen double-digit growth in sales for televisions, cars, computers and laptops over the past few years. Indonesia appears well positioned for future growth.
Chart of the Week - Oil's Breakeven Price
One way to gauge support for the price of oil is to calculate the breakeven price. In other words, what is the dollar amount per barrel that would be required for an oil-producing country to balance its fiscal budget? Analysts at Carnegie Investment Bank recently put together this chart, which illustrates the breakeven price needed for some of the worlds largest oil producers. Combined, these countries are expected to produce 30% of the worlds oil in 2011 Carnegie says. Note: these prices are for Brent crude, which have been $10-$15 per barrel above West Texas Intermediate prices this year.
What Makes the U.S. Special
This economic and cultural DNA is difficult to reproduce elsewhere. There are many advantages to starting a business in the U.S., including an open immigration policy, excellent universities, a large domestic market, and venture funding. What stops other countries from having their own version of Silicon Valley are obstacles such as rigid labor laws, bureaucratic hassles, regulations and access to debt instruments. Similar hindrances seem to have sprouted in the U.S. in recent years in the form of regulations.
Are Stars Aligned for a Year-End Rally?
Correlations will decrease along with volatility as we get more clarity on the eurozone crisis and see signs of stability in the global economy. Volatility fell this week, with the CBOE Volatility Index (VIX) declining 20 percent. This could be related to the news that November U.S unemployment unexpectedly dropped to 8.6 percent, U.S. auto sales in November were the strongest in more than two years, and preliminary data on holiday retail sales appears to be strong. According to Bloomberg News, Black Friday sales hit a record high this year, with consumers spending $11.4 billion.
Return of the Comandante's Gold
Back in August, we discussed the precarious proclamation that Venezuelan President Hugo Chavez was shipping his countrys gold reserves home for safekeeping. On Friday, we learned Chavezs chosen transportation method for Operation Gold was through the air after the first shipments arrived to much fanfare in Venezuela. Some believe Chavezs announcement of Operation Gold was a catalyst for the August run up in gold prices, but there is no way to be sure. However, the impact could be significant if other countries employ a similar strategy.
American Classic Finds New Life in China
With a middle class that could to balloon to 1.4 billion people by 2030, China has become a lifeline for automakers looking to keep their profits afloat in a weak global economy. Through October 2011, more than 15 million new vehicles have been purchased in China. Thats about 3 percent higher than a year ago. Toyota, Audi, Volkswagen, BMW and Nissan are all searching for ways to tap into this fast-growing market. One of the countrys biggest success stories is General Motors (GM), which has positioned itself as one of the most recognizable and highly sought after cars in China.
With Rising Wages, Will China Remain a Manufacturing Hub?
In 2010, countries such as Hong Kong, Japan, South Korea and Germany depended on China for data processing, apparel, and iron and steel exports. Chinas largest import partners in 2010 were Japan, South Korea, the U.S., Germany and Australia. For those companies not already doing business in China, theres one dominant factor that shows they should start: the vast domestic market. Companies may be able to find a cheaper workforce in Bangladesh, India or Sri Lanka, but being located in China allows convenient access to what is rapidly becoming the worlds largest consumer market.
Seven Surprising Stats on the Internet and Emerging Markets
With rising wealth in emerging markets in recent years, people in China, India and Brazil have quickly acquired a taste for mobile phone and Internet technology. The industry in developing countries is in its infancy but growth has been swift. Here are seven surprising facts about this fast-growing emerging market trend.
Big Shift in Gold Demand
In 1970, according to the latest World Gold Council (WGC) report, half of the worlds gold was purchased in two regionsNorth America and Europe. Ten years later, that figure jumped all the way to 68 percent during a period of high inflation, a weak economy and spiking gold prices. At the same time, China and India (broadly represented in the chart as East Asia and Indian Sub continent) saw their combined share of gold demand diminish from 35 percent to 15 percent.
The Gold Triple Play - Volatility, Currencies and Europe
Resurgent investment lifted global gold demand 6 percent from the previous year to just over 1,000 tons during the third quarter of 2011, according to the latest Gold Demand Trends Report from the World Gold Council (WGC). The potent cocktail of inflationary pressures in the emerging world and the European sovereign debt fiasco left investors searching for a safe haventhey looked for it in gold.
South Africa's Incredibly Shrinking Gold Production
Finding evidence to pop the talk of a gold bubble is much easier than finding a needle in a haystack. There are enough needles of evidence out there to fill a pin cushion. The latest Gold Demand Trends Report from the World Gold Council contained two salient visuals of how the dynamics of the global gold market have shifted from the West to the East over the past 40 years. Today well take a look at supply, and tomorrow well dive into demand.
Get Paid to Play Gold
With money markets and Treasuries yielding next to nothing these days, investors are finding income in new places. One area those investors should consider is gold mining. With gold rising in value, mining companies are reaping record profit margins, yet the stock prices are depressed due to lack of investor interest. A solution for both gold companies and investors may be dividends, specifically gold-linked dividends. Several top-tier gold producers that are benefiting from higher gold prices have begun to share a portion of their profits with shareholders via a dividend payout.
The Many Factors Fueling a Return to $100 Oil
The IEA says trends on both the oil demand and supply sides maintain pressure on prices. We assume the average IEA crude oil import price remains high, approaching $120 per barrel (in 2010 dollars) in 2035 (over $210 per barrel in nominal terms). Thats a distant projection but it certainly illustrates why you should consider investing a portion of your wealth in oil.
China's Rising Imports of American Goods
American companies are riding the wave of Chinas growth all the way to the bank. From what they drink and eat to where they shop and what they buy, as increasing incomes provide more discretionary income, the dynamics of the Chinese consumer forever change. I believe savvy investors can benefit from these emerging trends.
3 Drivers, 2 Months, 1 Gold Rally?
Combine the central bank purchases of gold with the fact that we are now entering the strongest months of the year for gold. While the spot gold price has differed from the S&P/TSX Composite Index of gold equities during the first 10 months of the year, their historical pattern is very similar during the last two months. November has historically been the strongest month of the year for gold equities, with mining stocks increasing 8.1 percent.
Poland's Power Play for Energy
Poland is setting the stage to become a rising player in the European natural gas market. Europe has long been reliant on Russia for its supply of natural gas, but domestic discoveries of shale gas might soon catapult Poland to the forefront of the energy landscape. Morgan Stanley cites several reasons for Polands likely success: a large resource base, gas pricing that is almost twice the pricing of the U.S., a developed gas market, and political support that welcomes foreign firms and hydraulic fracking permits compared to other countries in Europe.
How China Drives the Global Economy
The Chinese economy is not a bubble, but that does not mean a significant slowdown wouldnt affect the global economy, especially natural resources. This is because Chinas economic transformation over the past few decades has cast the country into the forefront of demand. PIRA Energy Group says that, in 1990, Chinas share of oil and GDP was less than 5 percent; its share of world energy was just under 10 percent. Since then, Chinas share of energy, GDP and oil has risen dramatically, with each expected to be approximately 28 percent, 21 percent and 16 percent, respectively, by 2025.
Happy Diwali
Whats significant to gold investors is that India makes up a considerable part of the worlds population that has a strong cultural bond with gold. This Love Trade identifies a key differentiator between the East and the West. Whereas in the U.S., we separate gold jewelry from investments in gold, in the eastern hemisphere in countries such as India and China, gold is one and the same. No matter the formjewelry, coins, bars or statuesgold is an investment. With half of the worlds population in this part of the world, this concept is what we believe will drive the long-term shift in demand.
Do Bullish Investors Have an Ace in the Hole?
You may not be able to count cards at the blackjack table, but counting historical trends of the stock market and discovering inflection points are not only legal strategies, they are essential to successful investing. One card worth counting is the Purchasing Managers Index (PMI), which measures the manufacturing strength of any given country. A rising PMI indicates a growing economy and is considered a leading indicator.
Which Gold Miners Have Largest Upside?
Since hitting $1,900 an ounce through the beginning of October, gold has declined nearly 11 percent. Over the same timeframe, the NYSE Arca Gold Miners Index lost almost 13 percent. Thats a closer performance correlation than the roughly 3-to-1 gold equities to bullion ratio weve historically seen and could mean the miners are finally closing the gap. Looking over the next year or so, we believe the smaller gold miners are especially poised to outperform this time. As TD says, on a rebound, we expect the best performing equities to be among the ranks of the explorers and developers.
Case Study: Buyouts Crystallize Value in the Market
Theres value in the market. Thats the message the market is sending through the recent strategic acquisitions in the energy and gold mining spaces.
This week it was announced that Sinopec, a large Chinese oil and gas company, is purchasing Canadian energy company Daylight Energy for $2.1 billion in cash. The deal was struck at a whopping 120 percent premium to Daylights share price prior to the announcement and a 43.6 percent premium over the 60-day weighted average price, according to Reuters.
Gold During Times of Market Turmoil
Jason Toussaint from the WGC provided an interesting perspective during our recent webcast. The WGC looked back at six incidences of market turmoil over the past few decades. In five out of the six periods during market turmoil, an allocation to gold preserved wealth by reducing the hit taken by the portfolio. On average, the portfolios with an allocation to gold were about 7 percent more buoyant. Only during the Dot-com Bubble did gold in a portfolio hurt its performance. These dramatic events happen infrequently. However, Its best to prepare for the worst and hope for the best.
Can Markets Find the Road Back to Positive Territory?
Can markets find the road back to positive territory? This week, wed like to point out three reasons investors should consider remaining in equities or reassessing whether to sit on the sidelines: 1. Investor sentiment is signaling the market is overextended to the downside. 2. Stocks are trading well below historical valuation trends. 3. S&P 500 dividend yields are higher than the 10-year Treasury yield.
Managing Emotions in Today's Marketplace
One positive point is the Conference Board Index of Leading Economic Indicators, which is also known as LEI. Historically, the LEI has proven to be a reliant indicator of recessions and recoveries. The index deteriorated ahead of the 2001 global recession, and again in early 2007 and 2008 before the global financial crisis and associated recession began.
Extreme Divergence Between Coal Rocks and Stocks Unwarranted
Coal was relatively flat for the quarter, but whats interesting is that coal companies were severely discounted. Over the last two years, coal stocks and the commodity have closely tracked each other, until this summer, when worries about a global slowdown caused coal stocks to fall off a cliff, not once, but twice, in August and again in early September. This extreme divergence between coal companies and the commodity seems unwarranted when the long-term drivers of coal remain supportive.
China--The Great Stabilizer
For the past ten years, whenever global base metals demand dissipated, Chinas voracious appetite stepped in to gobble up the leftovers. Since 2001, China has increased the countrys share of total global demand for base metals from about 15 percent to over 40 percent in 2011. This has made China more important to commodities than ever before, according to Macquarie. Macquarie says China has been a great stabilizer for commodities: As growth elsewhere in the world tends to weaken, Chinese call on supply from the rest of the world tends to rise and visa versa when demand weakens.
Extreme Moves Leave Markets in Rare Territory
Many investors have used gold and other commodities as a haven from recent volatility, buoying prices while equities sunk, but even those investments werent immune to the wave of selling. The U.S. dollar, in contrast, was up 2.2 percent. Much of the dollars rally came after the Fed announced the creatively named Operation Twist. The Fed will sell $400 billion of short-term securities and buy an equal amount of long-term debt. The goal is to push down long-term interest rates, which would spur economic activity.
Turkey Gets an Upgrade
The IMF offered a sober assessment of the global economy this week when it released the September 2011 update of its World Economic Outlook. The IMF stated the global economy is in a dangerous new phase, citing two main downside risks: The possibility the crisis in the eurozone will be too much for the regions policymakers to handle, and soft economic activity in the U.S. is due to a weak housing market, deteriorating financial conditions and a political impasse regarding fiscal consolidation. Accordingly, the IMF cut its projections for global growth to 4 percent through 2012.
World Running Low on its
Did you know that Chinas energy demand is set to grow so dramatically over the next 25 years that its consumption is expected to be 68 percent higher than that of the U.S.? That was only one of the findings of the U.S. Energy Information Administration (EIA). In its new International Energy Outlook 2011, the EIA reports that throughout the world, energy consumption is expected to rise by 53 percent from 2008 through 2035 driven by robust economic growth and expanding populations in the developing countries.
A Yuan, Euro and Dollar Walk Into a Bank...
Currency markets have been the pawns in central bankers chess games around the world in recent weeks, as each country looks to gain the slightest edge in todays economy. Weeks ago we saw an intervention from the Bank of Japan, which tried to stop the yens downward slide. Last week, the Swiss National Bank moved to improve the Swiss francs stature. Also recently announced was that the Hong Kong dollar will no longer be pegged to the U.S. dollar. Given the important role paper currency plays, weve developed a quiz so you can test how much you know.
Perfect Storm Creates Tidal Wave of Gold Demand
In the East, gold is not only celebrated, acquired, worn or displayed during holidays or special occasions; it is seen as an everyday symbol of wealth. Increases in demand from China and India have driven a 7.5 percent increase in demand for gold jewelry during the first half of the year despite a 25 percent increase in the price, according to a report released this week from GFMS. However, much of Indias potential gold demand remains untapped.
Six Reasons to Sell Economy, Buy Stocks
Money supply is a key lubricant of the economy and financial markets. Historically, if money is growing faster than nominal GDP, the excess money has found its way to other uses such as investment in stocks, commodities and other financial assets. The risk/reward profile for owning stocks appears positively skewed. While bond investors have enjoyed a 30-year bull market, equity investors can now use long-term mean reversion to their advantage by buying those undervalued companies that are flush with cash, reward their shareholders with a dividend payment and have envy worthy balance sheets.
Economic Resilience of Emerging Markets
A boxers stamina is judged by how quickly he rebounds from a blow. Strength of a country, then, could be measured by how quickly the economy can bounce back from a crisis. The Economist provided one measure when it compared countries percentage change in real GDP per person from the fourth quarter of 2007 through the second quarter of 2011.
China Fears Much Ado About Nothing
There are many questions surrounding the global market but the Chinese economy remains headed toward the moon. The country, of course, remains vulnerable to external forces but we believe the economys strong momentum will be enough to carry the country through, should volatile times persist.
Chart of the Week - Can Russia Stay #1?
Siberias western oil fields have been a mainstay of Russias economic growth for decades, but the worlds largest producer of oil is now looking elsewhere in its country to replenish its stagnating supplies. Western Siberias oil fields have proven to be fertile hunting grounds for Russian oil companies, producing nearly 70 percent of the countrys exported oil. But most of W. Siberia's oil fields are considered brownfieldsregions where roughly 75 percent of fields have been exploited. The firm says oil and gas firms must now consider the big picture to maintain growth of their resources.
How to Find Opportunities from Blood, Debt & Fears
For the long-term investor, the risk/reward profile for owning stocks appears positively skewed. Equity investors have suffered through one of the most difficult decadesrivaling even the Great Depressionwhile bond investors have enjoyed a 30-year bull market. Long-term mean reversion is a powerful tool that investors can use to help them attain their long-term goals.
Valuation Gap Makes Gold Miners Attractive But All Miners Arent Created Equal
Goldwatchers were reminded golds volatility works in both directions this week, with prices falling more than $100 an ounce in just one day. We forecasted the selloff last week, explaining a 10 percent correction would be a non-event. Once again the CME Group hiked the exchanges margin requirements for gold investment to shake out overleveraged speculation. This is a positive for long-term investors.
Oceans 2011: Venezuelan Gold
Now might be a good time for Daniel Ocean to start assembling his gang of 11. Venezuelan President Hugo Chavez announced last week that he was ordering the countrys ample gold reserves back to Caracas for safe keeping. Not a bad idea given the global geopolitical environment, but with some 211 tons of 400-ounce gold bars to be moved from bank vaults in London, President Chavez has a logistical nightmare on his hands.
Deflation or Inflation? The Answer is Gold
There are tectonic plates pushing against each other in Washington these days, and Im not talking about the 5.8 earthquake felt along the East Coast. Rather, it is a product of the governments rising levels of debt and a printing press pumping out money and weakening the dollar. In an excellent video, James Turk and James Rickards converse about golds role in this monetary issue. They discuss the tension building between natural deflation coming from the depression and inflation coming from policy. Eventually there will be a break, and the outcome is either deflation or hyperinflation.
The Neverending Story of a
Gold continued to make headlines last week, reaching nearly $1,900 an ounce on Friday before resting around the $1,850 level. Golds 15 percent rise to new nominal highs over the past month has rekindled gold bubble talk from many pundits. Long-term gold bulls have been forced to listen to these naysayers since gold reached $500 an ounce. If you would have joined their groupthink then, you wouldve missed golds roughly 270 percent rise since. That said, gold is due for a correction.
Gold's Sun Also Rises in the East
During the second quarter, golds rising value didnt deter Chinese and Indian buyers. In its webcast, the World Gold Council (WGC) said these predominant drivers of gold demand accounted for 52 percent of bars and coins and 55 percent of jewelry demand. Chinas demand grew 25 percent, while India saw an increase of 38 percent. WGC attributes this growth to increasing levels of economic prosperity, high levels of inflation and forthcoming key gold purchasing festivals.
Is Business Choking on Red Tape?
About a year ago, I wrote about The Shocking Cost of Regulation and the unintended consequences new rules can have on our business system without proper cost-benefit analysis being done. A year later, its clear the swarm of red tape is choking companies and impeding growth.
The Silver Lining for Markets and the U.S. Economy
There is a silver lining: Despite all the negative news out there, the global economy will continue to grow. In fact, the U.S. economy has had several positive developments recently. The four-week average for unemployment claims dropped to 402,000 during the week ending August 13. There is still a large chunk of America unable to find a job, but that group has shrunk 13 percent since August 2010 and is about 40 percent of peak 2009 levels.
Buy, Sell or Hold? Relax and Don't Panic
There was more blood in the streets Monday as the world continued to digest S&Ps downgrade of US debt, the two-week market selloff, and the likelihood the US economy could possibly slide back into recession. These concerns, combined with continued political/economic struggles in the eurozone from socialist policies, have created a potent concoction of fear across global markets and sent volatility skyrocketing Monday to its highest level since the May 2010 Flash Crash. While many investors are running for the exits, others have chosen to ride the wave of volatility or buy depressed shares.
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