Gold Cracks $1000/Oz: Investing For A Recession

Posted on March 14, 2008 by Nirav

Based on continuing weakness in the dollar, gold briefly breeched the $1000 level yesterday along with oil hitting an all time high of $111 per barrel. I had a really strong suspicion that we’d see $1000 gold by mid-March.

Despite what Bernanke and Paulson said last summer, the housing bubble has spread to other parts of the economy and subprime mess has not been contained. In a last ditch effort to prevent banks from collapsing, the Federal Reserve announced a bailout of Fannie Mae, Freddie Mac and other banks, promising to exchange bogus mortgages for Treasuries during a 28 day window. They named this Term Securities Lending Facility (TSLF) but it’s just a good old bail-out.

Of course, the stock markets loved this move because it means the Fed is going to prevent banks from failing. However, this $200 Billion bail-out doesn’t come without a cost. The Fed is going to have to print an extra $200 Billion to cover this deficit. But it was a clever move, because Bernanke didn’t have to cut interest rates before the 17th of March, when he’s slated to do so anyway. Another move like that might have created a panic in the markets instead!

Bloomberg reported today that OPEC is going to make about $927 Billion dollars from the sale of oil this year. That’s almost $1 Trillion dollars! Worldwide, sovereign wealth funds (SWF) are thought to be worth about $2.8 Trillion. Considering that the combined wealth of global nationalized assets is about $12 Trillion, that’s really impressive. It probably means that SWFs and OPEC will start buying up pieces of America, since they really can’t do much else with all those US Dollars. Of course, they could buy Treasuries, but it seems like everyone’s now realizing that they’re useless as the dollar keeps on devaluing. Meanwhile, the US government is helpless against stopping the sale of US assets. Our own SWF is negative $9 Trillion, so we have some catching up to do before we can actually buy anything. I think the government’s best bet is to make all those Trillion worthless by printing more and more dollars. Bernanke knows this and so far he’s doing a bang up job. Of course, this leads to severe inflation, but don’t say I didn’t warn you.

Considering how wrong our economic advisers have been so far, I think it’s safe to assume the 0.3% GDP growth that’s forecast for the year is a tad optimistic. While everyone’s still denying it, I think we’re already in a recession and along with inflation, that amounts to a 70s style stagflation scenario.

Considering that consumer spending has slowed down and is likely to continue, US companies are going to go through some tough times. How do you protect your stock investments then? You can’t sell them and move to cash, because the US dollar is sliding too. Coupled with inflation, your wealth is going to slowly (or maybe not so slowly) erode over the next several years.

Here are some investment ideas:

1. Diversify into foreign currencies: I like Australian Dollars, Swiss francs, Japanese Yen. Jim Rogers likes Chinese Remnimbi and Warren Buffett like the Brazilian Real. Take your pick.

2. Buy US giants with international exposure: Consumer staples have historically done very well over the past 60 years, regardless of the economic scenario. I like stocks with a decent dividend yield like Pfeizer (PFE), Johnson and Johnson (JNJ), Merck (MRK), Unilever (UNL), Proctor & Gamble (PG), Kraft Foods (KFT) and Anheuser-Busch (BUD).

3. Invest in agriculture: Bush’s moronic plan to reduce our reliance on foreign oil by substituting ethanol has only resulted in a surge corn prices. The economic growth in countries like China, India, Russia and Brazil is increasing the size of the world’s middle class. These people will be improving their diet and adding more meat and veggies. They’ll also be drinking more milk. There’s already surge in global prices of all of these soft commodities. There are quite a few ETFs that will help you profit from these trends, like PowerShares Agriculture (DBA) which consists of 30% soy, 28% wheat, 23% corn, 16% sugar, Van Eck Agribusiness (MOO) [8% Monsanto, 8% Mosaic, 8% Komatsu, 8% Potash Corp] and PowerShares Commodity (DBC) [33% crude oil, 20% heating oil, 14% wheat, 11% aluminum, 10% corn, 10% gold].

Along with this, a demand for fertilizer will result in compannies like Potash Corp (POT) doing very well. If you’d like to invest in milk, American Dairy (ADY) and Dairy Crest (DCG) are too suggestions, but I haven’t done much research on them.

4. Buy Gold: I don’t think it’s too late to start investing in gold. You can buy gold coins and bars, the gold ETF (GLD) or mining stocks (GDX).

5. Invest in Metals: The global boom is creating a huge increase in the demand for metals like copper, iron, aluminum, zinc, etc. Mining stocks like BHP and RIO have done very well. Indian company, Sterlite (STL) also looks like it has good long term prospects.

6. Invest in Infrastructure: Not only is America’s infrastructure collapsing, but global growth makes betting on infrastructure a safe bet. I like Brookfield Infrastructure Partners (BIP).

7. Invest in Oil and Gas: Major oil companies like Exxon-Mobile(XOM) have served its investors well for decades. I’ve also invested in direct oil drilling programs, which go out and drill wells with your money and give you a share of the proceeds. I also like Canadian Royalty Trusts that invest in oil fields. There a few new ETFs that buy heating oil and gasoline futures. I’d stay away from these as their performance is as yet unknown and they might be subject to backwardation and contango.

8. Invest in Water: Water pipes all over the US are breaking. Built after WWII, these pipes had a lifespan off about 50 years. As the nation replaces these pipes over the next several years, cast-iron pipe companies are set to make a killing. Check out NorthWest Pipe (NWPX) and the water ETF (PHO).

I don’t know about the rest of US, but Nevada and Southern California are going to face a huge water shortage in the next decade. Most of the water comes from Lake Mead and the tremendous population growth in Las Vegas and Henderson has tapped the limits on the lake’s capacity. Check out this photo:

Dont’ you think a company that owned the water rights in Nevada and California would make a decent amount of cash over the next few years.

Jim Rogers Gives His Take On The Economy.

Posted on February 15, 2008 by Nirav

I always like it when he rips into Ben Bernanke! Mr Rogers says that job of Federal Reserve is NOT to bail out a few financial institutions and the stock market, but to maintain a strong currency and job market. He says the Bernanke’s lowering of the interest rates is debasing the currency which will lead to higher inflation.

He also explains why we’re going to see the worst recession in a long time and also mentions some of his current investments.

Its a great informational video. Definitely check it out!

[youtube]http://youtube.com/watch?v=LjLMAQiIRyU[/youtube]

Global Markets Crash: All Non-Correlated Markets Converge In A Downturn

Posted on January 21, 2008 by Nirav

Following the decline in the US markets and a show of no-confidence in Bush’s Economic Recovery Plan, global markets crashed in unison.

According to Yahoo! Finance:

Britain’s benchmark FTSE-100 slumped 5.5 percent to 5,578.20, France’s CAC-40 Index tumbled 6.8 percent to 4,744.15, and Germany’s blue-chip DAX 30 plunged 7.2 percent to 6,790.19.

In Asia, India’s benchmark stock index tumbled 7.4 percent, while Hong Kong’s blue-chip Hang Seng index plummeted 5.5 percent to 23,818.86, its biggest percentage drop since the Sept. 11, 2001, terror attacks.

Canadian stocks fell as well, with the S&P/TSX composite index on the Toronto Stock Exchange down 4 percent in early afternoon trading. In Brazil, stocks plunged 6.9 percent on the main index of Sao Paulo’s Bovespa exchange.

In Tokyo trading, exporters got hit hard, partly because of the yen’s recent strength against the dollar. Toyota Motor Corp. lost 3.3 percent and Honda Motor Co. sank 3.4 percent.

Shares of Bank of China dropped 6.4 percent in Hong Kong after the South China Morning Post newspaper reported that the bank is expected to announce a “significant write-down” in U.S. subprime mortgage securities, citing unidentified sources. In Shanghai, the bank’s stock declined 4.1 percent.

India’s the benchmark Sensex index fell 1,353 points, or 7.4 percent – its second-biggest percentage drop ever – to 17,605.35 points. At one point, it was down nearly 11 percent.

Since the start of the year, Japan’s Nikkei index has declined 13 percent, while Hong Kong’s blue-chip index is down more than 14 percent. Even China’s Shanghai index — which nearly doubled last year — has fallen 6.6 percent over the same period and nearly 20 percent from its all-time closing high on Oct. 16.

The world is definitely getting smaller and the smart thing to do is invest internationally for global exposure. However, don’t expect these different stock markets to be non-correlated. In the event of an economic downturn, all non-correlated markets converge as selling pressures force the liquidation of all assets.

This was how Long Term Capital Management (LTCM), which was led by Nobel-prize-winning professors, went bankrupt. When the Russian government defaulted on their bonds, all emerging market bonds tanked. Because LTCM was leveraged to the tune of nearly a trillion dollars and couldn’t meet its margin calls, Federal Reserve Chairman, Alan Greenspan, had to step in to prevent a meltdown in the US financial system. For a fascinating and very informative history behind this, check out When Genius Failed: The Rise and Fall of Long Term Capital Management. Its one of my favorite books. Readers of the book would have realized that the fancy-schmancy Residential Mortgage Backed Securities and Collateralized Debt Obligations that hedge funds were leveraging 5-to-1 and 20-to-1 would come crashing down and they did in the form of the subprime meltdown.

The reason all these global markets are correlated is because of excessive leverage employed by financial institutions. When you lose 10% on an investment and you’re leveraged 5 times, you face a 50% loss of principle. In this case you have to liquidate your winners to meet your margin call. Unfortunately, this sometimes precipitates in a global panic to bail on investments as the selling causes further losses, which initiates further selling.

The lesson to learn is that its extremely difficult to beat the market and rather than be over-leveraged, its better to have 20% of your assets in cash (like Warren Buffett) so you can take advantage of over-sold conditions and undervalued investments.

Don’t believe that you can achieve risk-diversification by investing in non-correlated assets.

Have Gold Prices Peaked?

Posted on January 13, 2008 by Nirav

In case you were asleep, last week saw gold break all records and almost closed at $900/Oz. I still think its a good time to buy for long term investors. Lets see what other investment advisers think.

According to Merill Lynch, we’re already in a recession and according to Richard Russell of the Dow Letters, we’re entering a bear market.

The operative thesis for investors at this time is that the primary trend has turned down. A bear market is in progress. What does this mean? I’ve outlined this many times before, but here goes again – the position I favor here is cash and gold, a lot of gold. You can buy GLD, you can buy gold coins, and you can also buy GDX, which represents a list of gold mining shares. The important thing is to have a good position in all things golden.

I don’t know how far this bear market is fated to carry. Nor do I know how long it will last. My advice – be prepared for the worst and hope for the best. To hope costs you nothing, but to be unprepared can cost you much, maybe more than you can imagine at what probably is this early phase of the bear market.

Through over half a century of experience, I’ve learned to respect bear markets. I don’t trade them, I don’t fade them, I don’t short them – I stay out of them. I’ve learned to stay on the sidelines.

According to the Financial Times, Gold is the new global currency.

There was a time when gold was money. In today’s uncertain world, the yellow metal is back in fashion. Bullion prices rose to a record nominal high after the assassination of Benazir Bhutto in Pakistan added to nervousness about the world economy. Part of gold’s allure is its traditional status as a safe haven. It is seen as a store of value when everything else seems risky. But the bigger drivers behind the rising spot price are a depreciating dollar and the prospect of negative US real interest rates.

A better way to think of gold may be as central bankers used to before America dropped the gold standard: not as a commodity, but as another currency. As long as the dollar stays weak, gold’s bull run will last.

The arguments for further gains in the gold price are compelling. It looks cheap, despite climbing from a low of about $250 a troy ounce in 1999, when central banks were selling reserves. The UK’s decision back then to sell 60 per cent of its official holdings looks particularly poor judgment.

Gold is benefiting from diversification away from equities. Commodities have emerged as a distinct asset class, with billions of dollars poured into exchange traded funds. Physical demand for jewellery may have stalled in Asia, but consumption remains strong in the Middle East. Declining output in South Africa will help support spot prices.

But it is the relationship between the dollar and the reaction of the world’s central banks to the credit squeeze that some bulls would say really makes gold an attractive bet. The US Federal Reserve’s aggressive, rate-cutting response to the credit squeeze has created a risk of a sharp rise in American inflation. That in turn creates the risk of a precipitous fall in the dollar and so makes gold more attractive as a hedge.

The world’s major economies have experienced rapid money supply growth of 10 per cent plus per annum in recent years. The Fed remains the world’s biggest holder of gold, yet supplies of the metal are no longer growing annually. If gold is a finite currency, its value against not just the dollar, but sterling and the euro too, should rise.

Moreover, a sharp decline in US real interest rates – financial markets expect another half percentage point cut this month – means that the low yield on gold matters less. It may have been a poor hedge against inflation in the past but the combination of rising consumer prices and economic stagnation may make it a better store of value.

GaveKal also thinks its an ideal environment to own gold.

Gold has been an exceptional play, having risen +36% since mid-August. Of course, this marks the period in which the credit crunch drove the Fed to cut its discount rate, join the ECB in a series of liquidity injections, and begin stepping down the Fed Funds rate. However, these were not the only factors at play. The past six months has provided the ideal environment for gold:

1. Demand from Asia was on the rise;
2. Demand from the Middle East was also on the rise;
3. Real rates around the globe were fairly low;
4. And then came the credit crunch and the housing bust; and
5. Fears of currency debasement have escalated.

“Indeed, when it seems like things cannot get any better, they often do not. And, for example, if China were to really liberalize its capital markets, gold prices could lose a lot of steam. However, until something significant knocks off this surge in demand, it is hard to see gold retreating.

And Richard Russel believes gold is still a bargain.

What can I buy today at 1979-1980 prices? Russell, you’ve got to be kidding. Everything is much more expensive today. Forget those prices of 1979-1980. Get into reality, man.

Wait, there is one thing that I can buy today at around 1979-1980 prices. That one thing is gold. Gold today is selling just a bit higher than it sold for back in January 1980. How can that be? Brother, it be. Today you can buy gold for just a few percentages more than gold sold for at its high in January 1980.

‘Hey Russell, does that mean that gold is a bargain?’ My answer is that I don’t think of gold in terms of it being bargain-priced, I simply think of it as real money that is catching up to the times. I can’t buy the Dow at its 1980 price of 850. Hardly, the Dow is selling at 14 times its 1980 prices. Well then, how is it that gold is still under 900? That’s a long story, but let’s just say that I really don’t know. I do know that gold is underpriced compared with almost anything else. So yeah, when I think about it, yes, gold is a bargain. And I like bargains – particularly when the bargain happens to be real money.

I’m sticking to my belief that gold will break $2,500 in this cycle and probably reach $3,500. But its going to be a volatile ride over the next few years.

How The World’s Cheapest Car Is Bad For Your Wallet

Posted on January 10, 2008 by Nirav

India’s Tata Motors just unveiled its 100,000 rupee car today. According to today’s exchange rate, that works out to $2,551 which makes it the world’s cheapest car. Its a small car, with a 624 cc engine and seats 4 adults comfortably. (If you’ve ever sat in a rickshaw, you’d have a slightly lower standard of comfort).

This is good news of hundreds of millions of Indians who currently drive scooters and motorbikes and can now afford a car. The Nano costs about twice as much as a mid-range bike does. So you can expect it to wildly popular, especially in India and South East Asia.

Even though its very fuel efficient, at 76 miles/gallon in the petrol version (diesel version is expected to give you 92 miles/gallon) compared to the 195 miles/gallon you’d get from a scooter (& more from some bikes), its a rather large step down. This means that India’s consumption of oil is set to increase.

According to Peter Schiff‘s Global Investor Newsletter:

In 1900, we Americans were using one barrel of oil per person annually. By 1970, we were using 27 barrels per capita. At the end of World War II, Japan was using 1 barrel per person. By 1970, they were using 17. Today, China uses 1.3 barrels per person annually and India uses .7. The increased demand this similarity infers is staggering.

The standard of living for millions of Asians has been increasing dramatically over the past few years. The per capita consumption of oil is going to rise significantly as these people buy more cars and goods. If you believe that we’re at peak oil production already, this means that there is going to be a severe shortage of oil over the next years, which should lead to higher prices. Higher oil prices led to higher inflation.

According to Bloomberg, option traders are speculating that oil will hit $200/barrel in a year. While I think this is a long-shot, oil prices are likely to keep heading higher.

Oil is currently trading around $100/barrel. Why oil at the pump costs the same as when oil was $60/barrel is a bit of a mystery. Maybe the upcoming election has something to do with it? I really don’t have a clue. But so long as my Canadian Income Funds keep producing, I’m happy!

Click here for deals on a used bmw or used japanese cars.

Global Trends Between Increasing Health & Prosperity

Posted on December 21, 2007 by Nirav

Here’s a very interesting video on the global trends in child survival rates and increasing prosperity of nations. You can see the correlation between health and wealth.

Hans Rosling is is Professor of International Health at Karolinska Institute and Director of Gapminder Foundation in Sweden. He studied both statistics and medicine and also developed the amazing graphical tool that he uses in the video.

Its by far one of the most interesting videos on statistics I’ve ever seen. While it’s not really related to making money, understand a correlation between seemingly non-related issues can often lead to money making ideas.

The Weakening Dollar – I

Posted on November 28, 2007 by Nirav

There’s been a lot of talk regardimg the weakening US dollar and its effect on your wealth. Many people believe it can’t last and the dollar will rebound. Others think that it still has more room to fall.

I personally think that it will continue to fall so long as the government does nothing to stop the reasons for the weakness. Here’s a good explanation by Mark Hutchinson.

The U.S. greenback will remain generally weak for two key reasons:

* First, the United States is still running a $700 billion balance-of-payments deficit with the rest of the world. Asian central banks have been financing this by buying U.S. Treasury bonds. As we now also know, German regional banks have also been financing it by buying subprime mortgage debt. [It’s particularly good for the balance-of-payments ledger when foreigners buy subprime mortgage debt, helium-filled dot-com stocks, or the Brooklyn Bridge, because the profit that domestic shysters make from selling worthless assets to foreigners counts as income.] Nevertheless, both these once-favorable trends are showing signs of ending. This means the United States has to export more, which means the dollar must drop still more against the euro, sterling, yen, renminbi and the currency of anyone else that might be persuaded to buy U.S. products if they’re cheap enough.

* Second, the dollar will remain weak and probably get weaker – at least in the short run – because U.S. Federal Reserve Chairman Ben S. Bernanke has twice recently cut short-term interest rates: a half-percentage point [from 5.25% to 4.75%] on Sept. 18, and a quarter point [from 4.75% to 4.50%] on Oct. 31. Since the Bank of England, the European Central Bank and the Bank of Japan are all closer to raising interest rates than reducing them, Fed rate cuts make the even less attractive by comparison. And many analysts see additional rate reductions to come.

So assuming you agree that this trend is likely to continue, how have you positioned yourself to either hedge against or profit from this?

Time To Invest In Milk?

Posted on November 20, 2007 by Nirav

Here’s an interesting snippet from the International Herald Tribune about why milk prices have doubled in the past 2 years.

Driven by a combination of climate change, trade policies and competition for cattle feed from biofuel producers, global milk prices have doubled over the past two years. In parts of the United States, milk is more expensive than gasoline. There are reports of cows being stolen on Wisconsin dairy farms.

“There’s a world shortage of milk,” said Philip Goode, manager of international policy at Dairy Australia in Canberra.

But the biggest force driving up milk prices is the same one that has driven up prices for conventional commodities like iron ore and copper: a roaring global economy. Rising incomes, from China and India to Latin America and the Middle East, are lifting millions of people out of poverty and into the middle class.

It turns out that, along with zippy cars and flat-panel TVs, milk is the mark of new money, a significant source of protein that factors into much of any affluent person’s diet. Milk goes into infant formulas, chocolates, ice cream and cheese. Most baked goods contain butter, and coffee chains like Starbucks sell more milk than coffee.

Any idea on how to profit from this? Maybe buy shares of American Dairy Inc.

Japanese Housewives Burned By Forex Trading

Posted on September 17, 2007 by Nirav

The New York Times has an interesting article, Japanese Housewives Sweat in Secret as Markets Reel about housewives losing a lot of money in trading forex.

Since the credit crisis started shaking the world financial markets this summer, many professional traders have taken big losses. Another, less likely group of investors has, too: middle-class Japanese homemakers who moonlight as amateur currency speculators.

Ms. Itoh is one of them. Ms. Itoh, a homemaker in the central city of Nagoya, did not want her full name used because her husband still does not know. After cleaning the dinner dishes, she would spend her evenings buying and selling British pounds and Australian dollars.

When the turmoil struck the currency markets last month, Ms. Itoh spent a sleepless week as market losses wiped out her holdings. She lost nearly all her family’s $100,000 in savings.

While a lot of people have made fortunes trading forex (like George Soros), when a large number of housewives enter the market, its a sure signal that the market top is in. The lay people are always the last people to enter any bull market and like we saw in the internet bubble in 2000, mark the last phase of speculators to rush to profit from quick, easy money.

Apparently this greed-driven mania manifests itself regularly, prompting Alan Greenspan to observe that humans might never be able to protect themselves from bubbles. The history of manias has been well documented going back hundreds of years in Extraordinary Popular Delusions & the Madness of Crowds. If you haven’t read it I strongly recommend you pick up a copy at your local library. Another new book on the subject is Mobs, Messiahs, and Markets: Surviving the Public Spectacle in Finance and Politics, which is on my long and never-ending list of books to read and has come highly recommended.

Related Readings:
1. How the carry trade really works.
2. Turning Japanese.

How The Carry Trade Really Works

Posted on August 28, 2007 by Nirav

Here’s a really, really good video on how the carry trade works and what implications it has on global asset prices and the global financial stability.

I think the carry trade will have to reverse at some point in the near future. Trees do not grow to the skies and financial excesses do not last forever. When the average man on the street with no financial education starts talking or investing in a particular sector, it usually marks the end of that run. (In 2000 I overheard my hair-dresser talking about internet stocks – I should’ve sold then. In early 2005, I overheard some guys at the movie theater talking about getting into the local real estate market – I sold then and I’m glad I did!)

With Japanese housewives partaking in the carry-trade now, I think its safe to say that we’re pretty close to the end of the cycle of cheap, easy money. I sold some USD and bought Yen and I’ve also invested some money in Japanese investments (a REIT and a stock ETF).

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