GLD: Remain Positive and Patient

Friday, April 27th, 2012

by Guy Lerner, The Tech­ni­cal Take

Despite the highs in gold being well over 6 months ago, I have remained con­struc­tive (see here and here) view­ing the extended pull back as noth­ing more than a con­sol­i­da­tion of the prior move. The fun­da­men­tal back drop for gold remains strong as well. It is my belief (of course, sup­ported by the data) that cur­rent eco­nomic pres­sures are gold pos­i­tive as cen­tral bankers will con­tinue to inter­vene in mar­kets via their pre­ferred vehi­cle of push­ing inter­est rates lower.

Fig­ure 1 is a monthly chart of the SPDR Gold Trust (sym­bol: GLD). The pink labeled price bars are neg­a­tive diver­gence bars. As I have shown many times, the pres­ence of neg­a­tive diver­gence bars is more of a sign of slow­ing upside momen­tum. Fur­ther­more, price tends to travel within a range defined by the highs and lows of the neg­a­tive diver­gence price bar. The neg­a­tive diver­gence bar printed 8 months ago. As expected, price remains within a range, and it is cur­rently at the low end of that price range, which is at 154.19.

Fig­ure 1. GLD/ monthly

Break­ing the price struc­ture down even fur­ther, we turn to a daily chart of GLD. See fig­ure 2. The gold and black dots are key pivot points, which define the best areas of sup­port (buy­ing) and sell­ing (resis­tance). The com­bi­na­tion black and red dots are “super” pivot points — for lack of ter­mi­nol­ogy — and are more selec­tive in deter­min­ing areas of sup­port and resis­tance. Focus on the “super” pivot points (green up arrows). Prior to the cur­rent “super” pivot, there have been 10 “super” pivot points printed since 2005. 9 out of 10 these super pivot points have marked the low point for the sub­se­quent up move that followed.

Fig­ure 2. GLD/ daily

The “super” pivot at 158.20 is sup­port, and within the con­text of pos­i­tive fun­da­men­tals, this should rep­re­sent a good buy­ing point. A monthly close below 154.19, which is the low of the monthly neg­a­tive diver­gence bar, would be rea­son enough to re-consider this trade.

Copy­right © The Tech­ni­cal Take

Tags: 9 Out Of 10, Arrows, Belief, Consolidation, Economic Pressures, Figure 1, GLD, Gold, Guy Lerner, Highs And Lows, interest rates, Momentum, Nbsp, Negative Divergence, Pivot Points, Preferred Vehicle, Presence, Price Structure, Red Dots, Support And Resistance
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Managing Expectations: Why Gold Should Thrive

Sunday, April 8th, 2012

Man­ag­ing Expec­ta­tions: Why Gold Should Thrive

By Frank Holmes
CEO and Chief Invest­ment Offi­cer
U.S. Global Investors

It’s been a chal­leng­ing week for gold investors. As I often say, invest­ing, like life, is about man­ag­ing expec­ta­tions. Over the past 11 years dur­ing gold’s spec­tac­u­lar bull run, investors should remem­ber that price action can go both ways. What helps is to look at the his­tor­i­cal rise and fall of gold.  For exam­ple, look­ing at the past decade of one-day 5 per­cent drops in gold, you can see that this event is pretty rare. In 2006, gold dropped more than 5 per­cent in a day only two times. In 2008, there were three such events. Another one occurred at the end of this February.

The 1.7 per­cent drop expe­ri­enced over the past month shouldn’t sur­prise gold investors given the sea­sonal pat­tern for gold. Whereas gold rises nearly 2 per­cent in both Jan­u­ary and Feb­ru­ary, over the past 11 years, it’s been a non-event for gold to cor­rect in March.

In addi­tion, it’s a good reminder that bul­lion has his­tor­i­cally been less volatile than the stock mar­ket: the 12-month rolling volatil­ity over the past 10 years for gold was 13 per­cent. For the S&P 500 Index, the 12-month rolling volatil­ity over the same period was 19 percent.

This March, there seemed to be one main dri­ver eight thou­sand miles away neg­a­tively affect­ing gold prices. I often say that gov­ern­ment pol­icy is a pre­cur­sor to change, and fis­cal gov­ern­ment pol­icy strongly affected the Love Trade in India last month. To trim its cur­rent account deficit, India’s finance min­is­ter pro­posed dou­bling the cus­toms tax on the pre­cious metal. It was soon reported that jew­el­ers closed shops in protest.

As a result, gold imports into the world’s largest gold mar­ket fell 55 percent.

It’s not the cus­toms tax that has the gold shops boy­cotting, says UBS Invest­ment Research firm. Jew­el­ers’ “prime gripe is with the new 1 per­cent excise duty on unbranded jew­elry” lead­ing to a greater record­ing of gold trans­ac­tions, which means more reg­u­la­tion and red tape. What’s so egre­gious to jew­el­ers is the excise tax will be retroac­tive so those shop own­ers hold­ing old gold stocks will have to pay duty on those as well, says UBS.

I believe this is only a tem­po­rary sell-off for India. As I often dis­cuss in my pre­sen­ta­tions, tra­di­tional fes­ti­vals and hol­i­days drive gold demand in India because of their strong his­tory with gold. With their love for the yel­low metal, Indi­ans hold the belief that gold “will per­pet­u­ally rise,” although there are cer­tain buy­ers that wait for a “psy­cho­log­i­cally impor­tant $1,600 level,” keep­ing in mind the strength of the rupee, says UBS.

While the sea­sonal Love Trade period for gold gen­er­ally falls between August and Feb­ru­ary, an impor­tant hol­i­day is com­ing up which has his­tor­i­cally dri­ven higher sales of gold. Akshaya Tri­tiya fes­ti­val occurs on April 24 this year. This is an impor­tant occa­sion for Hin­dus, cel­e­brated annu­ally in late April or early May, depend­ing on the Hindu cal­en­dar. Buy­ing and wear­ing of gold jew­elry is impor­tant on this day, as UBS says it’s one of the two “biggest gold buy­ing events” in the Hindu cal­en­dar. The sec­ond event is Dhanteras, which occurs dur­ing the peak sea­son­al­ity period for the yel­low metal.

How impor­tant is this fes­ti­val for the gold mar­ket? UBS ana­lyzed the buy­ing data from India last year when Indi­ans cel­e­brated Akshaya Tri­tiya fes­ti­val on May 6. It found that “phys­i­cal sales to India peaked four days before­hand.” Also, “sales were con­sis­tently above aver­age for 13 work­ing days” before the fes­ti­val because local banks and jew­el­ers restocked their inventory.

Two fac­tors need to change to help sales in India this year, warns UBS. The firm says the jew­el­ers’ strike needs to end, and, accord­ing to one local who talked with UBS, it would help gold sales if the price of oil would reverse—this would “relieve some of the cur­rent account pres­sure and per­haps allow for more flex­i­bil­ity with regard to gold imports.”

What won’t change over the long-term is Indi­ans’ gold-buying behav­ior: Indi­ans “have an exten­sive cul­tural tie to gold” and this “is not chang­ing,” says UBS.

Fear Trade for Gold is Still Alive
The world has been expe­ri­enc­ing the largest liq­uid­ity boom, as the cen­tral banks’ seven-month eas­ing binge con­tin­ues. Over this time, ISI counted 127 dif­fer­ent stim­u­la­tive poli­cies, such as print­ing money, low­er­ing inter­est rates and other eas­ing mea­sures, taken by gov­ern­ments around the world.

The pol­icy shifts helped carry the equity mar­ket a long way from the low on March 9, 2009. At the time, we noted in a spe­cial Investor Alert that there were sig­nif­i­cant gov­ern­ment pol­icy changes that sig­naled the mar­ket had hit rock bot­tom. Accord­ing to USA Today, from the 2009 bot­tom through the end of the first quar­ter, the S&P 500 Index increased more than 100 per­cent. No won­der U.S. equity investors are singing.

How­ever, the side effect of the abun­dance of print­ing by the cen­tral banks in the U.S., Europe, Japan and Eng­land has bloated bal­ance sheets amount­ing to nearly $9 tril­lion. This is dou­ble the amount that it was three and a half years ago, says Ian McAv­ity in his recent Delib­er­a­tions on World Mar­kets, as the print­ing presses have pumped our mon­e­tary sys­tem full of liq­uid­ity. This is merely “kick­ing the can down the road,” as cen­tral banks will have to deal with the over­hang later, says Ian.

This has his­tor­i­cally been a strong pos­i­tive cat­a­lyst for gold. An ana­lyst at the Eco­nom­ics and Finance Fanatic blog put together a visual that illus­trates just how strong of a cat­a­lyst the non­stop print­ing of money is. The chart com­pares the U.S. adjusted mon­e­tary base since 1990 with the “surg­ing” price of gold. As you can see below, the amount of money in the U.S. sys­tem climbed to extra­or­di­nary heights since 2008, with gold fol­low­ing the same path.

The eco­nomic chal­lenges of the U.S. and euro­zone “promise to be a pro­longed one with slug­gish eco­nomic growth,” says the blog, and easy mon­e­tary poli­cies will likely be the rem­edy for awhile. I believe this pro­vides a strong case that any pull­back in the gold price appears to be a buy­ing oppor­tu­nity. Ian says, “Tax uncer­tainty, fes­ter­ing toxic debt that’s out there but out of sight and impos­si­ble debt ser­vice abil­ity loom­ing? I’ll stick with gold and sleep bet­ter at night.”

U.S. investors might sleep bet­ter at night with an allo­ca­tion to gold in the face of con­tin­ued neg­a­tive real inter­est rates. The chart below shows how gold has his­tor­i­cally climbed when inter­est rates fell below zero per­cent, with a “strong cor­re­la­tion from 1977–84, and again recently when rates turned neg­a­tive in early 2008,” accord­ing to Des­jardins Cap­i­tal Markets.

The U.S. has not made any cuts in enti­tle­ments which make up 60 per­cent of the deficit. There have been no changes in fis­cal pol­icy and no change in cur­rent mon­e­tary pol­icy. Ian McAv­ity says these fac­tors together make “the most pow­er­ful argu­ment in favor of con­vert­ing that paper into gold.”

What would have to change to make me turn bear­ish? I believe the fol­low­ing three actions would need to be taken:

1. Real inter­est rates would have to increase 2 per­cent above the CPI in the U.S. and Europe
2. GDP per capita in Chin­dia would need to fall, neg­a­tively affect­ing the Love Trade
3. Sub­stan­tial fis­cal cuts would need to be made in enti­tle­ment pro­grams in the U.S. and Europe

I believe there is a low prob­a­bil­ity of these events occur­ring any time soon, so in this envi­ron­ment, gold should thrive.

Tags: Bull Run, Bullion, Chief Investment Officer, China, Current Account Deficit, Driver Eight, Excise Duty, Finance Minister, Frank Holmes, Gold, Gold Imports, Gold Investors, Gold Market, Gold Prices, Government Policy, India, Investment Research, Managing Expectations, Precious Metal, Seasonal Pattern, Thousand Miles, U S Global Investors, Volatility
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Gold Market Radar (April 9, 2012)

Sunday, April 8th, 2012

Gold Mar­ket Radar (April 9, 2012)

For the week, spot gold closed at $1,631.23 down $37.12 per ounce, or 2.2 per­cent. Gold stocks, as mea­sured by the NYSE Arca Gold BUGS Index, fell 6.8 per­cent. The U.S. Trade-Weighted Dol­lar Index jumped 1.3 per­cent for the week.

Strengths

• Fol­low­ing the release of Fed min­utes that indi­cated sen­ti­ment towards renewed stim­u­lus pro­grams was not imme­di­ately press­ing, the pull­back in bul­lion prices stim­u­lated strong phys­i­cal demand from India on Wednes­day. Deal­ers reported that buy­ing demand was the strongest since March 14. His­tor­i­cally, Indian buy­ers have been fairly price-sensitive to buy­ing when they per­ceive pric­ing is at bar­gain levels.
• Rand­gold Resources, Mali's largest investor, and Angl­o­Gold Ashanti, Africa's largest gold pro­ducer, said on Wednes­day they had enough sup­plies of fuel to sit out any imme­di­ate changes in the way they do busi­ness with respect to the coup d’état in Mali.
• Mark Bris­tow of Rand­gold Resources said the com­pany, which sources two-thirds of its gold from Mali, had no prob­lem bring­ing in fuel and ship­ping gold despite bor­der clo­sures by the 15-state Eco­nomic Com­mu­nity of West African States designed to squeeze Mali's econ­omy. Gold com­pa­nies with mines in Mali are play­ing down the risk of bor­der clo­sures and fall­out from sanc­tions imposed on the West African nation after a coup last month.

Weak­nesses

• Gold’s recent decline has also been based on India’s nation­wide jeweler’s strike to protest a tax on non-branded orna­ments. The strike is in its 19th day today. The coun­try was the world's second-largest bul­lion con­sumer in the fourth quarter.
• Gold imports into India tum­bled more than 55 per­cent in March. The pres­i­dent of the Bom­bay Bul­lion Asso­ci­a­tion notes that the coun­try imported just 15 to 20 tonnes of gold in March as com­pared to the 45 to 55 tonnes that is usu­ally imported on a monthly basis. He added that the high price of the pre­cious metal also deterred fresh pur­chases in the first quarter.
• The com­bined jew­el­ers strike in India plus the com­ments that the Fed­eral Reserve was unlikely to pro­vide more stim­uli for the econ­omy, sent many gold stocks to 52-week lows this week. In addi­tion, this sit­u­a­tion was exac­er­bated by a large fund com­plex in Canada that had a change in own­er­ship, with the new man­age­ment insti­tut­ing whole­sale changes for many of the firm’s port­fo­lios, dump­ing mil­lions of shares of gold-mining and oil stocks.

Oppor­tu­ni­ties

• An upcom­ing Hindu fes­ti­val, Akshaya Tri­tiya, held on April 24, may be the cat­a­lyst that brings the jeweler’s strike in India to an end and moves gold prices higher in April. In terms of impor­tant fes­ti­vals, the Akshaya Tri­tiya fes­ti­val and Dhanteras are the two biggest gold-buying events in the Hindu cal­en­dar. These are essen­tial buy­ing occa­sions that jew­el­ers won't want to miss, espe­cially after the strike-inflicted drop in rev­enues in March.
• Accord­ing to an analy­sis of the Chi­nese gold mar­ket, growth in aggre­gate demand from jew­elry buy­ers, pri­vate investors, and the People's Bank of China will con­tinue to out­pace growth in total sup­ply from mine pro­duc­tion and sec­ondary sources. Fur­ther­more, it sug­gests that the country's gold pro­duc­tion and con­sump­tion are both far higher than fig­ures sug­gest, but also that this gold will not find its way back on to the global marketplace.
• With both domes­tic sup­ply and demand rel­a­tively price inelas­tic, the mar­ket will require a grow­ing stream of imports, which will be avail­able only at higher prices. Despite bul­lion prices hav­ing moved up from $300 to more than $1,600 over the last decade, world gold mine pro­duc­tion is essen­tially unchanged.

Threats

• The Mozam­bi­can gov­ern­ment is seek­ing to guar­an­tee that the sale of shares in min­ing com­pa­nies whose assets are in the coun­try should bring finan­cial ben­e­fits to the coun­try. A team of offi­cials from the Min­istries of Min­eral Resources and of Finance has been set up to work on how to tax these sales. The new law, which is expected to be sub­mit­ted to the country’s par­lia­ment, will stip­u­late that the trans­mis­sion of min­ing rights and titles must oblig­a­to­rily take place in Mozam­bique and any pub­lic offer of shares must be announced in the Mozam­bi­can press.
• Ongo­ing con­flicts in Eritrea and the threat of addi­tional sanc­tions pose sig­nif­i­cant risks to the country’s min­ing sec­tor and those com­pa­nies oper­at­ing within the bor­ders. The coun­try is cur­rently the tar­get of U.N. sanc­tions, its hos­til­i­ties with neigh­bor­ing Ethiopia have reignited in recent months, it faces seri­ous infra­struc­ture issues (par­tic­u­larly with regards to water), and its author­i­tar­ian government’s mil­i­tary and geopo­lit­i­cal ambi­tions are unsus­tain­able. So while Eritrea’s min­eral deposits are attrac­tive, it will remain one of the riskier min­ing juris­dic­tions in Africa for the fore­see­able future.
• A Roman­ian court annulled a zon­ing plan that fur­ther delayed the devel­op­ment of Gabriel Resources’ Rosia Mon­tana project. The project has been a favorite for a num­ber of non-governmental orga­ni­za­tions to rally around to pre­vent the devel­op­ment of the mine. React­ing to the news today, Gabriel’s share price plunged 23 percent.

Tags: African Nation, Anglogold Ashanti, Border Closures, Bullion Prices, Canadian Market, China, Coup D, Dollar Index, Economic Community, Gold, Gold Bugs, Gold Companies, Gold Imports, Gold Market, Gold Producer, gold stocks, India, Mark Bristow, Market Radar, Mining, Nyse Arca, Pullback, Quar, Randgold Resources, Spot Gold
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Energy and Natural Resources Market Radar (April 9, 2012)

Sunday, April 8th, 2012

Energy and Nat­ural Resources Mar­ket Radar (April 9, 2012)

Strengths

• Saudi Ara­bia is likely to main­tain high oil pro­duc­tion in the event con­sumer coun­tries release emer­gency stocks, but it will not seek to lure buy­ers for more oil by dis­count­ing its crude, indus­try sources said. Spare capac­ity has fallen below 2 mil­lion bar­rels per day which typ­i­cally is a sign of a tight oil market.
• Palm oil gained to the high­est level in more than a year on spec­u­la­tion that buy­ing from China, the biggest user of cook­ing oils, may increase when local mar­kets reopen this week after a three-day hol­i­day. June-delivery palm oil rose as much as 1.2 per­cent to 3,574 ring­git ($1,167) a met­ric ton on the Malaysia Deriv­a­tives Exchange, the high­est for a most-active con­tract since March 9 last year. Finan­cial mar­kets in China were closed from April 2 for pub­lic hol­i­days. Palm oil advanced 2.9 per­cent in two days after a U.S gov­ern­ment sur­vey showed soy­bean acreage in the world’s largest pro­ducer will decline. Palm oil and soy­bean oil are sub­sti­tutes in food and fuel uses.
• Also in agri­cul­ture, soy­beans jumped 3.5 per­cent after the U.S. Depart­ment of Agri­cul­ture cut the acreage to 73.9 mil­lion acres which is the low­est since 2007. Soy­beans advanced 17.1 per­cent in the first quar­ter and were the best-performing agri­cul­ture com­mod­ity year to date as dry weather con­di­tions in South Amer­ica hurt crops.
• The Sun reports that stores are hik­ing the price of Easter eggs — even though the cost of pro­duc­ing them has fallen. Since peak­ing two years ago, cocoa prices have plunged by a third. But Easter egg favorites are still up in price.

Weak­nesses

• A slump in coal exports con­tributed to another monthly trade deficit for Aus­tralia. Exports were down to their low­est level in a year at A$24.4 bil­lion as coal exports plunged 21 per­cent to A$3.4 bil­lion, the low­est since March 2011. Hard cok­ing coal exports were down $597 mil­lion, 27 per­cent, hurt by vol­umes down 27 per­cent. Ther­mal coal export vol­umes were down 16 per­cent and prices were down 4 per­cent, imply­ing a 19 per­cent drop in dol­lar terms.
• While gold pro­duc­ers in Mali sig­nal min­ing oper­a­tions have so far gone unaf­fected by a recent mil­i­tary coup d'état and an ongo­ing rebel insur­gency in the country's north, juniors, inter­me­di­ates and majors alike have sus­pended work at Malian explo­ration projects cit­ing, among other rea­sons, fuel-supply risk and flight of for­eign per­son­nel. The lat­est notice of sus­pen­sion of explo­ration oper­a­tions comes from inter­me­di­ate pro­ducer IAMGOLD.
• Bloomberg news reported wan­ing demand for gaso­line is putting the U.S. on course to miss a tar­get for ethanol use for the first time, sig­nal­ing no let-up in the slide in prices. A 2007 U.S. law requires refin­ers to mix 13.2 bil­lion gal­lons of renew­able prod­ucts with motor fuels in 2012, up 4.8 per­cent from last year. Gaso­line demand aver­aged over four weeks fell 3.8 per­cent from a year ear­lier, the U.S. Energy Depart­ment reported this week.

Oppor­tu­ni­ties

• Global food prices rose in March for a third suc­ces­sive month, dri­ven by gains in grains and veg­etable oils, the United Nations' Food and Agri­cul­ture Organ­i­sa­tion (FAO) said on Thurs­day, putting food infla­tion firmly back on the eco­nomic agenda. Food prices hit record highs in Feb­ru­ary 2011 and stoked protests con­nected to the Arab Spring wave of civil unrest in some north African and mid­dle east­ern coun­tries. They then receded but started to grow again in Jan­u­ary. An FAO index that mea­sures monthly price changes for a food bas­ket of cere­als, oilseeds, dairy, meat and sugar, aver­aged 215.9 points in March, up from a revised 215.4 points in Feb­ru­ary, FAO data showed. Its Cereal Price Index aver­aged 227 points in March, up from Feb­ru­ary, with maize prices show­ing gains, sup­ported by low inven­to­ries and a strong soy­bean mar­ket, the FAO said. "You can see prices in the near term ris­ing even fur­ther," FAO's senior econ­o­mist and grain ana­lyst Abdol­reza Abbass­ian told Reuters before the index update.
• China is mulling a new round of sub­si­dies for the home appli­ance sec­tor that may help sup­port cop­per demand this year accord­ing to Hu Xiao­hong, an offi­cial with China House­hold Elec­tri­cal Appli­ances Asso­ci­a­tion. Sub­si­dies for the pur­chase of energy-saving mod­els of air con­di­tion­ers and tele­vi­sions are being con­sid­ered. Last year, air-conditioner man­u­fac­tur­ers were the second-largest con­sumers of cop­per in China, behind the power sec­tor com­pris­ing 15 per­cent of consumption.
• Chi­nese alu­minum pro­ducer Chalco is said to be buy­ing a con­trol­ling stake in a Mon­go­lian coal miner. Chi­nese alu­minum pro­ducer Chalco has agreed to buy 56–60 per­cent of South­Gobi Resources at $4.89/share (a 29 per­cent pre­mium over SouthGobi’s clos­ing price) from Ivan­hoe Mines. Chi­nese min­ers have increased ini­tia­tives to acquire over­seas nat­ural resources assets as the deal sug­gests. Chalco is diver­si­fy­ing its expo­sure out of alu­minum and is invest­ing in other resources as well; how­ever, this coal will help in secur­ing coal for its alu­minum pro­duc­tion, too.
• In cok­ing coal, BHP Bil­li­ton has declared force majeure on coal ship­ments from its Bowen Basin coal mines in Aus­tralia due to a con­tin­ued work­ers' strike and heavy rain­fall. The indus­trial action at the BHP Billiton-Mitsubishi Alliance (BMA) oper­ated Bowen Basin coal mines has clearly inten­si­fied, adding to the rolling work stop­pages expe­ri­enced since June 2011. BMA-operated coal mines together pro­duced 38.2 mil­lion tonnes of cok­ing coal, account­ing for 14 per­cent of the global cok­ing coal trade and 29 per­cent of Aus­tralian cok­ing coal exports in 2011.

Threats

• Despite some con­fu­sion, an indus­try min­istry offi­cial said this week that Indone­sia plans to impose a 25 per­cent export tax on coal and base met­als this year, jump­ing to 50 per­cent in 2013, as the major pro­ducer of raw mate­ri­als looks to boost domes­tic invest­ment and take a big­ger slice of min­ing prof­its. If imposed, the tax would add to a raft of reg­u­la­tions announced this year that have caused con­fu­sion in Indonesia's min­ing sec­tor and wor­ried for­eign investors. It would hit the prof­its of both national and foreign-owned com­pa­nies and could also raise costs for importers. India, a major buyer of Indone­sian coal, said it would raise con­cerns about the pro­posed tax with Jakarta.
• States hop­ing to cap­i­tal­ize on their energy booms are run­ning into resis­tance from local offi­cials who want to be able to police the noise and indus­tri­al­iza­tion that accom­pany oil-and-gas drilling. Last Thurs­day, seven towns col­lec­tively sued Penn­syl­va­nia in state court to over­turn a law passed in Feb­ru­ary that pre­vents them from using their zon­ing author­ity to reg­u­late oil-and-gas devel­op­ment. The day before, an Ohio state sen­a­tor intro­duced leg­is­la­tion to grant local offi­cials more con­trol over where com­pa­nies can drill. The munic­i­pal­i­ties are fight­ing laws that bar them from reg­u­lat­ing drilling, enacted by state law­mak­ers who feared towns would stunt job-creation and a stream of tax revenue.
• Agri­money reported that “U.S. corn stocks may fall over 2011-12 up to 50 per­cent more than offi­cials are cur­rently fac­tor­ing in,” ana­lysts said, as they reacted to data show­ing inven­to­ries weaker-than-expected at the mid-year stage. The U.S. Depart­ment of Agri­cul­ture has fore­cast a 327 mil­lion bushel drop in inven­to­ries, to 801 mil­lion bushels, over the cur­rent sea­son, depleted by resilient domes­tic and export demand fol­low­ing a dis­ap­point­ing har­vest. How­ever, investors expected the fig­ure to be revised after inven­tory data, released on Fri­day, showed stocks as of March 1 at a multi-year low of 6.0 bil­lion bushels, and below mar­ket forecasts.
• Argentina’s Neuquen Province has revoked oil and gas con­ces­sions held by three com­pa­nies, Tecpetrol, Argenta Argentina and Petro­bras, because the com­pa­nies had not invested enough in pro­duc­tion at the oil fields, the province said in a state­ment. The con­ces­sions will be given to the provin­cial government's oil and gas com­pany, Gas y Petroleo del Neuquen.

Tags: Agriculture, China, Coal Exports, Cocoa Prices, Coking Coal, Consumer Countries, Cooking Oils, Department Of Agriculture, Dry Weather Conditions, Easter Egg, Easter Eggs, Food And Fuel, Gold, Government Survey, India, Industry Sources, Market Radar, Metric Ton, Mining, Oil Market, Palm Oil, Public Holidays, Soybean Acreage, Soybean Oil, Sun Reports
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AdvisorAnalyst.com's Top 20 Stories for March-April 2012

Friday, April 6th, 2012

Here are this month's Top 20 Sto­ries accord­ing to you:

1. Inter­est Rates: The Mar­ket Has it All Wrong (Jakobsen)

2. James Paulsen: Does Gold Still Glitter

3. Sprott: Invest­ment Out­look (April 2012)

4. Jef­frey Saut: How to Posi­tion Port­fo­lios for 2012

5. Twelve Steps to Mak­ing Your Busi­ness Fun Again

6. "This Time its Dif­fer­ent?" — David Rosen­berg Explains the Melt Up and the Latent Risks

7. Ray Dalio: Ugly = Beau­ti­ful / Beau­ti­ful = Ugly

8. Defin­ing Risk: War­ren Buffett's Three Kind of Investments

9. Why War­ren Buf­fett is Wrong About Gold (Koesterich)

10. Bill Gross: Invest­ment Out­look (April 2012)

11. A Sim­ple Method to Improve Your Client's Invest­ment Performance

12. A False Sense of Secu­rity (Hussman)

13. David Rosen­berg: The Record Quarter

14. John Huss­man: Invest­ment Out­look (March 19, 2012)

15. A Warn­ing From War­ren Buffett's Top Eco­nomic Indicator

16. Doug Kass Says The Mar­ket is Now Overvalued

17. ECRI: Why Our Reces­sion Call Stands

18. Are Record ECB Mar­gin Calls Impair­ing Gold

19. Fig­ur­ing Out ECRI's Reces­sion Call

20. Shift­ing Winds, Tur­bu­lence Ahead (Sonders)

Tags: David Rosenberg, Doug Kass, Economic Indicator, Ecri, False Sense Of Security, Glitter, Gold, Gross Investment, Investment Outlook, Investment Performance, Jakobsen, John Hussman, Latent Risks, March 19, Ray Dalio, Recession, Record Quarter, Sense Of Security, Sprott, Twelve Steps, Warren Buffett
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Commodity Snapshot (Bespoke)

Thursday, April 5th, 2012

Tags: April, Commodities, Commodity, Copper, Copyright, Corn, Gold, Gold And Silver, Gold Silver, Green Zone, Investment Group, Natural Gas, Orange Juice, Range Charts, Shading, Silver Platinum, Snapshot, Standard Deviations, Trading Ranges, Wheat
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3 Trends to Watch for Global Investors

Thursday, April 5th, 2012

Bloomberg announced over the week­end that China’s man­u­fac­tur­ing grew at the fastest pace in a year. We fol­low the government’s Pur­chas­ing Man­agers’ Index (PMI) closely, as we believe it is a bet­ter indi­ca­tor of China’s domes­tic demand than the HSBC PMI. Whereas HSBC PMI sur­veys 400 small and mid-sized com­pa­nies, which are typ­i­cally export-oriented, the government’s PMI sur­veys 820 mostly large, state-owned enter­prises across 20 indus­tries.
Though man­u­fac­tur­ing activ­ity exceeded ana­lysts’ esti­mates, some China bears focused on the fact that the March 2012 num­ber is lower than the aver­age dur­ing the third month from 2005 through 2011. What’s impor­tant for investors to con­sider is that the trend is your friend: It is the fourth month in a row where the PMI landed above the three-month PMI, and shows the econ­omy is on the right path.

Below are three addi­tional con­struc­tive trends we see in China.

1. China Returns Poised to Revert to the Mean

Over the past few years, Chi­nese stocks have lagged com­pared to their emerg­ing mar­ket peers. How­ever, the Peri­odic Table of Emerg­ing Mar­kets per­fectly illus­trates how last year’s loser can be this year’s win­ner. His­tor­i­cally, every emerg­ing coun­try has expe­ri­enced wide price fluc­tu­a­tions from year to year. Over time, though, each coun­try tends to revert to the mean.

In the visual below, we high­lighted China’s per­for­mance pat­tern over the past 10 years. Chi­nese stocks landed in the top half four out of 10 years—2002, 2003, 2006 and 2007. In 2003, China climbed an astound­ing 163 per­cent; in 2007, it was the top emerg­ing mar­ket again, return­ing nearly 60 per­cent.
Since then, the coun­try has fallen to the bot­tom half of the chart. If you apply the prin­ci­ple of mean rever­sion, his­tory appears to favor China land­ing in the top half dur­ing this Year of the Dragon.

See the orig­i­nal Peri­odic Table of Emerg­ing Mar­kets here.

2. Liq­uid­ity Cycle Could Ben­e­fit Stocks

Yet China lead­ers won’t leave its suc­cess to pure luck. If the Dragon doesn’t breathe fire into mar­kets, it may be a shot of liq­uid­ity injected by pol­icy eas­ing that could drive stock prices higher. Macro­eco­nomic the­ory states that when a country’s money sup­ply exceeds eco­nomic growth, the excess liq­uid­ity tends to drive up asset prices, includ­ing stocks.

BCA Research doc­u­mented this trend in China over the past eight years. The research firm com­pared the dif­fer­ence between the change in money sup­ply growth and nom­i­nal GDP growth and Chi­nese stock prices. In both instances when the change in excess liq­uid­ity fell to a low, so did stocks. Con­versely, the rise of money sup­ply growth com­pared to GDP growth “coin­cided with major ral­lies” for China’s stock mar­ket, accord­ing to BCA.

Today, it appears that the change in excess liq­uid­ity is just begin­ning to bounce off another low, as are stocks, indi­cat­ing another poten­tial inflec­tion point.

3. Incen­tive to Main­tain Growth

BCA hedges China’s pos­si­ble stock advance­ment in the short-term if signs of eco­nomic improve­ment con­tinue because they “reduce the odds of aggres­sive pol­icy eas­ing.” A few weeks ago, I dis­cussed how investors seemed to over­look China’s focused macro pol­icy strat­egy, with its actions delib­er­ate and pur­pose­ful. This year, the gov­ern­ment has extra incen­tive to sus­tain mean­ing­ful growth as it tran­si­tions to a new lead­er­ship by the end of the year. As Pres­i­dent Hu Jin­tao and Pre­mier Wen Jiabao depart, Xi Jin­ping and Li Keqiang are expected to take over.

Look­ing at his­tor­i­cal GDP growth per year since 1978, Deutsche Bank finds there’s prece­dence for this idea. Dur­ing the fifth year of the lead­er­ship tran­si­tion cycle, “high or sta­ble” GDP growth was main­tained, with the excep­tion being the Asian Finan­cial Cri­sis in 1997.

These trends will be cov­ered in my upcom­ing web­cast on China with CLSA’s Andy Roth­man. Join us as we dis­cuss what investors should expect from China in terms of long-term GDP growth, fixed asset invest­ment, exports and the hous­ing market.

When I was in Sin­ga­pore at the Asia Min­ing Con­gress last week, I was for­tu­nate to be among a group of sharp and intel­li­gent experts across the finan­cial and min­ing indus­tries. A China bull pre­sent­ing an excel­lent case for the coun­try was Jing Ulrich, JP Morgan’s man­ag­ing direc­tor and chair­man of China equi­ties and com­modi­ties group. She’s the Oprah Win­frey of the invest­ment world, as for the past three years, Forbes Mag­a­zine has ranked her among the 50 Most Pow­er­ful Women in Business.

Ulrich expressed sim­i­lar views toward China and its polit­i­cal will in a recent “Hands-On China Report” fol­low­ing her atten­dance at the China Devel­op­ment Forum in Bei­jing. She said that the gov­ern­ment min­is­ters empha­sized their com­mit­ment to rebal­anc­ing the econ­omy toward con­sump­tion. While “fun­da­men­tals are cur­rently sound, the nation must mod­ify its ‘imbal­anced, unco­or­di­nated and unsus­tain­able’ course of devel­op­ment,” says Ulrich. What investors should remem­ber is that the gov­ern­ment had the finan­cial resources to effect this change and con­sid­ered it impor­tant to main­tain sus­tain­able growth.

All opin­ions expressed and data pro­vided are sub­ject to change with­out notice. Some of these opin­ions may not be appro­pri­ate to every investor. The Pur­chas­ing Manager’s Index is an indi­ca­tor of the eco­nomic health of the man­u­fac­tur­ing sec­tor. The PMI index is based on five major indi­ca­tors: new orders, inven­tory lev­els, pro­duc­tion, sup­plier deliv­er­ies and the employ­ment envi­ron­ment. The Hang Seng China Enter­prises Index is a capitalization-weighted index com­prised of state-owned Chi­nese com­pa­nies (H-Shares) listed on the Hong Kong Stock Exchange and included in HSMLCI index (Hang Seng Main­land Com­pos­ite Index).

Tags: 10 Years, China, Chinese Stocks, Commodities, Commodity, Dragon, Economy, Emerging Market, Emerging Markets, Estimates, Global Investors, Gold, History China, India, liquidity, Loser, Mining, Pace, Periodic Table, Pmi, Price Fluctuations, Principle, Purchasing Managers Index, State Owned Enterprises, Surveys, Year Of The Dragon
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Drilling into Fuel Prices (Templeton)

Wednesday, April 4th, 2012

by Franklin Tem­ple­ton Investments

Gaso­line, deodor­ant, dish­wash­ing, liq­uid, eye glasses, crayons….What does this list of seem­ingly ran­dom items have in com­mon? They are all made from refined crude oil.¹ So even if you don’t feel pain at the gas pump, you prob­a­bly rely on more prod­ucts made with or from crude oil than you’d think. And of course even non-oil based prod­ucts are gen­er­ally shipped via fuel-consuming trans­port vehi­cles, so you’re bound to feel the pinch in the form of fuel sur­charges or price hikes sooner or later.

But Beyond Bulls & Bears has never taken a fatal­is­tic view. If volatil­ity can present buy­ing oppor­tu­ni­ties, surely there’s a pos­si­ble sil­ver lin­ing to headline-making oil price heights. And so we turn to Fred Fromm, port­fo­lio man­ager for Franklin Nat­ural Resources Fund and part of the team that man­ages Franklin Gold and Pre­cious Met­als Fund, aka the guy with the inside scoop on all things oil, gold, and even those other less-talked-about commodities.

Fromm in brief:

• U.S. demand for gaso­line is actu­ally down, but demand out­side the U.S. is strong.
• Geopo­lit­i­cal issues, namely in Iran and Syria, are being fac­tored into oil pric­ing, but major dis­rup­tions may not occur.
• If China’s growth rate could con­tinue indef­i­nitely, its too-strong growth would likely strain com­mod­ity supply.
• Supply-demand bal­ance looks tight enough to sup­port gold, but demand can fall quickly and should be closely watched.
• Fromm opts for geo­graphic diver­si­fi­ca­tion to avoid the risk of hav­ing too many invest­ments in a coun­try with a high degree of polit­i­cal risk.

Oil prices tend to fol­low a sea­sonal rise in the sum­mer, but the recent run-up, much like the recent odd weather, has been out­side the expected norm. The price of a bar­rel of crude oil has risen above $100 this year, and the U.S. national aver­age for a gal­lon of gas rose to $3.867 in mid-March, up more than 30% over last year.¹ All this, and the tra­di­tional North Amer­i­can sum­mer dri­ving sea­son hasn’t even started yet. Fromm explains the dance of sup­ply and demand, as he sees it.

“We’re actu­ally see­ing U.S. demand down year-over-year for gaso­line, but demand out­side the U.S. has remained strong. Exports out of the United States have now reached a level we haven’t seen for sev­eral decades; we’ve actu­ally become a net exporter of fuel.¹ Of course, we still import quite a bit of crude oil, but demand in Latin Amer­ica, for instance, is quite robust and they don’t have a lot of refin­ing capac­ity com­ing on line there. China’s demand has also remained quite strong, even though there’s a lot of con­cern about slow­ing eco­nomic growth. In Feb­ru­ary, China set a monthly record for oil imports.² One of the other fac­tors is sup­ply. Non-OPEC sup­ply con­tin­ues to dis­ap­point, mean­ing it’s com­ing in lower than most peo­ple had expected it. And, as a result, that helps keep the sup­ply side fairly tight as well.

And then, of course, there are geopo­lit­i­cal ten­sions: what’s going on with Iran and the poten­tial for a sig­nif­i­cant dis­rup­tion to fuel sup­ply, and also the issues in Syria, which are ongo­ing. I don’t think we’re going to have a sig­nif­i­cant dis­rup­tion, but there is some prob­a­bil­ity that a dis­rup­tion could occur. I think that’s being fac­tored into crude oil prices.”

Impact of Chi­nese Demand

As Fromm men­tioned, the impact of Chi­nese demand is impor­tant for the oil mar­ket. China is the world’s second-largest con­sumer of oil, behind the United States,³ and is also a large con­sumer of other nat­ural resources. That con­sump­tion has been an eco­nomic dri­ver for sup­pli­ers, but it’s also been a source of con­cern for those who fear China’s con­sump­tion will drive up prices and leave the rest of the world with expen­sive table scraps. Regardless, China’s GDP is antic­i­pated to slow a bit this year from last year’s pace of 9.2%. In Fromm’s view, that’s not nec­es­sar­ily a bad thing, because he does believe com­mod­ity sup­plies would be strained if China sus­tained its recent high level of demand.

“I think one of the most impor­tant things to think about is that China had to slow: as I see it, there’s no way it could con­tinue at the pace that it was grow­ing, indef­i­nitely. The world just does not have enough com­modi­ties to sup­ply that level of growth. We do see some risk areas that have been grow­ing quite rapidly, like steel pro­duc­tion, which is a fac­tor in iron ore con­sump­tion and where China rep­re­sents a large part of world demand. That is an area, where, even if you see a lit­tle bit of slow­ing, it could have a big­ger impact. And it’s one of the rea­sons why in the fund we tend to focus more on energy, because we believe it’s a more durable com­mod­ity in terms of global demand, longer term.

Our main job, as we see it, is to iden­tify the areas that we think are going to be the strongest in terms of the supply-demand bal­ance and then iden­tify the com­pa­nies that we think are posi­tioned to ben­e­fit from that envi­ron­ment. So what we’re try­ing to do is fig­ure out which com­modi­ties we think will be best sup­ported by the envi­ron­ment that we see, and then stay away from those that might suf­fer from a slower environment.”

A Look at Gold

Gold is another com­mod­ity that’s been cap­tur­ing head­lines, per­ceived as a “safe-haven” asset class by many investors. Gold made a record run in the wake of the 2008–2009 finan­cial cri­sis. What does Fromm, think of gold? And what is his strategy?

“Gold is prob­a­bly the most dif­fi­cult to pre­dict among all of the com­modi­ties for var­i­ous rea­sons, so we don’t try to come up with a spe­cific com­mod­ity price for gold. We use ranges and try to estab­lish a level where we feel its price is well sup­ported. And then we look to see what the gold-based– equi­ties are reflect­ing, because that’s where we invest. We do not invest in gold bul­lion itself. The demand side still looks fairly robust around the world, even though we do have to watch that closely because invest­ment demand has become a much big­ger por­tion and that’s some­thing that, as we know, can go away pretty quickly.

But I think the sup­ply side and what’s going on there is more impor­tant. It con­tin­ues to strug­gle to grow, and what we are see­ing right now is that costs are ris­ing sig­nif­i­cantly, espe­cially for new projects. And what that could mean in the future is that there could be less invest­ment. We’re also see­ing a lack of explo­ration from some of the major min­ing com­pa­nies, which could impact sup­ply longer term. So as long as demand stays fairly healthy, and the sup­ply side con­tin­ues to strug­gle, we think the supply-demand bal­ance should remain tight enough to sup­port the com­mod­ity.

I also think that, as impor­tant as how the com­mod­ity itself is priced, is what the commodity-based stocks are reflect­ing, and the equi­ties have sig­nif­i­cantly under­per­formed the metal itself over the past year or year and a half. And because of that, in our view, the equi­ties are look­ing more attrac­tive now. So what we are try­ing to do is to deter­mine if the metal will be sup­ported at a level that will still make the equi­ties attrac­tive, and we do believe at this time that looks to be the case.”

Geopo­lit­i­cal Risks

Both oil and gold are mar­kets that can be sub­ject to geopo­lit­i­cal risk, which in turn can cre­ate price volatil­ity. Vet­ting each indi­vid­ual com­pany is always a very impor­tant part of the invest­ment process, but polit­i­cal unpre­dictabil­ity can add a layer of addi­tional chal­lenges. For Fromm, it boils down to thor­ough fun­da­men­tal research and due dili­gence, which often includes man­age­ment meet­ings and site vis­its in far-flung locales.

“We have ana­lysts going to small coun­tries in Africa.  I’ve been to the inte­rior in China vis­it­ing sin­gle gold mines. And this is a very impor­tant part of the research process. But I think what’s very crit­i­cal is a company’s man­age­ment and their abil­ity to find their way through the polit­i­cal land­scape in the var­i­ous coun­tries. And so, there­fore, we put a high degree of impor­tance on management’s abil­ity, their expe­ri­ence and track record to not only explore new areas but also deliver on projects.  One of the areas where we are see­ing costs really go up is the process of actu­ally bring­ing pro­duc­tion on line at these var­i­ous mines.

The other fac­tor is diver­si­fy­ing. You obvi­ously don’t want to put all your eggs in one bas­ket and be in too many invest­ments in one coun­try that has a high degree of polit­i­cal risk. You are always going to have some polit­i­cal risk; we even have it here in the United States. But in cer­tain coun­tries it is ele­vated, and we will attempt to man­age that risk through diver­si­fi­ca­tion and also through posi­tion size. So we will strive to have smaller posi­tions in names that we believe have a higher degree of geopo­lit­i­cal risk.”

Fromm’s phi­los­o­phy fits with Sir John Templeton’s thoughts on the sub­ject. “No mat­ter how care­ful you are, you can nei­ther pre­dict nor con­trol the future…so you diversify—by indus­try, by risk, and by coun­try.”

What are the Risks?

All invest­ments involve risks, includ­ing pos­si­ble loss of prin­ci­pal. Stock prices fluc­tu­ate, some­times rapidly and dra­mat­i­cally, due to fac­tors affect­ing indi­vid­ual com­pa­nies, par­tic­u­lar indus­tries or sec­tors, or gen­eral mar­ket con­di­tions.

Franklin Nat­ural Resources Fund: Invest­ing in a fund con­cen­trat­ing in the nat­ural resources sec­tor involves spe­cial risks, includ­ing increased sus­cep­ti­bil­ity to adverse eco­nomic and reg­u­la­tory devel­op­ments affect­ing the sec­tor. The fund may also invest in for­eign stocks, which involve expo­sure to cur­rency volatil­ity and polit­i­cal and eco­nomic uncer­tainty. The fund’s hold­ings in smaller com­pa­nies involve spe­cial risks asso­ci­ated with smaller rev­enues and mar­ket share, and more lim­ited prod­uct lines. The prices of such secu­ri­ties can be volatile, par­tic­u­larly over the short term. These and other risks are described more fully in Franklin Nat­ural Resources Fund’s prospec­tus.

Franklin Gold and Pre­cious Met­als Fund: Invest­ing in a non-diversified fund involves the risk of greater price fluc­tu­a­tion than a more diver­si­fied port­fo­lio. Also, the fund con­cen­trates in the pre­cious met­als sec­tor which involves fluc­tu­a­tions in the price of gold and other pre­cious met­als and increased sus­cep­ti­bil­ity to adverse eco­nomic and reg­u­la­tory devel­op­ments affect­ing the sec­tor. In addi­tion, the fund is sub­ject to the risks of cur­rency fluc­tu­a­tion and polit­i­cal uncer­tainty asso­ci­ated with for­eign invest­ing. Invest­ments in devel­op­ing mar­kets involve height­ened risks related to the same fac­tors, in addi­tion to those asso­ci­ated with their rel­a­tively small size and lesser liq­uid­ity. The fund may also invest in smaller com­pa­nies, which can be par­tic­u­larly sen­si­tive to chang­ing eco­nomic con­di­tions, and their prospects for growth are less cer­tain than those of larger, more estab­lished com­pa­nies. These and other risks are described more fully in Franklin Gold and Pre­cious Met­als Fund’s prospec­tus.

² Source: People’s Repub­lic of China, Gen­eral Admin­is­tra­tion of Customs.

³ Source: CIA World Fact Book 2010 – 2011.

Tags: China, Commodities, Commodity, Commodity Supply, Demand Balance, Eye Glasses, Franklin Templeton Investments, Fromm, Fuel Prices, Fuel Surcharges, Gallon Of Gas, Geographic Diversification, Geopolitical Issues, Gold, Liquid Eye, Mid March, Mining, Natural Resources Fund, Oil Price, Political Risk, Precious Metals Fund, Price Hikes, Price Of A Barrel Of Crude Oil, Seasonal Rise, Transport Vehicles
Posted in Brazil, Markets | Comments Off

Chuck Royce: Why the Rally Can Last

Tuesday, April 3rd, 2012

by Chuck Royce, Royce Funds

Can the cur­rent rally last through the end of the year?

I think it can. What's inter­est­ing to me is that we're see­ing one of those rare occa­sions when one of our pre­dic­tions for the mar­ket as a whole worked out almost exactly the way we thought it would. For a while now, we have been not­ing the dis­junct between the very neg­a­tive and alarmist head­lines and the more opti­mistic view our own analy­ses and con­tacts with man­age­ments were reveal­ing. It seemed to us as early as last Sep­tem­ber that the econ­omy was in bet­ter shape than the con­ven­tional wis­dom was suggesting.

"I think we're on our way to a pos­i­tive and sat­is­fac­tory year.
I also believe that we're on our way to see­ing three– and five-year
aver­age annual total returns that will look bet­ter than what
most investors have seen recently."

There were—and are—problems that need to be worked out, but we were hope­ful that even­tu­ally the world's bankers and politi­cians would for­mu­late solu­tions, at least for the most imme­di­ately press­ing issues, such as Greek default. The announce­ment of a bailout plan for Greece cre­ated a great sense of relief through­out the cap­i­tal mar­kets. Once it became clear that Europe would not go bust, investors felt bet­ter about the grow­ing sta­bil­ity in the world econ­omy. This pos­i­tive devel­op­ment, along with the improv­ing econ­omy and the under­per­for­mance of the stock mar­ket over the last five years, leads me to think that the rally can last. The year's remain­ing quar­ters may not be as robust as 2012's first three months, but I remain cau­tiously opti­mistic and still think that this decade will be bet­ter for stocks than the pre­vi­ous one.

So you're still a strong believer in equities?

Absolutely. I think we're on our way to a pos­i­tive and sat­is­fac­tory year. I also believe that we're on our way to see­ing three– and five-year aver­age annual total returns that will look bet­ter than what most investors have seen recently. To me, it all comes down to equi­ties remain­ing the most effec­tive choice for assets that carry risk. I agree strongly with the notion that a care­fully con­structed stock port­fo­lio is the best way to build long-term returns that can out­pace infla­tion and pre­serve pur­chas­ing power.

Returns for the major U.S. indexes—and many around the globe—were closely cor­re­lated in the first quar­ter. When do you expect this to change?

It's cer­tainly more pleas­ant to par­tic­i­pate in a cor­re­lated rally than it was last year to be part of a wide­spread bear mar­ket. I expect cor­re­la­tion to remain fairly high through the inter­me­di­ate term, though I don't see that refut­ing the argu­ment that we still need to shop the mar­ket for what we think are the high­est qual­ity small-cap com­pa­nies trad­ing at attrac­tive val­u­a­tions. So as much as cor­re­la­tion has been a fact of life for most of the cur­rent mar­ket cycle, we con­tinue to invest with an eye toward non-correlated equity results, par­tic­u­larly when look­ing at com­pa­nies out­side the U.S. We build our port­fo­lios antic­i­pat­ing that they will out­per­form and, more impor­tantly, pro­vide strong absolute returns over the long term. At some point, we expect cor­re­la­tion to abate and more dif­fer­en­ti­ated returns to materialize.

Do you still see qual­ity stocks, regard­less of mar­ket cap, as poten­tial mar­ket cycle leaders?

We do. Qual­ity as we define it—companies with strong bal­ance sheets, pos­i­tive cash flow, and high returns on invested capital—has done well on an absolute basis both in the cur­rent rally and since the small-cap high in July 2007. How­ever, dur­ing the rally off the Octo­ber 3, 2011 small-cap low, qual­ity small-cap stocks have lagged. This hasn't been alto­gether sur­pris­ing since most ral­lies, espe­cially those in the after­math of the finan­cial cri­sis, have not favored qual­ity. How­ever, our thought is that qual­ity will likely begin to lead when we start to see more dif­fer­en­ti­ated returns. When those investors who have been avoid­ing stocks return to the mar­ket, we sus­pect that many will be look­ing for those attrib­utes that we typ­i­cally seek.

Should there be room in asset allo­ca­tion plans for global or inter­na­tional small-caps?

We think that any diver­si­fied asset allo­ca­tion plan should include some global or inter­na­tional stocks. The real­ity is that we are in an increas­ingly global econ­omy. Equity port­fo­lios that hold mostly or exclu­sively domes­tic com­pa­nies are invested in stocks that derive a sub­stan­tial amount of rev­enue from out­side the U.S. More impor­tant from our per­spec­tive is the vast size and return poten­tial of the uni­verse. We see it as too impor­tant an area to ignore.

What do you see as Royce's strengths culturally?

We also believe strongly in eat­ing our own cook­ing. Each of our port­fo­lio man­agers is a large share­holder in the funds that he or she man­ages, which is an absolute neces­sity. I don't think you can man­age effec­tively with­out some skin in the game.

First, com­pany cul­ture is an impor­tant and nec­es­sary topic. It's espe­cially impor­tant for finan­cial ser­vices firms in light of the op-ed piece that Greg Smith wrote recently in The New York Times. We have always cher­ished cer­tain val­ues here at Royce, and those val­ues inform every­thing that we do. For exam­ple, our long-term ori­en­ta­tion doesn't sim­ply apply to our port­fo­lios, it also applies to the hold­ing peri­ods we have for stocks, the tenure of port­fo­lio man­agers on our funds, the length of time we want all of our employ­ees to be with the com­pany, and even the objec­tives and tenures of the man­age­ment teams that we meet with. We look for com­pa­nies capa­ble of estab­lish­ing long-term goals for their busi­nesses because we typ­i­cally plan on hold­ing com­pa­nies for at least a few years. There are sev­eral that we have owned for more than a decade.

We also believe strongly in eat­ing our own cook­ing. Each of our port­fo­lio man­agers is a large share­holder in the funds that he or she man­ages, which is an absolute neces­sity. I don't think you can man­age effec­tively with­out some skin in the game. Our employ­ees who are not part of the invest­ment staff are also share­hold­ers, so it's a company-wide prac­tice that we encour­age. Some­what related to this is the fact that many man­agers serve on mul­ti­ple port­fo­lios, which had fos­tered a highly col­lab­o­ra­tive cul­ture. There are no rewards for hav­ing the best idea and no penal­ties for com­ing up with ones that don't work. We eval­u­ate our peo­ple with the same long-term stan­dard that we use for port­fo­lios, so each man­ager will have his or her share of hits and misses. Mak­ing mis­takes is part of learn­ing how to be suc­cess­ful, so we allow for that and are never shy about admit­ting when we've screwed up. We can't expect share­hold­ers to make a long-term com­mit­ment to us with­out being trans­par­ent about our process and practices.

Finally, I think that dis­ci­pline and con­sis­tency are vital parts of our cul­ture. Main­tain­ing our dis­ci­pline has been cru­cial to build­ing long-term returns, whether we're talk­ing about the '87 crash, the early ‘90s reces­sion, the Inter­net Bub­ble or the 2008 cri­sis. Through all of those points and more, we stuck to what we think we do best. It wasn't always easy, but our sense through each try­ing time was that even­tu­ally we and our share­hold­ers would be rewarded for our patience.

Impor­tant Dis­clo­sure Information

The thoughts expressed in this piece are solely those of the per­son speak­ing and may dif­fer from those of other Royce invest­ment pro­fes­sion­als, or the firm as a whole. There can be no assur­ance with regard to future mar­ket movements.

This mate­r­ial is not autho­rized for dis­tri­b­u­tion unless pre­ceded or accom­pa­nied by a cur­rent prospec­tus. Please read the prospec­tus care­fully before invest­ing or send­ing money. Invest­ments in secu­ri­ties of micro-cap, small-cap and/or mid-cap com­pa­nies may involve con­sid­er­ably more risk than invest­ments in secu­ri­ties of larger-cap com­pa­nies. (Please see "Pri­mary Risks for Fund Investors" in the prospec­tus.) Secu­ri­ties of non-U.S. com­pa­nies may be sub­ject to dif­fer­ent risks than invest­ments in secu­ri­ties of U.S. com­pa­nies, includ­ing adverse polit­i­cal, social, eco­nomic or other devel­op­ments that are unique to a par­tic­u­lar coun­try or region. (Please see "Invest­ing in For­eign Secu­ri­ties" in the prospec­tus.) There­fore, the prices of secu­ri­ties of for­eign com­pa­nies, in par­tic­u­lar coun­tries or regions may, at times, move in a dif­fer­ent direc­tion than those of secu­ri­ties of U.S. com­pa­nies. (Please see "Pri­mary Risk of Fund Investors" in the prospec­tus.)

Copy­right © Royce Funds

Tags: Bailout Plan, Believer, Bust, Capital Markets, Conventional Wisdom, Decade, Disjunct, First Three Months, Gold, Greece, Last September, Optimistic View, Politicians, Quarters, Rally, Royce Funds, Shape, Stock Market, Stocks, Those Rare Occasions, World Economy
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Europe: "€1 Trillion May Not Be Enough"

Monday, April 2nd, 2012

A core piece of last week's Euro­pean news­flow was that fol­low­ing much push­back, Angela Merkel, who under­stands the under­ly­ing math all too well, finally dropped her oppo­si­tion to expand­ing the Euro­pean "fire­wall" in the form of a com­bined EFSF and ESM res­cue mech­a­nisms, to bring the total "fire­power" to €800 bil­lion (ignor­ing for a moment that when the true dry pow­der of the com­bined vehi­cle is just about €500 bil­lion net as explained here, hardly enough to res­cue Spain, let alone Italy). Yet as has been explained here repeat­edly, and as Merkel has fig­ured out, this is eas­ily the most sym­bolic expan­sion of a res­cue facil­ity ever. Because while the ECB's agree­ment to allow Eurobanks to abuse its €1 tril­lion dis­count win­dow for three years (which is what the LTRO is), fol­low­ing the replace­ment of JC Trichet with a Gold­man appa­ratchik, at least infused the sys­tem with $1.3 tril­lion in new fun­gi­ble liq­uid­ity (and resulted in a stock mar­ket per­for­mance boost for the ages, one which is now unwind­ing), the 'fire­wall" does not rep­re­sent new money, nor is a "fire­wall" to begin with — it is merely one mas­sive con­tin­gent lia­bil­ity which will remain unfunded in per­pe­tu­ity. Slowly the Ger­man media is wak­ing up, and in an arti­cle in Der Spiegel, the authors observe that "Even a 1-Trillion Euro Fire­wall wouldn't be enough." And they are cor­rect, because the size of the fire­wall is com­pletely irrel­e­vant, as explained later. All the "fire­wall" does is shift even more back­stop respon­si­bil­ity on the only true AAA-country left in the Euro­zone, Ger­many. How­ever, the main cause of prob­lems in Europe — a mas­sive debt over­hang which can at best be rolled over but never paid down due to the increas­ingly lower cash flow gen­er­a­tion of Europe's (and America's) assets, still remains, and will do so until the debt is finally writ­ten down. How­ever, it can't because one bank's lia­bil­ity is another bank's asset. And so we go back to square one, which is that the sys­tem is caught in the biggest Catch 22, as we explained back in 2009. We are glad to see that slowly but surely this damn­ing con­clu­sion is finally being under­stood by most.

From Spiegel:

Euro­pean finance min­is­ters meet­ing in Copen­hagen on Fri­day agreed to boost the euro-zone fire­wall to over 800 bil­lion euros. The move marks another U-turn on the part of the Merkel admin­is­tra­tion, which recently dropped its oppo­si­tion to increas­ing the fund. Ger­man com­men­ta­tors warn that even the new fire­wall may still be too small.

Aus­trian Finance Min­is­ter Maria Fek­ter announced on Fri­day that the per­ma­nent euro res­cue fund, the Euro­pean Sta­bil­ity Mech­a­nism (ESM), would be expanded, by con­sid­er­ing the around €200 bil­lion in cur­rent bailouts as being sep­a­rate from the €500 bil­lion ear­marked for the ESM — orig­i­nally, the €500 bil­lion fig­ure was to have included the €200 bil­lion in exist­ing aid. The ESM, which is due to come into oper­a­tion in mid-2012, will also be boosted by includ­ing around €100 bil­lion in bilat­eral aid that was given to Greece in 2010, as well as aid from other EU funds, bring­ing the firewall's total capac­ity to over €800 billion.

Fek­ter expressed her con­fi­dence that Friday's move would be enough to calm the finan­cial mar­kets. "The mar­kets are already sig­nal­ing rel­a­tive calm," she said. "That shows that the mar­kets can work with what we have set up here."

The Nuclear Option

On Thurs­day evening, in the run-up to Friday's sum­mit, Ger­man Finance Min­is­ter Wolf­gang Schäu­ble had said he was pre­pared to com­bine the exist­ing bailouts with the new per­ma­nent mech­a­nism. He said that the €800 bil­lion capac­ity was "con­vinc­ing" and "sufficient."

But not every­one shares his view that the sum is enough. On Thurs­day, French Finance Min­is­ter François Baroin called for the per­ma­nent euro bailout fund to be increased to €1 tril­lion, to shore up mar­ket con­fi­dence and pre­vent con­ta­gion in the euro cri­sis. "The fire­wall, it's a lit­tle like the nuclear option in mil­i­tary plan­ning, it's there for dis­sua­sion, not to be used," Baroin said in a radio inter­view. He was echo­ing calls made by the Orga­ni­za­tion for Eco­nomic Coöper­a­tion and Devel­op­ment (OECD) ear­lier in the week to boost the fire­wall to €1 trillion.

The Ger­man press is also finally start­ing to wake up:

The center-right Frank­furter All­ge­meine Zeitung writes:

"It is to be doubted whether all mem­bers of the Bun­destag actu­ally under­stand the finan­cial dimen­sion and the tech­ni­cal details of the ESM. It doesn't help mat­ters that the fed­eral gov­ern­ment has repeat­edly shifted its posi­tion on this issue — as the SPD's floor leader Frank-Walter Stein­meier rightly pointed out."

"But the entire euro res­cue is a bal­anc­ing act. On the one hand, fis­cal dis­ci­pline needs to be pro­moted. The pres­sure on the crisis-stricken euro-zone mem­bers to carry out reforms must not be under­mined by the knowl­edge that, if they fail, they will be caught by a finan­cial safety net. On the other hand, there is the need for sol­i­dar­ity. Those coun­tries that are in a bet­ter posi­tion can 'help the oth­ers to help them­selves,' as Schäu­ble put it."

"As always in the EU, these things lead to com­pro­mises in prac­tice, which also explains why the gov­ern­ment has read­justed its posi­tion on the ESM. The high rat­ings that Merkel enjoys in the polls may be related to the fact that the Ger­mans seem to intu­itively under­stand this del­i­cate maneuver."

The left-leaning Die Tageszeitung focuses on the calls to boost the ESM to €1 trillion:

"A tril­lion! That's how much money France is now demand­ing for the euro res­cue fund. Until now, Chan­cel­lor Angela Merkel only wanted to come up with €700 bil­lion. On the sur­face, it looks as if a Franco-German show­down is on the hori­zon. In fact, it is noth­ing more than a PR bat­tle, where noth­ing is really new. It was already clear last sum­mer that the exist­ing EU res­cue fund, the EFSF, was much too small to save Italy or Spain in an emer­gency. Even then, peo­ple were talk­ing about €1 tril­lion as a target."

"One tril­lion euros is a lot of money, and yet even this huge sum will not be enough. But again, that's noth­ing new. For months, cal­cu­la­tions have been doing the rounds that show that at least €1.5 tril­lion will be needed. The only inter­est­ing ques­tion left is how long it will take France and Ger­many to acknowl­edge this reality."

The last obser­va­tion is off on the right track but is nowhere near close enough to the true con­clu­sion, which was stated here yes­ter­day by Mark Grant:

The Fire­wall Lie

Whether some pro­posed fire­wall is $760 bil­lion or $1.3 Tril­lion or $13 Tril­lion makes no dif­fer­ence as in zero, nada, noth­ing and null. It is an IOU, a promise to pay and it is not counted in any Euro­pean sov­er­eign debt num­bers nor is it counted in the fig­ures for the Euro­pean Union’s debt. It will not stop Spain or Por­tu­gal or Italy from ask­ing for or need­ing money. It will not stop con­ta­gion nor will it pro­tect any nation from the calami­ties of another nation. If approved by the Finance Min­is­ters it is not approved by the Euro­pean Par­lia­ments and even if approved; it accom­plishes noth­ing besides one more unac­counted for con­tin­gent lia­bil­ity that is nowhere to be found on anyone’s books. This whole dis­cus­sion is a head fake, a decep­tion and a ruse care­fully plot­ted out for investors in one more attempt to mis­lead the entire world. If you wish to be a sta­tis­tic in the Greater Fool The­ory be my guest but I refuse to be apart of this unadul­ter­ated scam.

In other words, the next time a cri­sis flares up, the only thing that will delay the unwind, as the LTRO 1 and 2 did in late 2011, is another fresh injec­tion of liq­uid­ity, whether in exchange or not for worth­less col­lat­eral which was unused to begin with, as only new money can delay the unwind.

Of course, with every new tril­lion in incre­men­tal cash, now that cen­tral bank bal­ance sheets are grow­ing expo­nen­tially, more and more is now spilling over into hard assets, despite a clogged mon­e­tary trans­mis­sion mech­a­nism. The longer Europe's far­ci­cal cri­sis con­tin­ues, the more the sta­tus quo will have to fight tooth and nail to pre­vent an explo­sion in hard asset prices expressed in fiat. This is a fight they will lose.

Tags: Angela Merkel, Apparatchik, Article In Der Spiegel, Backstop, Contingent Liability, Core Piece, Debt Overhang, ECB, Efsf, Esm, Europe 1, Eurozone, Firepower, German Media, Gold, Massive Debt, New Money, Perpetuity, Spiegel, Stock Market Performance, Trichet
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Does China Hold the Winning Ticket?

Sunday, April 1st, 2012

By Frank Holmes, CEO and Chief Invest­ment Offi­cer, U.S. Global Investors

The odds of win­ning tonight’s Mega Mil­lions jack­pot are 1 in 175,711,536. This remote chance hasn’t stopped peo­ple from lin­ing up to buy a ticket, as the “what-if-I-win” idea seems so thrilling.

Some bears may think the odds of China being the win­ner among emerg­ing mar­kets in 2012 are also remote. Over the past few years, Chi­nese stocks have lagged com­pared to its emerg­ing mar­ket peers. How­ever, the Peri­odic Table of Emerg­ing Mar­ketsper­fectly illus­trates: last year’s loser can be this year’s win­ner. His­tor­i­cally, every emerg­ing coun­try has expe­ri­enced wide price fluc­tu­a­tions from year to year. Over time, though, each coun­try tends to revert to the mean.

In the visual below, we high­lighted China’s per­for­mance pat­tern over the past 10 years. Chi­nese stocks landed in the top half four out of 10 years—2002, 2003, 2006 and 2007. In 2003, China climbed an astound­ing 163 per­cent; in 2007, it was the top emerg­ing mar­ket again, return­ing nearly 60 percent.

Since then, the coun­try has fallen to the bot­tom half of the chart. If you apply the prin­ci­ple of mean rever­sion, his­tory appears to favor China land­ing on top dur­ing this Year of the Dragon.

See the orig­i­nal Peri­odic Table of Emerg­ing Mar­kets here.

Unlike the lot­tery sys­tem, China won’t leave its suc­cess to pure luck. If the Dragon doesn’t breathe fire into mar­kets, it may be a shot of liq­uid­ity injected by pol­icy eas­ing that could drive stock prices higher. Macro­eco­nomic the­ory states that when a country’s money sup­ply exceeds eco­nomic growth, the excess liq­uid­ity tends to drive up asset prices, includ­ing stocks.

BCA Research doc­u­mented this trend in China over the past eight years. The research firm com­pared the dif­fer­ence between the change in money sup­ply growth and nom­i­nal GDP growth and Chi­nese stock prices. In both instances when the change in excess liq­uid­ity fell to a low, so did stocks. Con­versely, the rise of money sup­ply growth com­pared to GDP growth “coin­cided with major ral­lies” for China’s stock mar­ket, accord­ing to BCA.

Today, it appears that the change in excess liq­uid­ity is just begin­ning to bounce off another low, as are stocks, indi­cat­ing another poten­tial inflec­tion point.

BCA hedges China’s pos­si­ble stock advance­ment in the short-term if signs of eco­nomic improve­ment con­tinue because they “reduce the odds of aggres­sive pol­icy eas­ing.” A few weeks ago, I dis­cussed how investors seemed to over­look China’s focused macro pol­icy strat­egy, with its actions delib­er­ate and pur­pose­ful. This year, the gov­ern­ment has extra incen­tive to sus­tain mean­ing­ful growth as it tran­si­tions to a new lead­er­ship by the end of the year. As Pres­i­dent Hu Jin­tao and Pre­mier Wen Jiabao depart, Xi Jin­ping and Li Keqiang are expected to take over.

Look­ing at his­tor­i­cal GDP growth per year since 1978, Deutsche Bank finds there’s prece­dence for this idea. Dur­ing the fifth year of the lead­er­ship tran­si­tion cycle, “high or sta­ble” GDP growth was main­tained, with the excep­tion being the Asian Finan­cial Cri­sis in 1997.

When I was in Sin­ga­pore at the Asia Min­ing Con­gress this week, I was for­tu­nate to be among a group of sharp and intel­li­gent experts across the finan­cial and min­ing indus­tries. One China bull pre­sent­ing an excel­lent case for the coun­try was Jing Ulrich, JP Morgan’s man­ag­ing direc­tor and chair­man of China equi­ties and com­modi­ties group. She’s the Oprah Win­frey of the invest­ment world, as for the past three years, Forbes Mag­a­zine has ranked her among the 50 Most Pow­er­ful Women in Business.

Ulrich expressed sim­i­lar views toward China and its polit­i­cal will in a recent “Hands-On China Report” fol­low­ing her atten­dance at the China Devel­op­ment Forum in Bei­jing. She said that the gov­ern­ment min­is­ters empha­sized their com­mit­ment to rebal­anc­ing the econ­omy toward con­sump­tion. While “fun­da­men­tals are cur­rently sound, the nation must mod­ify its ‘imbal­anced, unco­or­di­nated and unsus­tain­able’ course of devel­op­ment,” says Ulrich. Impor­tantly, the gov­ern­ment had the finan­cial resources to effect this change and con­sid­ered it impor­tant to main­tain sus­tain­able growth, writes Ulrich.

The ups and downs of this road toward a consumption-led econ­omy are top­ics I’ll cover in next week’s web­cast on China. I will be joined by CLSA’s Andy Roth­man. Together, we’ll dis­cuss what investors should expect from China in terms of long-term GDP growth, fixed asset invest­ment, exports and the hous­ing mar­ket. Be sure to sign up now.

Copy­right © U.S. Global Investors

Tags: Asset Prices, Chief Investment Officer, China, Chinese Stock, Chinese Stocks, Commodities, Commodity, Emerging Market, Emerging Markets, Excess Liquidity, Frank Holmes, Gold, India, Lottery System, Macroeconomic Theory, Mega Millions, Mining, Money Supply Growth, Nominal Gdp Growth, Periodic Table, Price Fluctuations, Ris, Stock Prices, Theory States, U S Global Investors, Year Of The Dragon
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Gold Market Radar (April 2, 2012)

Sunday, April 1st, 2012

Gold Mar­ket Radar (April 2, 2012)

For the week, spot gold closed at $1,668.90 up $6.45 per ounce, or 0.4 per­cent. How­ever, gold stocks, as mea­sured by the NYSE Arca Gold BUGS Index, fell 0.4 per­cent. The U.S. Trade-Weighted Dol­lar Index slid 0.5 per­cent for the week.

Strengths

• Early in the week, com­ments from Fed­eral Reserve Chair­man Ben Bernanke sug­gested the need for con­tin­ued accom­moda­tive mon­e­tary pol­icy. This brought prospects of QE3 back onto the hori­zon and helped pro­vide a floor to the recent down­swing in gold prices.
• Queen­ston Min­ing sold their joint ven­ture prop­erty to Kirk­land Lake Gold for $60 mil­lion and a roy­alty this week. Fac­tor­ing in this $60 mil­lion, the com­pany now has $120 mil­lion in cash and cash equiv­a­lents on their bal­ance sheet. This will be used to fund explo­ration and advance the fea­si­bil­ity study of the Beaver Creek project. The mar­ket reacted pos­i­tively to this and the stock out­per­formed the major gold indexes for the week.
• AuRico Gold sold two small gold mines in Aus­tralia to Croc­o­dile Gold this week. This came as no sur­prise to the mar­ket as AuRico had been talk­ing about the sale of their assets before. The total amount of the sale is $105 mil­lion (Cana­dian), or $0.32 per share. In our eyes, AuRico sold their mines for too lit­tle, but when you con­sider the increas­ing oper­at­ing costs for the company’s Aus­tralian assets, it was the right thing to do strategically.

Weak­nesses

• Fol­low­ing 12 days of protests by gold traders across India, the Indian gov­ern­ment has said that it will review the tax on ‘unbranded’ gold jew­elry. For­mer finance min­ster Yash­want Sinha pressed for a roll­back of the excise duty on non­branded jew­elry, and called for doing away with the newly required Per­ma­nent Account Num­ber (PAN) card to doc­u­ment any gold jew­elry pur­chases worth greater than roughly $4000. The PAN card allows the gov­ern­ment to track sig­nif­i­cant gold pur­chases and would have to be doc­u­mented on an individual’s income tax returns.
• Speak­ing to the Indian par­lia­ment, Pranab Mukher­jee said, “I know it (gold) is part of our cul­ture … but the import of gold of such mag­ni­tude strains bal­ance of pay­ments and affects exchange rate of the rupee through impact­ing supply-demand bal­ance of for­eign exchange.” He went on fur­ther to express his con­cern over the out­flow of pre­cious for­eign exchange on the import of “dead assets that cause prob­lems in the coun­try.” We think Mukher­jee may be con­fused as to which is asset, gold or the rupee, is the “dead” one.
• Cen­terra Gold took a hit this week, down 15 per­cent on Tues­day alone, on news that ice and waste move­ment has halted pro­duc­tion at their Kum­tor mine. In response to the dis­rup­tion, the com­pany revised and reduced its 2012 gold pro­duc­tion by 33 per­cent to 570,000–625,000 ounces. The news proved to be a great buy­ing oppor­tu­nity as Cen­terra fin­ished the week only down 1.8 percent.

Oppor­tu­ni­ties

• Gold­man Sachs urged traders to buy gold in a research note this week. The company’s research shows U.S. real inter­est rates as the pri­mary dri­ver of U.S. dollar-denominated gold prices. Their mod­els sug­gest the cur­rent level of real inter­est rates would be con­sis­tent with the cur­rent trad­ing range of gold prices. As they look for­ward how­ever, their U.S. econ­o­mists expect sub­dued growth and fur­ther eas­ing by the Fed­eral Reserve in 2012. They fore­cast this would push the market’s expec­ta­tions of real inter­est rates back down near zero and gold prices back to $1,840 an ounce.
• Franco-Nevada Corp CEO David Har­quail said that with share prices lag­ging, min­ers are wary of turn­ing to equity mar­kets to raise money and are explor­ing all alter­na­tives such as stream deals or roy­al­ties. The lat­ter are at an all-time high, but with most deals hap­pen­ing in the mid-tier mar­ket, ones over $500 mil­lion will be few and far between. We have a feel­ing there will be a num­ber of roy­alty streams locked-in this upcom­ing year.
• In an inter­view with the Gold Report, Brent Cook com­mented on some trends he has noticed gold sec­tor. He empha­sized that com­pa­nies are start­ing to rec­og­nize that qual­ity of a min­eral deposit super­sedes size. “Grade, or more suc­cinctly mar­gin, is get­ting more and more impor­tant ... These junior com­pa­nies with these large, low-grade, low-margin deposits are then doomed to build.” On a supply-demand basis though, all signs point to gold going up. Brent says that 83 mil­lion ounces are being mined annu­ally right now while only 20–30 mil­lion ounces are being found per year. This gap between pro­duc­tion and dis­cov­ery is not being filled and can only point to a bet­ter gold environment.

Threats

• Still no con­clu­sion or real pro­gres­sion out of Mali, but Rand­gold Resources CEO Mark Bris­tow said that the Bamako air­port has reopened and the bor­ders are open for all traf­fic. He main­tained that the company’s Loulo com­plex was replen­ished with fuel sup­plies over the week­end and that all three of the Rand­gold mines in Mali were oper­at­ing in full.
• Ren­Cap Secu­ri­ties held a spe­cial con­fer­ence call on the sit­u­a­tion in Mali. Their con­sul­tant expects eco­nomic pressure–primarily in the form of sanc­tions and sus­pended West­ern aid–to be the pri­mary out­side inter­ven­tion in Mali. This could ham­per import and export activ­ity, though the rebels have promised to tran­si­tion to new elections.
• How­ever, no timetable exists for the tran­si­tion and given the rebels’ lack of orga­ni­za­tion; they may be tempted to stay in power for a period of months in order to found a polit­i­cal party. This could mean that sanc­tions have the time to truly bite. Any such sanc­tions, how­ever, would be leaky by virtue of the lack of bureau­cratic capa­bil­ity to enforce them among Mali’s neighbors.

Tags: Beaver Creek, Canadian, Canadian Market, Cash And Cash Equivalents, Dollar Index, Feasibility Study, Federal Reserve Chairman, Federal Reserve Chairman Ben Bernanke, Gold, Gold Bugs, Gold Jewelry, Gold Market, Gold Mines In Australia, Gold Prices, gold stocks, Gold Traders, Income Tax Returns, India, Jewelry Purchases, Kirkland Lake Gold, Market Radar, Mines In Australia, Mining, Nyse Arca, Spot Gold
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Stocks: Still A Bargain (Koesterich)

Friday, March 30th, 2012

With global stocks up approx­i­mately 25% from their fall low and many mar­ket watch­ers endors­ing equi­ties in recent weeks, it’s hardly sur­pris­ing that investors are won­der­ing if stocks are still a good bargain.

While some mea­sures of sen­ti­ment – notably abnor­mally low volatil­ity lev­els – could be inter­preted as flash­ing yel­low cau­tion signs, val­u­a­tions and fun­da­men­tals still favor global stocks over the long term.

Cur­rently, equi­ties look rea­son­ably priced on an absolute basis. Devel­oped mar­ket equi­ties are trad­ing at around 14.5x trail­ing earn­ings, while large emerg­ing mar­kets are trad­ing at roughly 12x earnings. These val­u­a­tions are sig­nif­i­cantly above those touched dur­ing last year’s trough, but both emerg­ing and devel­oped mar­ket stocks are now trad­ing at a sig­nif­i­cant dis­count to their long-term aver­ages.

The rel­a­tive case for stocks, how­ever, is even more com­pelling as equi­ties look very cheap com­pared to bonds. While equity val­u­a­tions are mod­estly below their long-term aver­age, bond val­u­a­tions are sig­nif­i­cantly above theirs when mea­sured by vir­tu­ally any metric.

Nowhere is this more evi­dent than in the US Trea­sury mar­ket. Late last year, the yield on the 10-year Trea­sury note dipped below the level of core infla­tion for the first time since 1980. Rather than pay­ing investors the typ­i­cal long-term aver­age real yield of 2.5% to 3%, the US gov­ern­ment is now pay­ing a neg­a­tive real yield to bor­row.  As a result, unless the US is slid­ing toward Japan­ese style defla­tion – and so far there is lit­tle evi­dence of this –US Trea­suries look extremely expen­sive and investors in 10-year notes are accept­ing a loss in pur­chas­ing power and no real income. In addi­tion, because coupons are so low, the dura­tion or inter­est rate risk of Trea­suries is at or near a his­toric high.

Some investors have weighed the volatil­ity of stocks against the low yield on bonds and opted for choice C: Cash. A tac­ti­cal move into cash is cer­tainly rea­son­able for brief peri­ods of time. But if you’re wor­ried about long-term pur­chas­ing power, hav­ing a sig­nif­i­cant, long-term allo­ca­tion to an asset pay­ing zero return makes lit­tle sense. Stocks are a more rea­son­able option to consider.

To be sure, invest­ing in equi­ties has its risks. Some have argued that equity val­u­a­tions are flat­tered by his­tor­i­cally high mar­gins. But in the United States at least, a com­bi­na­tion of just enough gross domes­tic prod­uct growth, ane­mic wage growth and low rates should sup­port mar­gins over the near term.

Among other risks, while US defla­tion looks unlikely, it’s pos­si­ble and it’s a sce­nario that would clearly favor bonds. Under the oppo­site sce­nario – higher US infla­tion – equi­ties would surely suf­fer thanks to lower mul­ti­ples. How­ever, in an infla­tion sce­nario, equi­ties would likely hold up bet­ter than bonds or cash.

In short, equi­ties may not offer the stel­lar prospects of the 1980s or 1990s, but absent a bout of defla­tion, stocks are likely to out­per­form the alter­na­tives over the long term. Pos­si­ble iShares solu­tions include the iShares S&P Global 100 Index Fund (NYSEARCA: IOO), the iShares MSCI ACWI Index Fund (NASDAQGM: ACWI) and the iShares MSCI All Coun­try World Min­i­mum Volatil­ity Index Fund (NYSEARCA: ACWV).

Source: Bloomberg

The author is long IOO.

In addi­tion to the nor­mal risks asso­ci­ated with invest­ing, inter­na­tional invest­ments may involve risk of cap­i­tal loss from unfa­vor­able fluc­tu­a­tion in cur­rency val­ues, from dif­fer­ences in gen­er­ally accepted account­ing prin­ci­ples or from eco­nomic or polit­i­cal insta­bil­ity in other nations. An invest­ment in stocks, bonds or ETFs is not equiv­a­lent to and involves risks not asso­ci­ated with an invest­ment in cash.

Tags: 10 Year Treasury, Absolute Basis, Average Bond, Caution Signs, Choice C, Core Inflation, Deflation, ETF, ETFs, Global Stocks, Gold, Good Bargain, Interest Rate Risk, Japanese Style, Perio, Purchasing Power, Tactical Move, Term Averages, Treasuries, Treasury Market, Us Treasury, Volatility Levels, Year Treasury Note
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James Paulsen: Does Gold Still Glitter?

Friday, March 30th, 2012

Does GOLD Still Glitter?

by James Paulsen, Chief Invest­ment Strate­gist, Wells Cap­i­tal Man­age­ment (Wells Fargo)

Gold has been an invest­ment dar­ling in recent years. Indeed, it is often per­ceived as the cure for any invest­ment worry. Whether you are con­cerned about infla­tion, defla­tion, gov­ern­ment deficits, war, a U.S. dol­lar col­lapse, reces­sion, or depression—GOLD is the answer!

The extra­or­di­nary pop­u­lar­ity of gold today is easy to understand—it has done so well for so long! Since the end of the 1990s, the price of gold has risen almost six-fold from less than $300 to its cur­rent price of almost $1,700. Many expect the price of gold to rise con­sid­er­ably higher in the next sev­eral years and per­ceive the mod­est decline in the gold price since its all-time peak last Sep­tem­ber as a buy­ing oppor­tu­nity. While own­ing some gold is fine for all investors (diver­si­fi­ca­tion is para­mount), we think gold weight­ings should be scaled back in most port­fo­lios. The yel­low metal may soon lose some of its lus­ter as its strug­gles with its newly ele­vated val­u­a­tion and with the like­li­hood that con­fi­dence through­out the econ­omy is begin­ning to improve.

Gold is OVERVALUED!

Unlike stocks or bonds, gold has always been more dif­fi­cult to value since it pro­duces no cash flow (i.e., earn­ings or coupons) that can be dis­counted to arrive at a present (fair) value. How­ever, Exhibit 1 illus­trates a sim­ple “rel­a­tive val­u­a­tion” method­ol­ogy pro­vid­ing an his­tor­i­cal per­spec­tive against most other invest­ment classes (e.g., stocks, bonds, com­modi­ties, and real estate) and rel­a­tive to the value of labor and a bas­ket of con­sumer goods and ser­vices. In each of the six charts shown, the price of gold on a rel­a­tive basis is either near­ing or is at one of its high­est val­u­a­tions of the last 50 years. At the end of the 1990s, it took almost 5.5 ounces of gold to buy the S&P 500 Stock Price Index. Today, it only takes 0.8 of a sin­gle ounce to buy the stock mar­ket. Rel­a­tive to stocks, gold is almost as expen­sive today as it was in the late 1970s when the price of gold had surged after its peg was elim­i­nated and after the stock mar­ket was rav­ished by a decade of run­away inflation.

Rel­a­tive to Trea­sury bonds, the price of gold cur­rently trades near an all-time, post-war record high sur­pass­ing its old rel­a­tive val­u­a­tion record estab­lished in the late 1980s when bonds were incred­i­bly cheap. It is indeed remark­able that gold today is this expen­sive rel­a­tive to an asset class (bonds) which most agree is prob­a­bly itself extremely overvalued.

In recent years, while gold prices have soared, U.S. home prices have col­lapsed. Although the price of gold rel­a­tive to U.S. homes is not yet as high as it reached in the late 1970s, its cur­rent rel­a­tive val­u­a­tion com­pared to house prices leaves lit­tle opti­mism about the future poten­tial for gold prices. Gold is also expen­sive rel­a­tive to worker pay. In 2000, it took less than 20 hours of work (at the aver­age hourly wage rate) to pur­chase a sin­gle ounce of gold. Today, by con­trast, it takes almost 90 hours of labor to buy an ounce of gold! In a sim­i­lar fash­ion, the price of gold rel­a­tive to the bas­ket of con­sumer goods and ser­vices com­pris­ing the Con­sumer Price Index is near its all-time record high reached in the early 1980s.

Finally, even com­pared to other com­mod­ity prices, the price of gold is near­ing its all-time record rel­a­tive price reached in the late 1980s. Even though com­mod­ity prices in gen­eral have increased sig­nif­i­cantly in the last decade, the price of gold has risen even more dramatically.

While val­u­a­tion met­rics have not tra­di­tion­ally been a good invest­ment tim­ing tool, they have pro­vided a use­ful indi­ca­tion of the future upside/downside price poten­tial of an invest­ment. Rel­a­tive to other invest­ments, the charts in Exhibit 1 not only sug­gest upside is prob­a­bly lim­ited for gold but also cau­tions that down­side price risk could be sig­nif­i­cant. At a min­i­mum, these charts do not seem to sup­port the wide­spread pop­u­lar­ity and opti­mism con­cern­ing gold investing.

Gold and the “Fear Premium”?

Exhibit 2 shows the price of gold rel­a­tive to other com­mod­ity prices. Although gold has been a spec­tac­u­lar invest­ment since 2000, so have other com­modi­ties. Sur­pris­ingly, since 2000, the price of gold has only sig­nif­i­cantly out­paced other com­mod­ity prices dur­ing a few months in late 2008 when the “Great Finan­cial Cri­sis” erupted. Between 2000 and late 2008, the rel­a­tive price of gold to other com­modi­ties remained flat at about 1.5 imply­ing both gold prices and other com­mod­ity prices rose by equal amounts dur­ing the period. Sim­i­larly, the rel­a­tive price of gold was also unchanged between early 2009 and today. That is, “all” com­mod­ity prices rose just as much as gold prices between 2000 and late 2008 and again between early 2009 until today (despite this, how­ever, gen­eral com­modi­ties remain a much less pop­u­lar invest­ment than gold).

The only time gold sig­nif­i­cantly out­paced other com­mod­ity invest­ments was when investor “fear” surged. Exhibit 2 illus­trates the “fear pre­mium” the price of gold received rel­a­tive to other com­mod­ity prices dur­ing the 2008 cri­sis and how much of this pre­mium is still embed­ded in its price today. Between 2000 and late 2008, the price of gold oscil­lated in broad range about 1.4 times the value of the S&P GSCI Com­mod­ity Price Index. Today, gold trades at about 2.4 times the value of this com­mod­ity index. The risk or fear pre­mium embed­ded in the price of gold (i.e., about 1.0, the dif­fer­ence between the rel­a­tive price of gold today at 2.4 and where it used to trade prior to the 2008 cri­sis at about 1.4) is quite large and needs to be assessed when con­sid­er­ing an invest­ment in gold. A pri­mary risk for gold investors is the poten­tial for decay in this fear premium.

Gold’s Best Friend (Fear) May be Fading?!?

Exhibit 3 illus­trates the chal­lenge gold investors may face in the next few years should con­fi­dence slowly improve and “cri­sis fears” fade. This exhibit com­pares the rel­a­tive price of gold to the Con­sumer Con­fi­dence Index. The con­fi­dence index (dot­ted line) is shown on an inverted scale so a rise (fall) in the dot­ted line illus­trates peri­ods when con­fi­dence is declin­ing (increasing).

While not a per­fect rela­tion­ship, the rel­a­tive price of gold rel­a­tive to other com­mod­ity prices seems impor­tantly dri­ven by con­fi­dence. Gold’s best friend in recent years has been fear! As con­fi­dence col­lapsed in 2008, the rel­a­tive price of gold far out­paced other com­mod­ity invest­ments. Like­wise, the decline in con­fi­dence after the tech wreck and after 9/11 in the early 2000s pro­duced a sim­i­lar “fear pre­mium” in the rel­a­tive per­for­mance of gold prices. How­ever, between 2003 and 2007, the “fear pre­mium” embed­ded in gold even­tu­ally evap­o­rated once con­fi­dence again revived as the eco­nomic recov­ery matured. A sim­i­lar revival in eco­nomic con­fi­dence may be emerg­ing today. If the Consumer

Con­fi­dence Index does recover to at least 100 in this recov­ery, a good por­tion of the “fear pre­mium” embed­ded in the price of gold may evap­o­rate pro­duc­ing dis­ap­point­ing results for gold bugs.

Sum­mary

Main­tain­ing some gold expo­sure within port­fo­lios makes sense. Should cri­sis fears con­tinue to peri­od­i­cally flare in the next sev­eral years, gold should pro­vide the port­fo­lio with some defen­sive prop­er­ties. How­ever, we believe investors should con­sider reduc­ing gold expo­sure. This is an invest­ment which today seems far too pop­u­lar among the masses, appears extremely over­val­ued rel­a­tive to most other asset classes and faces a chal­leng­ing envi­ron­ment should eco­nomic con­fi­dence slowly improve in the next sev­eral years. The val­u­a­tion of gold rel­a­tive to vir­tu­ally any other asset class (stocks, bonds, real estate or com­modi­ties) seems to sug­gest the price of gold is either extremely rich today and at risk of sig­nif­i­cant decline or sug­gests most other asset classes are very cheap. Either way, it is prob­a­bly time to posi­tion port­fo­lios to ben­e­fit from a slow but steady revival in con­fi­dence rather than in an asset which only “glit­ters” when fear predominates.

Copy­right © Wells Cap­i­tal Management

Tags: Chief Investment Strategist, Commodities, Commodity, Consumer Goods, Diversification, E G Stocks, Glitter, Gold, Gold Price, Government Deficits, Historical Perspective, Last September, Luster, Price Of Gold, Relative Basis, Relative Valuation, Stock Market, Stock Price Index, Stocks Bonds, Time Peak, Valuations, Wells Capital Management, Wells Fargo
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Bianco and Biderman on Bonds and Debasement

Thursday, March 29th, 2012

James Bianco plays straight-man to Charles Bider­man in this extended (and admit­tedly audio-challenged) dis­cus­sion of the real­ity behind money print­ing, infla­tion, and the US Trea­sury mar­ket. Fol­low­ing our dis­cus­sion of the deficit ear­lier, it seemed appro­pri­ate to lis­ten to this back-and-forth as Bianco addresses who is really buy­ing US Trea­suries, how 'money' is cre­ated by the Fed for the banks, and where infla­tion is leak­ing into the sys­tem. "The day the Fed admits there is an infla­tion prob­lem is the day they are too late" is how they sum­ma­rize the temporary/transitory ver­biage that the Fed needs to keep using to pla­cate the masses. Gold (and TIPS) remain their pre­ferred strat­egy as Bianco argues that putting the 'infla­tion' threat in con­text is crit­i­cal — this is not about 14/15% com­par­isons, this is about investor expec­ta­tion that we get 3% infla­tion with the Fed at ZIRP and intend­ing to keep print­ing money — which is just as toxic. The two end with an inter­est­ing con­ver­sa­tion on the simul­ta­ne­ous debt defla­tion and price infla­tion and the impor­tance of not com­par­ing either to their extremes by way of shrug­ging off concerns.

Tags: Banks, Bonds, Debasement, Deflation, Expectation, Extremes, Gold, Inflation Problem, Inflation Threat, Investor, James Bianco, Money Printing, Preferred Strategy, Price Inflation, Printing Money, Straight Man, Treasuries, Treasury Market, Us Treasury, Verbiage
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Charles Ellis and Peter Bernstein: On Risk and Winning the Loser's Game

Thursday, March 29th, 2012

Here is the full tran­script:

CONSUELO MACK: This week on Wealth­Track– how you can win in what one of our guests calls a losers’ game– the stock mar­ket– and how can you pro­tect your­self from finan­cial peril? These two wise men of Wall Street have skill­fully nav­i­gated many finan­cial storms. We revisit the late, great Peter Bern­stein, a renowned expert on risk, and Charles Ellis on time­less invest­ment strate­gies, next on WealthTrack.

Hello and wel­come to this edi­tion of Wealth­Track. I’m Con­suelo Mack. Some­times, to under­stand the present, you have to revisit the past. That is what we are doing this week. We are re-broadcasting a Wealth­Track clas­sic, inter­views we did with two of Wall Street’s wis­est men: one sadly no longer with us, the other very much alive and contributing.

The year was 2006, two years before the finan­cial cri­sis hit full force. But storm clouds were gath­er­ing for those expe­ri­enced and attuned enough to notice. One of those was Peter Bern­stein, uni­ver­sally con­sid­ered to be the author­ity on risk. He was an econ­o­mist, money man­ager, sem­i­nal finan­cial thinker, his­to­rian and author of many books, includ­ing the best­seller, Against the Gods: The Remark­able Story of Risk . His twice monthly analy­sis of the econ­omy and the cap­i­tal mar­kets, Eco­nom­ics and Port­fo­lio Strat­egy, was read by investors around the world. Even back in 2006, Bern­stein expected rel­a­tively low returns from the finan­cial mar­kets in the years ahead. I asked him how we should invest?

PETER BERNSTEIN: As you know, I believe pas­sion­ately in diver­si­fi­ca­tion, so you have a lit­tle bit of every­thing. The United States is kind of a very well worked over as an invest­ment oppor­tu­nity. So I think one goes abroad. Not only are secu­ri­ties abroad, both bonds and stocks, val­ued more cheaply than in the U.S. They're no bar­gains, but more cheaply in the U.S. But in the emerg­ing mar­ket world, in the devel­op­ing world, excit­ing things are hap­pen­ing. Coun­tries that were once in the dog­house are on a roll now, largely because they're sell­ing to us in such huge amounts. But even in Europe, which has been kind of lag­gard, things are stir­ring, gov­ern­ments are chang­ing. Nobody notices this, but pro­duc­tiv­ity growth in Europe is as good or bet­ter than in the United States. They're giv­ing it away in the social safety net rather than in grow­ing their busi­nesses. But this is begin­ning to change. And I think if some­thing hap­pens there, there's huge oppor­tu­ni­ties. We see Japan finally com­ing up out of the doldrums.

So I think the oppor­tu­ni­ties are out­side the U.S. Some­body once said to me, you're not diver­si­fied if you're com­fort­able with every­thing that you own. And we're always com­fort­able with what we know. We buy, we live in New York, we buy Con Edi­son. If we live in Cal­i­for­nia, we buy the Cal­i­for­nia util­ity. But that means going out­side the U.S. is very impor­tant. And it's a big part of the world now. It's not a lit­tle periph­eral thing. It's a major part of the world.

CONSUELO MACK: Now, let me ask you about that, Peter, because I know one of the things that you have advised clients, and you and I have talked about before as well, is the impor­tance of being well diver­si­fied, and hav­ing a lit­tle bit of every­thing.  And as kind of the least risky way to go, and also the best way again, to get the kind of returns that we expect more, that we want from our invest­ments. But, so how should we diver­sify, though? Because the aver­age U.S. investor has prob­a­bly, you know, 60, 70, 80% in stocks. We've been fed this mantra that stocks pro­vide long term growth, that's where we should be. You dis­agree with that. About U.S. stocks at this point. But how do we diver­sify then? What should we be invest­ing? I mean do so asset allo­ca­tion for us.

PETER BERNSTEIN: I mean I guess, today I would have no more than half my assets in the U.S. if I was start­ing fresh.

CONSUELO MACK: In U.S. stocks.

PETER BERNSTEIN: Well, the U.S. stocks, maybe even U.S. stocks and bonds. One can do this quite eas­ily. There are exchange traded funds– all kinds of, almost any­thing that you want. And exchange traded funds that will offer a whole big piece. For instance you can buy all the stocks in the world out­side the U.S., and sim­i­larly, you can buy bonds out­side the United States. And there's one for gold.  If you do, just go to iShares on the Inter­net. They have a very easy, easy site to work with, and to look. So I do not think that indi­vid­u­als say, I won­der what French stock I should buy, or what Ger­man stock. I wouldn't dare do that myself. So it should be done in funds. And these are the best ways to do it. It's worth look­ing at.

CONSUELO MACK: And talk a lit­tle bit about one of the things, again, one of your major themes has been in invest­ing is that div­i­dends matter.

PETER BERNSTEIN: Yes.

CONSUELO MACK: So div­i­dends have mat­tered historically.

PETER BERNSTEIN: Yes.

CONSUELO MACK: I think the returns, the stock returns from rein­vested div­i­dends is, I don't know, 50%.

PETER BERNSTEIN: Yes, that's right. That's right.

CONSUELO MACK: But in this day and age, with stock pay­outs low, and div­i­dend yields low, do they mat­ter as much, and will they mat­ter as much in the future?

PETER BERNSTEIN: Yes. I think they mat­ter, first, because it is cash in your pocket. And at a time when, who knows what earn­ings are, there's been so much hanky panky all the way. Now they're going to start expens­ing options, so that it gets a lit­tle more com­pli­cated. This, at least, you know what it is. And you can make more of a judg­ment about a stock, the growth rate div­i­dends. But div­i­dends at this point, I think, have two pos­i­tive fea­tures that deserve atten­tion. One is the tax rate is the same as on cap­i­tal gains, 15%. Not a big num­ber. I mean it's 85% is yours.

CONSUELO MACK: Right.

PETER BERNSTEIN: And the other is that because the pay­outs are so low, and because of the tax thing and so forth now, there is pres­sure for com­pa­nies to increase their pay­outs. I think div­i­dends are going to increase faster than earn­ings. So if you're in some­thing where you think the earn­ings growth is there, and the div­i­dends, that it is impor­tant. It is an impor­tant con­sid­er­a­tion. Even Microsoft is pay­ing a dividend.

CONSUELO MACK: Yes, they are. They paid a big one as a mat­ter of fact. Let me ask you about that point. Because a lot of ana­lysts, or strate­gists that one talks to, will tell you that the com­pa­nies that keep earn­ings, and don't pay them out in div­i­dends, you know, they can grow faster, and you know, they'll give you bet­ter growth over the long term. You have found through your research absolutely the opposite.

PETER BERNSTEIN: That's cor­rect. That the lower the pay­out, and the big­ger the rein­vest­ment, the lower the future earn­ings growth. There's noth­ing like hav­ing man­age­ment a lit­tle starved for money. Because then they will only choose the best invest­ments. Best things to do, if they've got lots of it. If they're plow­ing back most of their earn­ings, oh, boy, that's like, in a ... I for­got the metaphor. But they can just pick any­thing. So they will be mak­ing less than opti­mal invest­ments, because they have so much money. That's how it works. Man­age­ments like to have money. They like to be expan­sive. They like to add the power. And there's more dis­ci­pline when there isn't as much. This is a lot about the whole buy­out busi­ness of the 1980s was about– cor­po­ra­tions accu­mu­lat­ing too much cash, and not using it prop­erly. The com­pa­nies that have to go into debt in order to expand will be much more care­ful about what they do. Much more selec­tive in what they invest in. That's very important.

CONSUELO MACK: A cou­ple of more ques­tions. You wrote a book about the his­tory of risk. What you know, when you and I have talked, you were actu­ally, it strikes me that you're an optimist.

PETER BERNSTEIN: Yeah, I really...

CONSUELO MACK: And why, given the risks that all of us toss and turn about every night, why are you essen­tially an optimist?

PETER BERNSTEIN: I'm an opti­mist about the U.S. But I'm an opti­mist because prob­lems do get solved. Maybe not one day you wake up, and every­thing is back in order. But it takes an awful lot to crush a sys­tem as vital, in many ways as flex­i­ble, as the U.S. econ­omy. We went through, in 2000, when the bub­ble burst. I mean the bot­tom really dropped out of NASDAQ, and a big drop in the U.S. mar­ket, too. And word about bank­rupt­cies, and peo­ple were say­ing that the deriv­a­tives were going to pull the whole... noth­ing bad hap­pened, really. I mean, Enron, all of the scan­dals, those com­pa­nies dis­ap­peared. We kept right on going. Now this Revco, an enor­mous, really ter­ri­ble fail­ure, though it's a rip­ple. So there's a lot of resilience. There's a lot of youth in this coun­try; a lot of new peo­ple com­ing in, who want to be part of it. Sure I'm an optimist.

CONSUELO MACK: So, one last ques­tion. And what is the ... for indi­vid­ual investors, for suc­cess­ful, long term invest­ing, what should our phi­los­o­phy be? I mean what should our mantra be? What should our approach be, to really take advan­tage of the vital­ity that you see in the cap­i­tal markets?

PETER BERNSTEIN: Well, the vital­ity, I mean vital­ity you get in the equity mar­kets.  I mean there's no ques­tion about it. You must be there. All the scare sto­ries about what might hap­pen and so forth, you should still have some money in the equity mar­kets. This is essen­tial. As I say, I think big things out­side the U.S. also. I am– since I don't like stock pick­ing, and I'm not very good at it– a big believer in funds, rather than in try­ing to do it your­self. And although– this occurred to me the other day– the mutual fund indus­try has been crit­i­cized, because their returns aren't good enough, and so on. How much worse, the peo­ple who were in mutual funds, may be dis­ap­pointed with what hap­pened. But if they'd man­aged that money them­selves, I know they would have done worse. So this may not be divine and per­fect. But it's bet­ter than doing it your­self. It's worth the cost.

CONSUELO MACK: Peter Bern­stein, thank you so much for your time and your just, bril­liance. Thanks for shar­ing it with us.

PETER BERNSTEIN: Thank you.

CONSUELO MACK: Our sec­ond wise man of Wall Street is Charles Ellis. Charley is the founder and for­mer man­ag­ing part­ner of the inter­na­tional con­sult­ing firm, Green­wich Asso­ciates, from which he advised the world’s lead­ing finan­cial firms on strat­egy for decades. He’s found time to author 15 books, includ­ing Win­ning the Loser's Game, Fifth Edi­tion: Time­less Strate­gies for Suc­cess­ful Invest­ing. And he’s also taught at Har­vard and Yale’s busi­ness schools. He has chaired Yale’s invest­ment com­mit­tee, which over­sees one of the best per­form­ing endow­ments of all time. I talked to Charley about why he thinks Wall Street is a loser’s game for most individuals.

CHARLES ELLIS: Active invest­ing is the Loser's Game, and the rea­son I call it Loser's Game is the out­come is deter­mined not by the win­ner but by the loser. And I like to use the anal­ogy of ten­nis. The way some peo­ple play ten­nis. The win­ners with 120-mile-an-hour serves and bril­liant shots at net and ter­rific place­ment, they win points. Game I play, we lose points. And who will come out ahead is deter­mined by the per­son who loses the most points makes the other per­son the win­ner. And if you're in a Loser's Game, it's impor­tant to know the right ways to play that game.

Give you another illus­tra­tion. Teenage dri­ving is a Loser's Game. The kids all think if they're really good with their steer­ing, if they really take off when the light changes, if they're clever about find­ing ways to bob and weave in and around traf­fic, that's great. But as the father of a teenage dri­ver, or the mother of a teenage dri­ver, what do you really care about? Only one thing. No seri­ous acci­dents. No seri­ous acci­dents, your kid is a great dri­ver. And if it's my kid that's dri­ving your daugh­ter, and my kid has no acci­dents, you're very glad to have your daugh­ter in my car. Same thing with invest­ing. Active invest­ing is, the out­come is dri­ven by the behav­ior of the per­son that winds up, while they're try­ing to get it right, try­ing to win, try­ing to get ahead, they wind up doing them­selves more harm than good, and the net result is they lose rel­a­tive to the market.

CONSUELO MACK: Why is that? What is it that indi­vid­ual investors do in try­ing to man­age their port­fo­lios that puts them in the Loser's cat­e­gory? And you know, who are the win­ners, num­ber one? And define what you mean by win­ning in the market.

CHARLES ELLIS: Well, to me, win­ning in the mar­ket is truly get­ting the results you really, really want, that are right for you over the long, long, long term. And I think of invest­ing much more like mar­riages and most peo­ple who are active investors are doing more dat­ing. And I have noth­ing against dat­ing. But great rela­tion­ships will be devel­oped only by hav­ing a mar­i­tal com­mit­ment and work­ing together to have some­thing of real impor­tance take place. And I think anybody's been mar­ried under­stands. This is a real dif­fer­ence, and none of us who are mar­ried want to go back to dat­ing. Same way of invest­ing. If you will think care­fully about what are your real, long-term objec­tives and find a way to artic­u­late those objec­tives, you can then find invest­ments that match with what you're try­ing to accom­plish. And you'll be rel­a­tively happy all the time and over the long term you'll be very happy.

CONSUELO MACK: So, when I think about objec­tives, you're talk­ing about more than just, "I want to make money in the mar­ket." You're talk­ing about really estab­lish­ing an invest­ment phi­los­o­phy and dis­ci­pline is key and then going out and seek­ing out the invest­ments that will ful­fill those goals.

CHARLES ELLIS: True.

CONSUELO MACK: Is that right?

CHARLES ELLIS: Yes. Most of us, most of us, our first objec­tive is to not lose.

CONSUELO MACK: Actually...

CHARLES ELLIS: What Mark Twain used to call return of the money and then return on the money is the sec­ondary thing.

CONSUELO MACK: So, that should be our first objec­tive, is not to lose, as opposed to win?

CHARLES ELLIS: Yes.

CONSUELO MACK: Which is the way most peo­ple go about it. All right.

CHARLES ELLIS: Because we're human beings, we do a whole bunch of stuff that there's now in the field of eco­nom­ics being described as behav­ioral eco­nom­ics, we do crazy things that are not in our best inter­ests. But that's who we are. So might as well accept that that's who we are and find a way to live with who we are. Those of us who get ner­vous when prices are com­ing down ought to study. You know, when prices are com­ing down, they're less costly. You can buy more value for less money. This is actu­ally, although you're uncom­fort­able, it's good news, and those of us who get excited about, "Look, my stock is going up, it's really going up." Well, yes, that's right. But, Char­lie, in the long run, if it's gone way up, what's the des­tiny? The des­tiny is, it's going to come back to its aver­age, long-term value to price rela­tion­ship. It prob­a­bly will come down. So it's not nec­es­sar­ily good news for you that the stock has gone way up in price if you're a long-term investor, and I'm only inter­ested in being a long-term investor.

CONSUELO MACK: So, for long-term investors, you are a big pro­po­nent of index funds ver­sus actively man­aged funds.

CHARLES ELLIS: I am.

CONSUELO MACK: Why? Why index funds; why not just go with the market?

CHARLES ELLIS: The data shows over and over and over again that most all active man­aged funds under­per­form the index, a sen­si­ble index. Now, if you're a small-cap value man­ager, active, the right index to com­pare against is a small-cap value index. Not high-growth, high-priced index. You have to choose your index. But if you choose the right and fair index, 75 to 80% of the active man­agers over every ten year period under­per­form, plus– and this is worth keep­ing in mind– you have higher taxes because the turnover is pretty rapid, and so, you're get­ting short-term taxes as well as more fre­quent long-term taxes. Index funds don't do much. So they don't have much taxes, and the com­bi­na­tion of low fees, low taxes, and low errors, index funds keep com­ing up with a bet­ter result.

CONSUELO MACK: There are tons of index funds being cre­ated as we speak. The exchange-traded funds, which are index funds that trade like stocks, you know, I feel like there's one being cre­ated every day prac­ti­cally. How do you pick the best index fund, num­ber one, and what kind of diver­si­fi­ca­tion should you have in your index fund port­fo­lio? Again, think­ing as a long-term investor?

CHARLES ELLIS: Well, you're ask­ing sev­eral dif­fer­ent ques­tions at the same time. So, I'll try to–

CONSUELO MACK: Yes. I am. Sorry.

CHARLES ELLIS: –pick it up. Now, first thing in index funds, you want to be with a highly-reputable index fund man­ager who has spe­cial­ized in this field, has become pro­fi­cient at it, because if you're really good at doing index fund man­age­ment in your trad­ing activ­i­ties, you'll be a lit­tle bit less costly than any­body else. Secondly...

CONSUELO MACK: So, names– Van­guard, for instance.

CHARLES ELLIS: Van­guard, with whom I'm asso­ci­ated because I'm a direc­tor. I became a direc­tor because I so admire the work that they do. It's not the other way around. But they do a great job. Sec­ond would be that the fees are low. It's really upset­ting to me, again, I'm back to Van­guard, they've got a low-fee strat­egy towards life, and their con­cept of value-delivered ser­vice to investors. Low fee of ten basis points. You get to some index funds .Exactly same index fund. Now, ten basis point but 100 basis points. And you'll never get that money back. And you're not get­ting any­thing for it. You're just pay­ing up for nothing.

CONSUELO MACK: So, don't pay them basi­cally and those costs can really add up over time?

CHARLES ELLIS: Over the long, long period, they do add up.

CONSUELO MACK: So, sec­ond part of that ques­tion: Asset allo­ca­tion. Very impor­tant, right, for long-term invest­ment results?

CHARLES ELLIS: Yes. If you think about your chil­dren or grand­chil­dren or the peo­ple that you love and care about the most, and you said, "Okay, I could give them the abil­ity to pick stocks really well or I could give them the abil­ity to pick man­agers really well, or I could give them the abil­ity to know which kinds of stocks to be invest­ing in or whether to go inter­na­tional or go emerg­ing mar­kets or go large cap or go small cap, or I could help them get the asset mix right." So, okay, those are five dif­fer­ent deci­sions. I could get only one of them. They're going to get, like, the oth­ers will get aver­age expe­ri­ence. Which one would you choose? Absolutely– asset mix. If you get the asset mix right, you'd have to make a major mis­take to get any­thing neg­a­tive to get a bad result in the whole. Get the asset mix right, most every­thing else can take care of itself. Get the asset mix wrong. You don’t have a chance.

CONSUELO MACK: How do you get the asset mix right?

CHARLES ELLIS First, under­stand who you are and under­stand what the money's pur­pose is in your life. If you're a very wealthy per­son, you're prob­a­bly invest­ing for phil­an­thropic insti­tu­tions that you're going to give money to or your grand­chil­dren and their chil­dren and their children's chil­dren. Think about it that way, you'll prob­a­bly be entirely involved in equity invest­ing. If, on the other hand, you have a mod­est amount of sav­ings– maybe it's in your 401k plan, maybe it's in your own invest­ment account– and it's prob­a­bly enough to make it through your life with finan­cial secu­rity, then you should be more pro­tec­tive. If, as a human being, you just do like sta­bil­ity, you don't like the ups and downs of the mar­ket, accept who you are and behave accordingly.

CONSUELO MACK: Final ques­tion. Actively man­aged funds, which, you know, many investors fol­low slav­ishly. How do you han­dle the actively man­aged funds? Do you invest in them at all? Under what cir­cum­stances? What per­cent­age of your port­fo­lio should you put with an active port­fo­lio manager?

CHARLES ELLIS: The last ques­tion about what per­cent­age. That's a mat­ter of per­sonal judg­ment. The fun­da­men­tal propo­si­tion that I would put to you is if you're going to choose an active man­ager, choose some­one that you'll stay with for at least 20 years. If you're going to stay with a man­ager for 20 years, you're not going to choose because of their recent per­for­mance, you won't choose because of the stocks they own now.  Those will all be replaced. You won't choose because of the indi­vid­ual fund man­ager. He or she will be replaced. You will choose char­ac­ter or cul­ture or the value set of the orga­ni­za­tion. And as you know, and just slip in, I think there's one such orga­ni­za­tion. They man­age the Amer­i­can Funds. It's called the Cap­i­tal Group Com­pa­nies. And I wrote a book about it because I wanted to under­stand: why were they so able over every long time period to out­per­form and com­pete so suc­cess­fully? And I believe they under­stand how to man­age pro­fes­sion­als in such an effec­tive way that they will achieve very sub­stan­tial results. So, if you wanted to tease me a lit­tle bit, my wife owns the Amer­i­can Funds. And I own the Van­guard Index Funds. And we get along fine.

CONSUELO MACK: And the rea­son the Amer­i­can Funds– and Cap­i­tal is the name of the book– that they do man­age so suc­cess­fully, why is it?  What is it about them that’s enabled them for 75 years to do so well?

CHARLES ELLIS They start with a very strong con­vic­tion. Their pur­pose, and they recruit for it, and they train for it, and they believe it in deeply; they drink the Kool-Aid, as they say. Their pur­pose is to serve the indi­vid­ual investor– full stop. It is not to make money for the peo­ple who are work­ing there, to make money for the own­ers. That is not their objec­tive. Their objec­tive is to serve the investor, and, as a result, they do some very inter­est­ing things. For an exam­ple, when money mar­ket funds first came out, they would not intro­duce one. Why not? Because they were afraid that money mar­ket funds came out in the early mid ‘70s, and that was the worst time to move out of stocks and into cash. And they didn't want to make it easy for peo­ple to make that mis­take. So, they wouldn't offer them. Then, as a result, their investors stayed more in equi­ties and get the ride in the best bull mar­ket the world has ever seen.

CONSUELO MACK: Charles Ellis, it is a treat and an honor to have you here. Thank you so much.

CHARLES ELLIS Thanks.

CONSUELO MACK: At the con­clu­sion of every Wealth­Track, we try to leave you with one sug­ges­tion to help you build and pro­tect your wealth over the long term. This week’s Action Point is: put the power of div­i­dends to work in your port­fo­lio. Over the last eight decades, div­i­dends have accounted for more than 40% of the total return of the stock mar­ket. How do you invest in div­i­dend pay­ing stocks? Obvi­ously you can buy com­pa­nies that have a his­tory of pay­ing and increas­ing div­i­dends year after year. Stan­dard & Poor’s pub­lishes a list of what they call their Div­i­dend Aris­to­crats– stocks with a 25-year his­tory of increas­ing div­i­dends. If you pre­fer mutual funds, you can buy an equity income fund or an ETF, such as the Morn­ingstar rec­om­mended Van­guard Div­i­dend Appre­ci­a­tion ETF– the sym­bol is VIG. The key to get­ting max­i­mum returns from any of these invest­ments is by rein­vest­ing the div­i­dends, thereby unleash­ing the power of com­pound­ing over time.

That con­cludes this edi­tion of Wealth­Track. Next week, we’ll be dis­cussing how to max­i­mize your ben­e­fits from social secu­rity with retire­ment income guru, Mary Beth Franklin. It turns out that tim­ing is every­thing. Thanks for watch­ing and make the week ahead a prof­itable and a pro­duc­tive one.

Tags: Capital Markets, Classic Interviews, Consuelo Mack, Developing World, Diversification, Emerging Market, Financial Peril, Financial Storms, Full Transcript, Gold, Investment Opportunity, Investment Strategies, Losers Game, Money Manager, Peter Bernstein, Portfolio Strategy, Remarkable Story, Renowned Expert, Storm Clouds, Wealthtrack, Wise Men
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Morgan Stanley's Latest 'Commodity Thermometer'

Tuesday, March 6th, 2012

Two weeks ago we pre­sented the lat­est and great­est "com­mod­ity ther­mome­ter" cour­tesy of Mor­gan Stanley's com­modi­ties team. Below is the lat­est just released iter­a­tion. Not much of a change, with gold still the most loved, and inc the most hated (this could well be one of those "endorsed by John Paul­son" moments), and the only notable change being that sil­ver has pushed above Live Cat­tle and entered the Top 5.

(click to enlarge)

Tags: Cattle, Commodities Team, Commodity, Gold, Iteration, John Paulson, Morgan Stanley, Thermometer
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Charting The Federal Reserve's Assets — 1915–2012

Monday, February 13th, 2012

Sub­mit­ted by Thomas Gre­sham of Gresham's Law,

Here we present a his­tory of the Fed in charts. As you’ll surely glean from the below — the Fed has degen­er­ated from a by and large pas­sive insti­tu­tion (deal­ing only in high-quality self-liquidating com­mer­cial paper and gold) to an active pur­suant of junk, an enabler of wars, a ‘benev­o­lent’ com­bat­ant of the depres­sions of its own cre­ation, a cen­tral plan­ner of employ­ment & prices and of course a for­giv­ing friend to incon­ve­nient mar­ket follies.

The Fed's Assets from 1915 to 2012:

1915 to 1925

1925 to 1935

1935 to 1945

1945 to 1955

1955 to 1965

1965 to 1975

1975 to 1985

1985 to 1995

1995 to 2005

2005 to 2012

Tags: Amp, Assets, Central Planner, Charting, Depressions, Enabler, Federal Reserve, Follies, Gold, Gresham S Law, High Quality, Quality Self, Thomas Gresham
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George Soros Sees Gold as the "Ultimate Asset Bubble"

Friday, December 30th, 2011

Gold is set to fin­ish its 11th con­sec­u­tive year of gains, the longest win­ning streak in at ninety years, and is on the brink of a bear mar­ket, says George Soros. The bil­lion­aire who called it the “ulti­mate asset bub­ble” two years ago, reduced his gold and gold related by 99 per­cent in the first quar­ter of 2011, accord­ing to the Secu­ri­ties and Exchange Com­mis­sion data.

Betty Liu reports on Bloomberg Television’s “In the Loop.”

Gold Bub­ble Seen by Soros on Brink of Bear Market

Source: Dec. 29 (Bloomberg)~~~

See also

George Soros Says Mar­kets Are `Always Fallible’

Bil­lion­aire investor George Soros talks about global finan­cial mar­kets and his phil­an­thropy. He speaks with Francine Lac­qua on Bloomberg Television’s “Eye To Eye.” (Source: Bloomberg)Oct. 10 (Bloomberg)

Tags: Bear Market, Billionaire, Bloomberg Television, Brink, Eye To Eye, First Quarter, George Soros, Global Financial Markets, Gold, Investor, Liu, Longest Winning Streak, Market Source, Philanthropy, Securities And Exchange, Securities And Exchange Commission, Securities Exchange
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Get Paid to Play Gold (Holmes)

Friday, November 11th, 2011

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. Thir­teen of the world’s largest gold pro­duc­ers are expected to pay nearly $2 bil­lion in div­i­dends this year, accord­ing to Mine­Fund, mak­ing it the largest pay­ment in gold stock his­tory. The Finan­cial Post also reported that min­ers’ div­i­dend pay­ments are up 75 per­cent on a year-over-year basis, com­pared to a 26 per­cent increase in 2010.

Yamana Gold is just one of sev­eral large pro­duc­ing min­ers to report increased rev­enues, expand­ing cash flows and record adjusted earn­ings. Because of the company’s strong bal­ance sheet, Yamana increased its div­i­dend for the sec­ond time this year to $0.20 per share annu­ally. When dis­cussing the enhanced pay­outs, CEO Peter Mar­rone cited that the com­pany “con­tin­ued to focus on deliv­er­ing growth across all mea­sures, enhanc­ing share­holder value and gen­er­at­ing sig­nif­i­cant cash flow in the third quarter.”

The lat­est pay­out rep­re­sents a 67 per­cent increase over the past 12 months and the sec­ond increase this year.

Yamana has imple­mented a gold-linked div­i­dend, which means that the amount of the div­i­dend the share­holder receives will be linked to the aver­age price of gold. As the yel­low metal trades higher, the com­pany would increase div­i­dends paid out to its investors. Con­versely, if gold falls in value, div­i­dend pay­outs would decrease.

Eldo­rado Gold has also come out with a sim­i­lar div­i­dend pol­icy, link­ing div­i­dends to the price of gold. As shown in the chart below, Eldo­rado Gold antic­i­pates its next div­i­dend pay­out will be 67 per­cent higher than the pre­vi­ous quarter.

Bar­rick Gold also announced a third quar­ter div­i­dend increase dur­ing its earn­ings release. Over the past five years, the com­pany has increased its div­i­dend by more than 170 per­cent on a quar­terly basis. The company’s lat­est dividend—$0.15 per share— rep­re­sents a 25 per­cent increase from the prior quarter.

Bar­rick esti­mates its third quar­ter gold cash mar­gins have increased by 55 per­cent on a year-over-year basis, dri­ven by the company’s lever­age to higher gold prices. The com­pany says it will con­tinue to offer its share­hold­ers a ris­ing income stream while also expand­ing oper­a­tions in Pueblo Viejo, Pascua-Lama and Nevada.

While the share prices of these min­ers have been pun­ished in 2011, increas­ing div­i­dends allow investors to get “paid to wait” for the mar­ket to turn around. The div­i­dends are a cash incen­tive for investors to hold shares of the com­pany and allow them to par­tic­i­pate in ris­ing earn­ings. We like that idea.

We believe gold equi­ties will even­tu­ally be rewarded by the mar­ket and rise with higher gold prices. In the mean­time, investors of gold min­ers may ben­e­fit from income linked with ris­ing gold.

Read: Which Gold Min­ers Have the Largest Upside?

All opin­ions expressed and data pro­vided are sub­ject to change with­out notice. Some of these opin­ions may not be appro­pri­ate to every investor.

By click­ing the links above, you will be directed to third-party web­sites. U.S. Global Investors does not endorse all infor­ma­tion sup­plied by these web­sites and is not respon­si­ble for their content.

The fol­low­ing secu­ri­ties men­tioned in the arti­cle were held by one or more of U.S. Global Investors Fund as of 09/30/11: Angl­o­Gold Ashanti, Agnico-Eagle Mines, Bar­rick Gold, Eldo­rado Gold, Franco-Nevada, Gold­corp, Gold Fields, Har­mony Gold Min­ing, IAMGOLD, Kin­ross Gold, New­mont Min­ing, Rand­gold, Royal Gold, and Yamana Gold.

Tags: Dividend Payments, Dividend Payout, Dividend Payouts, Dividend Policy, Dividends, Gold, Gold Companies, Gold Mining, Gold Prices, Gold Producers, Gold Stock, Investor Interest, mining companies, Money Markets, Price Of Gold, Profit Margins, Record Profit, Shareholder Value, Stock History, Stock Prices, Treasuries
Posted in Gold, Markets | Comments Off