More Fuel for the Gold Rush of 2011
Summertime, history tells us, is wobble time for gold. It weakens in value. Not so this summer.
Moreover, gold usually drops in value when the dollar rises. Not so
now. Since May 1, gold is up 2.58% percent even as the dollar has risen
by 1.76% percent.
Why, to put it poetically, is gold so bold, not weak or wobbly in any
sense, and, just the contrary, primed to keep busting through all-time
record highs?
We’ve written a lot about our bullishness in past issues. Another
answer becoming more and more evident is the desperate rush by investors
to shed Euros.
The financial muddle of the European Union, as we said last week,
seems to produce one crisis after another. Bond markets and banks are in
trouble. The present situation also appears to be generating a new wave
of continental demand for gold, already now stronger than it has been
in decades. This development, along with fundamental factors at play
elsewhere in the world, provides additional fuel for gold continual
rise.
You may see short-term technical resistance here and there as gold
moves higher, still we see a confluence of factors that will create
breakthrough momentum. Thus, our outlook on gold, bullish since 2003,
has become even more so than usual at this time of the year.
Stress Test in Name Only
The European Banking Authority last weekend delivered its “stress
test” report card on 90 banks and declared essentially that things
aren’t as bad as they seem. Only eight banks failed the test, meant to
find weak spots in banking systems and help prevent banking collapses.
The report was met largely with ridicule on the part of private-sector
observers like us watching the farce play out.
The conditions of the stress test were blatantly non-stressful and
the results largely a joke. One major flaw (intentional, without a
doubt) was setting a far greater value on Portuguese and Greek debt
bonds than they currently trade for in the market. European banks hold
significant quantities of such bonds and so the fictional pricing
enabled the sickly assets of many vulnerable banks to masquerade as
healthy. A real test would have identified many more than just eight
troubled banks. Such a prospect, of course, would create ever larger
waves of distrust and apprehension over the prevailing European bailout
and spread-the-debt strategies. The lesson we take away from this
test-that-really-wasn’t-a-test is that bank assets in Europe are
largely, and probably egregiously, overstated. In a real crisis, the
bank holders of sovereign debt bonds would have huge problems trying to
sell these “assets” for anything near what they were valued at in the
stress test. The test was a sham but still informative. The financial
hierarchy ofEurope may be fooling some of the public but not the
markets.
The great majority of bond buyers are conservative. They look for a
return with as little risk involved as possible. In the developed world
today, the risks are high and the returns low. If you live in the U.S.,
or in most of Europe, the best case scenario is this: your bond is safe
and will be repaid, but the currency in which the bond is denominated
may fall in value. The euro, as an example, has fallen in value over the
past few years. The European sovereign debt we have been concerned
about trade in euros.
Banking systems in Europe, the U.S., and Japan remain stressed. They
are shrinking, deleveraging, and less stable. But they are not the only
unstable elements in the financial landscape. Instability is contagious.
Insurance companies, according to a recent article in the Financial
Times, are also having problems. Please click link
FT Article
to read the article revealing how one in ten European insurance
institutions failed to cope with a series of damaging financial market
and economic shocks in stress tests carried out in recent weeks.
Newly-Rich Nations Stockpiling Hard Assets
When we look at developments in the developing world, we see a much
different storyline. Demand for goods and services are very strong.
Growth is rapid. Nations and citizens are becoming wealthier.
This turn-around is fueled by exportation of raw materials, goods,
and services and increased domestic consumerism. Countries in the fast
growth lane include China, India, Brazil, Thailand, Indonesia, Malaysia,
Chile, Columbia, Philippines, Peru, and even Mexico. Not everyone in
these countries is getting wealthy, but the middle and upper classes are
clearly reaping the benefits.
As nations and their citizens, grow in wealth, they tend to consume
conspicuously, a la developed countries. They also tend to stockpile
food, energy, and gold against lean times in the future. They do so for
three reasons: 1) they can, 2) they acutely remember the recent lean
times, and 3) they realize that holding consumable wealth may be more
conservative and profitable than holding financial assets like bonds and
stocks that are dependent upon unstable banking systems in Japan,
Europe, and the U.S.
You may think this doesn’t make sense. Wouldn’t the newly-rich
deposit money in domestic banks? What do their banks have to do with
banks in other parts of the world? Unfortunately, banking systems
throughout the world are connected to one degree or another. Banks and
governments anywhere may own bonds and stocks of the deleveraging and
shrinking nations. Herein lies the danger of contagion. The biggest
banking systems — in the U.S., Europe, and Japan — are the most
leveraged and the ones with the largest quantity of bonds distributed in
the market place. Thus, a newly-rich investor and his/her newly-rich
country will wisely look with suspicion and even distaste at many of the
available investments on sale in the marketplace. They are less safe
and in some cases potentially dangerous. If wisdom prevails, those state
and individual investors will seek holding hard assets like gold, oil,
and food.
CBOT Corn Future 1 (Year Chart)
ICE Brent Crude Oil Future (1 Year Chart)
Comex Gold 100 Troy Ounces Future (1 Year Chart)
Based on years of studying the history of world economy, we have an
eye for current economic developments. Rising economies create
stockpiles. They hoard gold and other valuable assets against future
difficulties or to protect the buying power of their holdings. Today is
no different. They maintain stockpiles to protect assets against the
devaluation of the currencies or the bonds of debtor countries that sell
them bonds. During the last couple of years major gold purchases have
been made by China, India, Thailand, Sri Lanka, Russia and other
developing nations. This is no surprise. Why would they not do so and
instead buy more depreciating paper money or bonds of nations whose
finances are poorly managed? It’s not rocket science.
Summary
Banks and government officials charged with overseeing banking
systems try to answer these types of questions by performing stress
tests—subjecting banks to “unlikely but plausible” scenarios designed to
determine whether an institution has enough net wealth—capital—to
weather the impact of such adverse developments.
Stress tests of banking systems in Europe in 2010 and the United
States in 2009 have generated considerable interest given the impact of
the global crisis on the health of the financial system as a whole.
Stress tests are meant to find weak spots in the banking system at an
early stage, and to guide preventive actions by banks and those charged
with their oversight.
Late Friday afternoon, the European Banking Authority released its
report of the euro bank stress tests. The report suggested only 8 of the
90 banks failed the test, and these eight would pass the test with an
investment of only €2.5B.
Analyst, having the weekend to pick at the numbers, concluded the
stress testers from the Banking Authority were delusional. Take the
treatment of the Greek debt, for example. The value of the Greek debt in
the bank portfolios was written down a mere 15%, even though it is
trading at 50% of face value, and most in the trade give the Greek’s a
90% default probability.
Consequently, the capital inflow needed by the euro banks is much
higher. Goldman Sachs estimates 18 banks failing the test with a minimum
of €26B needed, more, if there is any write down of Spanish or Italian
debt. J.P. Morgan, using a higher percentage of capital requirement, 7%,
said 20 banks would need an additional €80B
Are your finances strong enough to withstand another couple of years
of this battering economy? Can you suffer additional losses and still
pay your bills and, if not thrive, at least survive if the economy
continues to deteriorate?
That’s what federal banking regulators are trying to determine with
the country’s largest banking institutions. The stress tests you’ve
heard about are "forward-looking economic assessments." Do these
organizations have enough capital to withstand another two years of an
economy that may be worse than presently anticipated?
Nineteen banks and retail thrift banks, each with more than $100
billion in assets, are being put to the test. As a group, they hold an
estimated two-thirds of the assets in the U.S.banking system. Most
Americans do business with one or more of these institutions. Among
those being tested are JPMorgan Chase, Bank of America, Citigroup, Wells
Fargo and Goldman Sachs.
Please see our recommendation table below, and stay tuned to our upcoming letters for new recommendations.
|
Date |
Date |
Appreciation/Depreciation |
| Investment |
Recommended |
Closed |
in U.S. Dollars |
| Commodity Market Recommendations |
|
|
|
| Corn |
4/20/2011 |
Open |
-8.5% |
| Gold |
6/25/2002 |
Open |
+391.4% |
| Oil |
2/11/2009 |
Open |
+173.1% |
| Corn |
12/31/2008 |
3/3/2011 |
+81.0% |
| Soybeans |
12/31/2008 |
3/3/2011 |
+44.1% |
| Wheat |
12/31/2008 |
3/3/2011 |
+35.0% |
Currency
Recommendations |
|
|
|
| Short |
|
|
|
| Japanese Yen |
4/6/2011 |
Open |
-8.3% |
| Long |
|
|
|
| Brazilian Real |
9/13/2010 |
Open |
+9.3% |
| Long |
|
|
|
| Canadian Dollar |
9/13/2010 |
Open |
+8.5% |
| Long |
|
|
|
| Chinese Yuan |
9/13/2010 |
Open |
+4.5% |
| Long |
|
|
|
| Singapore Dollar |
9/13/2010 |
Open |
+10.2% |
| Long |
|
|
|
| Swiss Franc |
9/13/2010 |
Open |
+22.6% |
| Long |
|
|
|
| Australian Dollar |
9/13/2010 |
6/29/2011 |
+14.1% |
| Long |
|
|
|
| Thai Baht |
9/13/2010 |
6/22/2011 |
+6.5% |
| Short |
|
|
|
| Japanese Yen |
9/14/2010 |
10/20/2010 |
-3.3% |
Equity Market
Recommendations |
|
|
|
| Malaysia |
6/29/2011 |
Open |
+1.0% |
| U.S. |
6/29/2011 |
Open |
+0.4% |
| India |
4/6/2011 |
Open |
-6.3% |
| Japan |
2/15/2011 |
Open |
-6.8% |
| Australia |
2/15/2011 |
6/22/2011 |
-0.9% |
| Canada |
3/24/2011 |
6/22/2011 |
-7.1% |
| Colombia |
9/13/2010 |
6/22/2011 |
+2.6% |
| Malaysia |
4/6/2011 |
6/22/2011 |
+0.8% |
| Canada |
12/16/2010 |
3/11/2011 |
+7.9% |
| U.S. |
9/9/2010 |
3/11/2011 |
+18.1% |
| South Korea |
1/6/2011 |
3/3/2011 |
-2.9% |
| Colombia |
9/13/2010 |
2/2/2011 |
+3.9% |
| China |
9/13/2010 |
1/27/2011 |
+5.0% |
| India |
9/13/2010 |
1/6/2011 |
+7.9% |
| Chile |
9/13/2010 |
12/16/2010 |
+8.9% |
| Indonesia |
9/13/2010 |
12/16/2010 |
+9.5% |
| Malaysia |
9/13/2010 |
12/16/2010 |
+1.3% |
| Peru |
9/13/2010 |
12/16/2010 |
+32.2% |
| Singapore |
9/13/2010 |
12/16/2010 |
+4.8% |
| Thailand |
9/13/2010 |
12/16/2010 |
+11.9% |
|
|
|
|
Bond Market
Recommendations |
|
|
|
|
|
|
|
| 30 YR Long Term |
|
|
|
| U.S. Treasury Bond |
8/27/2010 |
10/20/2010 |
0.0% |
More…
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