Global Investing

Financial survival tips for the age of debt

From whom would you rather take investment advice:  one of the thousands of bankers or wealth managers who did not see the financial crisis coming or one of the few economists who predicted it?

In his 2003 bestseller “The Dollar Crisis”, Richard Duncan forecast how the unbridled creation of liquidity was set to spark a financial crisis. Three years after the crisis unfolded, Duncan’s new book, “The Corruption of Capitalism”, paints an even bleaker future.

Duncan expects that, in the years ahead, governments will prop up economies with ever-bigger doses of fiscal and monetary stimulus, but that eventually the extreme imbalances in the world economy will be corrected by market forces.

This will probably involve a collapse of globalisation and a drastic reduction of the standard of living of almost everyone alive

So how can investors protect themselves from such a dire outlook? Duncan says that his books aim to give policy advice, not investment advice. In “The Corruption of Capitalism” he writes only one line, at the very end of the book, about how to prepare for lean years:

It’s the dollar

Two graphs (from Scott Barber) to remind that what you get from assets depends on the currency:

Start building the bunker

They keep telling us that the recession is over so maybe now’s the time to start worrying about inflation. That’s the view many wealthy investors are already taking, reasoning that a little bit of the yellow shiny stuff will provide some comfort as we start piling our cash into wheelbarrows to do the weekly groceries shop.

It is gold exchange traded commodities (ETCs) that have seen the biggest investor inflows this year so perhaps it’s not surprising that the gold price broke through $1,000 an ounce this week.

“Investors are concerned about sovereign risk, quantitative easing, government deficits and the outlook for the US dollar,” said Nicholas Brooks, head of research and investment strategy at ETF Securities, at a Dow Jones Indexes commodities briefing on Tuesday. “They are using gold as an insurance policy.”

from MacroScope:

Gold to go

Automatic teller machines (ATMs) -- 500 of them -- dispensing pieces of gold will be available around Germany, Switzerland and Austria by the end of this year.

That at least is the plan of German precious metals online trading company TG-Gold-Super-Markt.de. The ATMs, to be located at airports, railway stations and shopping malls, are intended to accustom ordinary people to the idea of investing in a physical asset such as gold, the thinking goes.
 
Thomas Geissler, the company's chief executive, said the gold ATMs might even improve relations between the sexes.
 
"I have yet to meet a woman who does not like a gift of gold. It's better than flowers. Flowers are more expensive. They wilt and you (as a man) don't get as many points at home as if you bring gold," he said.
 
A prototype ATM on display for a one-day marketing test at the main railway station in Frankfurt, Germany's financial capital, did indeed reward your correspondent with a 1-gramme (0.0353 ounce) piece of gold.
 
It cost the equivalent of $42.25 -- a 30 percent premium over the spot market price.

Big Five

Five things to think about this week:

VALUATIONS
- The MSCI world stocks index has rebounded 37 percent since March, the VIX fear gauge has hit its lowest level since September 2008, and positive earnings surprises in Europe are marginally outstripping negative ones. But there are serious questions over the equity market’s ability to sustain its rise.

MACRO SIGNALS
- Trade data from the U.S., Canada and the UK, all out in this week, will be combed for signs of any recovery in global commerce. Also due are flash GDP data from the euro zone, industry output for the U.S., France, Italy, the euro zone and the UK, and Japan machinery orders.  
  
QUANTITATIVE EASING
- The ECB has finally shown willingness to deploy unconventional easing measures but it’s hard to judge the success of such steps. Narrowing credit spreads, stock markets’ bounce and gains in emerging market assets all show efforts to restore confidence in the financial system are having an effect. But if getting and keeping bond yields down is the yardstick for success, it’s unfortunate that 10-year UK and U.S. government bond yields are back up to levels seen before the announcement of quantitative easing in those countries. And diminishing returns on further balance sheet expansion raise questions over how much more money central banks can print before inflation fears start to preoccupy policymakers and markets.
  
COMMODITIES
- Confusion over the reasons for the commodities rally has reduced the usefulness of commodities prices as indicators of the industrial outlook. An apparent economic recovery in China has helped to boost the CRB commodities index by 21 percent from February’s lows. But how much does the rise reflect a change in supply/demand for commodities, and how much is it simply due to idle money flooding back to unstable markets? Similarly, why has spot gold remained strong above $900 as jitters over the financial system decrease? Gold could be reflecting expectations that recovering economies will boost physical demand for the metal, but it may also be responding to fears of currency debasement after central banks’ radical monetary easing.

EMERGING MARKETS 
- Rising commodity prices and an easing dollar have offered a perfect environment to re-enter emerging markets. The coming week’s  EBRD meeting will focus attention on central and eastern Europe and how it is coping with a nasty period of refinancing (albeit less dire than the IMF initially estimated).

Gold offers double-edged shine

It was Goldman Sachs who famously predicted oil prices to reach $200 a barrel last year, but there are a school of bullish investors who forecast a substantial rally in gold.

Take Gold and Energy Advisor, which predicts gold will soon reach $2,500 an ounce (from today’s $895) then to $5,000. The Florida-based firm argues that gold is the only asset class that’s not only private (as opposed to state-owned), but also liquid, portable, fungible, divisible, and valuable enough that a small amount can store a massive amount of wealth.

It also argues that of $11.5 trillion stored in offshore accounts and other assets, if one percent were transferred into gold, that would be almost four times the entire annual investment demand for gold.

Attention, girls: Diamonds may not be your best friend

Marilyn Monroe, who sang “Diamonds are a girl’s best friend” in the 50s, might be shocked to find out that the value of dimonds has fallen rapidly in the past six months.

According to Nomura, the average best price for to quality 1-Carat diamonds has fallen below $7,000 from hitting a multi-year high near $9,000 in September 2008.

Perhaps gold might grab her attention. The metal has surged towards $1,000 an ounce in the past weeks as investors rushed to seek save-haven gold when stock markets came under renewed pressure.

The final frontier market

As a fallout in emerging markets — once hailed as a safe-haven from the global financial crisis — gathers pace, asset managers are scrambling for newer markets.

What about North Korea? The Stalinist country boasts large untapped natural resources with deposits of gold, coal, zinc and other minerals. It has virtually no capital markets and its banks are all state-owned — making it a true safe haven from the global financial crisis.

The communist state has a good logistics route. It has borders with China, Russia and of course South Korea and a short sea route to Japan. South Korean firms such as Hyundai and LG already invest in the North.

Barrels and ounces

The price of oil was falling sharply on Tuesday after traders stopped worrying about former Hurricane Gustav’s winds, but by at least one calculation it remains very pricey – that is, its link to the price of gold.Some market watchers argue that there is a long-term relationship between the prices of the two commodities. Roughly speaking, this theory would have 10 barrels of crude oil costing the same as one ounce of gold.  Back in March, for example, gold hit a record of $1,030 an ounce and a barrel of oil brought around $105.Oil

By July, however, gold had fallen and oil had risen to the extent that the ratio was not 10 to 1, but 5.9 to1. Some argued at the time that hedge funds noticed this and began to short crude. With the latest tumble, oil is about 27 percent below its high. But against gold, the ratio is still at 7.4 to 1.

The problem is that gold won’t stop falling either, which rather undermines the ratio theory. Perhaps it is all just hooey. If it is not, however, oil would have to dive another 25 percent to reach equilibrium of $79 a barrel against today’s gold price.