The world markets are in a turmoil and unsure of what is going to happen next when Greece is announcing possible bankruptcy and possible bailouts from the EU partners. One day, the bailout is ready and market rise and the next day, news anchors report that the bailout is in trouble and the market fell. This feels like the days of uncertainty when the world is trying to guess if AIG will be bailed out or not. My guess is, the world will bail out Greece no matter what the cost as the cost of not doing a thing is much more damaging than the cost of bailout. My main allocations in Asia, emerging markets and Commodities with the exceptional of the gold fund, has been struck a blow. China is badly affected as their tightening process to prevent a domestic bubble coincides with the Euro programs, compounding the fall in China stocks. Let me boldly make a few forecast on what is to happen and what are the opportunities right now!
Gold, Glorious gold! 1) I have been advocating gold for a long time and now, I think I must reemphasis that this will probably be one of the best investment to make in the next 5 years. Traditionally, USD and gold has an inverse relations. Gold typically moves in same direction as Euro as both gold and Euro are seen as alternative currency in comparison to USD. At one pt of time, businesses around the world prefer transacting in Euro over USD as people are worried about the huge US trade and government deficit which will lead to a rapidly diminished USD in the future. Right now investors are worried about the Euro dollars being dismantled as the richer European countries refuses to bail out their much more extravagant and reckless neighbours and Euro dollars are being hammered as the Greece saga drags on. Just 6 months ago, Euro is at 2.1 vs SGD. Currently, it is at 1.79 and still falling. That’s a 15% fall in Euro dollars in just a couple of months. So if Euro fell, does it mean that USD has appreciated against SGD. Wrong again. 4 months ago, USD is 1.42 and currently it is at 1.39. This means that global investors prefer SGD to Euro or USD?!? That’s is being absurd given how small our country is. This only goes to show one thing. Global investors are losing confidence in the 2 most important currencies and other than USD and Euro, what other currency can they fall back on? Yen? Yuan? Pounds?
The answer to this question is obviously gold, the de facto currency of the world that has ruled thousands of years before being replaced by paper just 40 years ago. As of today, Gold prices has blown past $1200 per oz and has appreciated against both USD and Euro. There is a clear trend that global governments, financial institutions and individuals are buying gold. Let’s see the following scenarios and how it will affect gold price
1) Greece doesn’t get bail out. Euro drop even more and Germany and France threatened to withdraw from Euro to save their own economies from influenced by Greece. More money will pour into gold as what we have seen in the last few weeks. Asia currency will rise against USD and Euro as investors trust currencies with a stronger economy (Asia) and the rising currency will be a blow to the mainly exporter nations as their profit margins eroded by currency losses. Asia growth will halt, stock market and property market get hit and we are set back a year or two towards recovery. In order to prevent the currency from rising too fast, Asian government will need to sell both Euro and USD and guess what they have to buy. Yes, gold.
2) Greece gets bail out and Euro recovered. However, it will take a while to regain confidence. As investors leave the “safe shelter” of USD and put the money back into riskier assets, investors will remember that US is actually the same state as Greece, Technically bankrupt with a huge deficit. USD will start to fall again and this time round, investors will not have that much confidence in Euro. In order to protect themselves from a falling USD, investors have to put their money elsewhere. Euro and pounds? Not much confidence. Yen? Japan holds too much USD and is as good as a proxy as USD. Yuan? China has most of their reserves in USD and only 1.6% in gold. The only thing left is gold. (AUD may do well as they are still a primary commodity currency and they have one of the highest interest in the developed nations now)
So no matter what scenario that pans out, it will be favourable to gold from the short to medium term. The PiiGs (Portugal, Ireland, Italy, Greece, Spain) crisis only serves to strengthen the belief that only gold can be the real currency of the world. As to how much can gold rise, it is for me to know and for you to guess.
Short Term Trading Idea: European Bonds
With the Euro hitting a new low, many investors been asking me if Euro is a good buy now. Yes and No. Yes as in it is cheap and there is huge potential to make a decent profit when the PiiGs woes are over but I expect the rise to slow and moderate. Remember how long some Asian countries took for their currency to recover during the Asian currency crisis in 1997? It’s almost the same scenario. Government overspending, reckless and wild. No as in, the Euro may continue to fall even with the bailout as confidence need time to build. Euro can continue to fall from this stage! So I would advise investors to put their money in Gold first being a safer bet and if they have extra money, they can try European bonds. The returns can be fantastic if the recovery is fast making potentially 50% pa or it can take forever and your capital stuck in unproductive Euro dollars
Equities Takes a Hit: China Worst HitChina market has taken a beating ever since the government tries to slow down the economy. Interesting fact to note is that whenever the government announces a double digit growth for the quarter, stock market will plummet. When the government announces a single digit growth, the market rallies. What the market wants for China is a moderate sustainable growth with only small bubbles forming. The world has no doubt which is the fastest growing country in the world but not that fast! Recent news from China indicated that growth has indeed slowed. Manufacture Index growth has dropped tremendously and the rise in Yuan against both USD and Euro, Chief export nations, will slow the economy down. With China using monetary, fiscal and currency tightening measures, I have no doubt that it will slow down to a more moderate pace. Once growth in china is more predictable, and no more “shock” announcements by the Chinese government, the stock market can perform again.
The Black Horse: Indonesia
World’s third largest population, huge resources, growing middle class, relatively smooth sailing political situation, rich Indonesians buying Singapore properties by floors. I think you get the picture. Indonesia is essential to the growth of the region, especially Singapore. No matter how strong China is and how we “suck up” to them, we will always be third class citizens to them. The main beneficiary will always be Shanghai and Hong kong while Singapore get third rates Listed China companies that seems to be closing down faster than new stocks can IPO. Even Prudential who just bought AIA, looked to Hongkong to rise their money. Singapore as a secondary listing, in my opinion, is to “give face”... During the roaring nineties and the time of Suharto, Singapore benefited from the tremendous growth from Indonesia and that critical period, propelled us from a developing nation to a developed nation. The best performing markets in 2003- 2007 is China and India. This time round, maybe we can add Indonesia to the List. I would strongly recommend in a BRIIC fund. (Brazil, Russia, India, Indonesia, China)
The Future Ahead
The next few months will be extremely volatile and creates many opportunities to buy cheap. The long term fundamental is still there. US reporting slow but steady growth in all areas. Asia has little exposure to the PiiGs economies and is still doing well. The rise in Asian currency will hurt them but as long as the rise is controlled with global demand catching up on the loss of profits due to currency losses, Asia markets will still be the best performing in coming days. Greece and other troubled nations will probably be bailed out as they are “too large to fail” and gold will continue to do well. Oil will be at the mercy of economic growth and may underperform gold in the next few months. I still do not believe in the “safety” of bonds when interest rates are still at their extreme low and I believe that this crisis will be short term. Clients who are doing short term trading in Singapore stocks/ US stocks & options. Please be careful. Technical Analysis breaks down in extreme political intervention and when anything can happen out of the blue, TA will fail to work.
Below is an explanation of all the frequently used funds for my clients
The chart here shows the few funds that i used for my client. Some of you may not have accessibility to some of the funds if you have only been investing CPF. Some of these funds are cash approved funds only.
1) This chart is based on the best to worst performing based on a 1 month return. 1 month is the start of the Greece crisis and the market fell the most in that period so is a good reflection of the resilient in the near future. Top of the list is of course gold. It is still losing money due to currency exchange. Most of the holdings in UOB gold is in foreign currency and it doesn’t help SGD appreciated against them. Worst performing is First state global resource. Ironical contrast since both are commodity fund. First state has a big chunk invested in oil and industrial metal and a lesser in gold. Oil fell from $87 to $77 in a week. That is more than 10%. Not surprising it did badly. 1 month ago, First state is the best performing fund and UOB gold the worst when oil prices is soaring while gold price is depressed. Fate change in a blink of eyes.2) Indonesia is the best performing for 3 months and 6 months and is ranked 2nd in the 1 month chart. If you look at the 1 week chart, they are ranked third. Not bad for our chaotic neighbour. They would have done better is her finance minister did not quit to join world bank.
3) Bond funds did well during the crisis and is the best performing for the 1 week performance. Their longer term performance still leaves little to be desired.
4) And the Dud award goes to ... CHINA! Worse performance fund consistently no matter what period. BRIC has around 40% weightage in China so it did badly despite the overall good performance from the BRI nations. As I highlighted in the Gold/resource scenario. Fate can change in a blink of eye. Stay tuned.
Below is an article from Biz Times which I thought will help you understand more about gold.
Inflation could force gold to be new global currency Gold prices continue climbing, and acts as a warning of times to come. -BT
Sat, Aug 08, 2009
The Business Times
By ANTHONY ROWLEY
TOKYO CORRESPONDENT
IT'S party time again, it seems, in world stock markets and revellers are beginning to sound as though the financial crash and the global recession were nothing more than a pause for breath.
Yet the 'ghost at the banquet' is the gold price which, at near US$1,000 an ounce, is an unwelcome guest to have around just when it seems the good times are ready to roll again.
Even as advanced and emerging equity markets hit their highest level for the year on Monday of this week, the gold price continued its upward climb and reached US$955 an ounce. What's more, even those investment managers who do not normally display a tendency toward hyperbole said it would hit US$2,000 an ounce soon and could go on to reach US$3,000.
So, what is the gold price trying to tell us from the elevated heights where it stands sentinel nowadays over securities markets? Presumably that all is not well with the current state of the world, and that things are not what they may seem to be in the investment universe.
Not that many people pay much attention to gold nowadays. It is seen as being just another commodity, or a 'barbarous relic' as John Maynard Keynes once described it. But whether viewed as an anachronism in a world of paper and electronic money or just a quasi currency, gold has an eerie way of being able to see into the future.
Gold coasted along at around US$250 an ounce throughout much of the 1990s, content, it seemed, in the knowledge that inflation was under control and that the oil shocks of previous decades were over. Its relatively low price was seen by some as evidence that gold had finally been relegated to a minor role in the monetary and investment firmament.
But once the new millennium dawned, and with it the boom and bust of the IT bubble (provoking a profligate monetary response by the US Federal Reserve and other equally panicked central banks), gold reverted to its barometric role of acting as a storm warning.
The price doubled quite quickly as gold scented inflation. Inflation did not come in the expected form of hikes in the prices of goods and services in the developed world, because China and other emerging economies were flooding the world market with cheap goods while India and others supplied outsourced services that also kept conventional measures of inflation in check.
Instead, 'asset inflation' reared its head as stocks and real estate reached for the sky.By the time the most recent crisis struck, gold had already signalled its mounting alarm at the dismal stewardship of the global economy and of the international financial system by moving inexorably upwards.
Then came the crash and with it the potential (and in some cases, such as that of Japan, actual) threat of deflation. With the steam knocked out of global demand and commodity prices in general collapsing, gold ought in theory to have slid back down again, safe in the knowledge that its inflation-hedging role was no longer needed, at least for the present.
Instead the gold price continued to climb. If this ancient store of value is not worried about actual inflation, what is keeping it awake around the 24-hour trading clock as its refuses to relax its vigilance?
The answer is the profligacy of central banks - the US Fed most of all - in printing money as if there were no tomorrow and of government (again the US) in spending that money. Such habits have led to hyper-inflation in the past and could again if a bubble in stocks and other assets coincides with an abundance of financial liquidity, as appears to be the case now.
Stock market bulls would do well to bear in mind the danger of inflation devouring wealth gains that stem from easy money rather than from hard slog.
Gold has more to worry about than a new great inflation. There is a widespread perception (going well beyond China) that the US has debauched its currency by printing so much of it and that its future value as the principal store of international reserves has been compromised as a result.
What will step into the breach if confidence in the dollar continues to wane? Not the euro, because as former Fed chairman Paul Volcker pointed out recently, it is not in the long-term interest of any single nation (or geographical region) to bear the burden of operating a global reserve currency.
Another candidate could be forced willy nilly to occupy the role of principal store of value and immutable medium of exchange - ie gold.
It has been playing these roles for thousands of years, even if forced to do so in a 'shadow' capacity recently by a belief that fiat currencies such as the dollar (and before that the pound) were as good as gold. This is why the gold price is where it is now. Be warned.
This article was first published in The Business Times.
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