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March 08, 2005 Gold Investments Weekly Newsletter |
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Weekly Markets Precious Metals Gold's response to the positive US job numbers was very encouraging for the bulls. U.S. employment rolls registered their first appreciable growth in nine months during February, with nonfarm payrolls expanding by an above-consensus 262,000, according to Labor Department data. "Gold surged right after the employment numbers, and that shows gold is defying the typical expectations," said Kevin Kerr of Kerr Trading International. "I think we have moved into a new realm for gold as it finds its own way and charts a new path with investors," Kerr said. "I think now we are setting up to test $475 very soon." For the month of February, Silver was the best performer as it was up more than 9%. Since its latest major interim low on January 4th, it has appreciated by 17%. The NASDAQ fell by 4% over the same period of time. Silver's recent correction and consolidation looks to be over and it looks like it will attempt to challenge the $8 mark again in the coming weeks. Palladium's surging price was attributed to Russian President Vladimir Putin's order on Thursday to unveil all data on Russian precious metals production and reserves. There is apprehension that Russian palladium reserves will be less than expected, analysts from AG Edwards said. Palladium and platinum are used to clean car exhaust fumes, but until recently palladium could not be used in diesel-powered vehicles. Given the huge price difference between the two -- platinum is currently around four times more expensive -- car manufacturers have been looking to switch to palladium where possible. In the jewellery sector, where the use of platinum is much more prevalent, the price advantage has encouraged some Asian manufacturers to try palladium. "The price differential...is sufficient to be encouraging substitution in the auto, and possibly jewellery sectors, although this has been the case for some time and shows no sign yet of restoring the (palladium) market to balance," Alan Williamson, analyst with HSBC said in a report. Oil Oil's latest jump came on top of two weeks of increases, which have already reached the petrol pumps in the US Analysts warn that more petrol price increases are coming. Commodities The Reuters CRB Index (basic components include hard tangible assets such as Metals, Textiles and Fibers, Livestock and Products, Fats and Oils, Raw Industrials, Foodstuffs). One of the CRB index's greatest strengths is the fact that there is an equal weighting of all of its 17 components. This weighting assures that no price increase in any single commodity, like oil, can significantly skew the entire index. Significant moves in the CRB are only possible when the majority of its component commodities are moving in unison with a particular primary trend. The most important commodities - gold, oil, and silver only account for 3/17th of the entire index. Rubber: Prices in two key markets rose owing to the continued low harvest season in leading producer countries. Coffee: Prices hit 4 and a half year highs in London and traded close to five-year peaks in New York on huge speculative buying amid expectations of a world production deficit in 2005-06. Coffee prices have jumped 20% since the start of the year, indicating that futures could be on a path to sustained recovery after recent tough years caused by ample supplies. ``Sentiment is bullish and fundamentals remain supportive,'' said Ann Prendergast of the Refco brokerage. Robusta quality coffee for May delivery shot to $978 a tonne in London, the highest level since July 2000. Sugar: Prices fell as speculators continued to bank profits. Prices had risen to the highest level for 3 and a half years in London and for 3 and a half months in New York at the end of January on strong global demand but then declined on profit-taking. Commodities, as represented by the CRB have been moving higher since it's massive double bottom in early 1999 and late 2001. It has marched from a low near 183 in October 2001 to a recent bull market high of 309. This sterling 70% gain over some four years means that the CRB is likely in a secular bull market or a major new long-term trend likely to run higher for a decade or so. It is worth noting that if the Reuters CRB Index all time high of 338 in 1980 is adjusted to real dollar terms or adjusted fro the considerable inflation of the last thirty years it gives a price of 754 in November 1980 or 962 in early 1974. "China's breakneck economic growth is causing a dangerous shortage of its most important energy source -- coal -- with potential consequences for the entire world, the China Business Weekly reported... The scarcity is so severe that officials even worry aloud that it could cause social instability among the 1.3 billion Chinese, the state-run newspaper said. 'The imbalance between coal demand and supply will become more acute this year,' the newspaper quoted the National Development and Reform Commission as saying. Martin Weiss, author of 'The Ultimate Safe Money Guide' and who writes the Safe Money Report wrote how "For the first time in 24 years, a key index of commodity prices -- the Reuters CRB index -- surged above the 300 mark, reflecting one of most dynamic demand-driven commodity booms of all time. Just in the past eight months, world steel prices have surged by nearly 70%, driving producers into a frenzy and consuming companies into a panic. Nearly half of the world's steel suppliers have cancelled orders in January. Nearly all are slapping on special surcharges or renegotiating their contracts. The commodities boom is sweeping through metals, grains, meats, and other foods. Nearly all commodities are being catapulted higher by supply/demand imbalances the likes of which have not been seen since the 1970s." Currencies The latest bout of dollar selling/euro buying extended the single currency's gains through key technical levels, which forced additional euro buying as traders moved to stop losses on dollar-heavy positions. The euro broke technical resistance at US$1.3225, but the next key level at US$1.3240 wasn't decisively breached. The euro has soared from about $1.20 in September to an all-time high of $1.3667 at the end of December, powered by concerns over the U.S. budget and trade deficits. The dollar has since regained some ground, but those worries remain and analysts think the recovery could be temporary. Stocks Bonds Weekly Commentary Property in Ireland and Investment Diversification The fundamental tenet of investment theory is diversification or in lay man's terms to not have all the proverbial eggs in the one basket. Thus a wide range of assets including a variety of equities with exposures to different market sectors and regions; a variety of different countries bonds; a diversified property portfolio; a cash component including euros and possibly a number of other sound international currencies and a 5% allocation to gold bullion would be considered a sensible, conservative and prudent properly diversified portfolio. The key obviously is to determine what amount or ratio of each asset class to have and this should be decided based upon global macroeconomic fundamentals. There are no accurate statistics as to the breakdown of Irish investor's asset allocation but it is believed that there is some 80% invested in property, primarily in property in Ireland but increasingly internationally as well. Thus under any criteria there can be no doubt that Irish investors have not taken the important maxim of not having all one's eggs in one basket to heart. This may be because of Irish investors being more risk averse than their counterparts in the UK and especially the US where there are far higher levels of share ownership. Possibly this risk averseness is due to our history and the very poor state of the Irish economy up until relatively recently. Throughout our history and all agrarian societies throughout the world, land and other hard tangible assets such as livestock have been the measure of one's wealth and status in society. Only through acquiring and retaining land could families become wealthy and pass that wealth on down through the generations. The deeply rooted attraction to acquiring livestock and land or with might be termed 'the field mentality' seems to have been transmuted into our recent mania for property.
More importantly, since the mid-1990's Irish investors have rightly realised that our joining the Eurozone with access to a huge and growing EU market, a stable currency and low and stable interest rates would be a massive benefit to the Irish economy. This instilled great confidence and this, along with a young dynamic educated English speaking work force and low corporate tax rates, contributed to the 'Celtic Tiger' and it's attendant property boom. The Irish economy was now and still is subject to unprecedentedly low interest rates, some would say inappropriately low interest rates. This very cheap money made saving unattractive due to the low return available on deposit accounts especially considering the significant rate of inflation. Thus borrowing to invest in property in Ireland from the mid-90's to today was rightly seen as a sound, safe and rewarding investment option. Banks lending practices have become very loose and banks and building societies have been lending multiples of annual income. Lending institutions have been lending money for house purchases on the back of parental guarantees and prospective future earnings. Indeed the Standard & Poor's credit-rating agency is monitoring the Irish property boom very closely and the Economist magazine, the IMF and even the Irish Central Bank have all warned regarding the property market in Ireland. The Central Bank warned "It is imperative, that, at this time, high standards of discipline continue to be maintained, that all credit institutions remain fully alert to the dangers of lending to marginal borrowers and that lenders take full account of the economic cycle when making lending decisions." 
It is a little dangerous to extrapolate the past decade's extraordinary Irish, US and global economic growth and consequent property price gains far into the future. With economists heralding the return of the 'Celtic Tiger' and the 'animal spirits' of complacency, irrational exuberance and greed becoming more evident it is important that Irish investors remember that past performance is no guarantee of future returns. One might be forgiven for thinking that this continually repeated but often forgotten truism has been replaced in the investors lexicon by the more imprudent 'you can't go wrong with property'. The conventional wisdom in the United Kingdom in the second half of the 1980s was that you couldn't lose money in property. After all, U.K. house prices had never fallen on an annual basis since the war, as opposed to the stock market, which fell by over 20 percent in one day on Oct.19, 1987. Thus property was viewed as being as safe as houses. However the cosy consensus was soon disturbed when prices began to drop as the Bank of England raised interest rates. Property prices in the UK dropped by between 15% and 50% in different regions and locations. The housing recession of the early 1990's saw almost 400,000 homes repossessed and 1.8 million home-owners suffered negative equity. Students of financial and economic history will know that five of the most dangerous words are "this time it is different". Conventional wisdom or the consensual view of the 'experts' and the masses often prove to have been wishful thinking and plain wrong. History repeats itself or at least often rhymes and a blind belief that "this time it is different" can end up being both expensive and financially painful. It is more important than ever to have and apply a sound economic analytical framework and not to ignore massive macroeconomic fundamentals such as the huge and unprecedented US trade and budget deficits and the near record oil prices. Those who are bullish and very optimistic about the economic prospects for the Irish economy will hopefully be proved right but one way or another it is important that investors evaluate the risk and diversify accordingly. Given that it is believed that 80% of our wealth is in property it would be wise to curtail further investment in the property sector and to look to pay down existing debt and to look to safer more conservative asset classes such as cash savings accounts and gold. In this vein the Special Savings Investment Schemes (SSIA's) was an important step in creating a greater culture of saving. It goes without saying that the conservative and prudent investor seeks to minimise his or her investment risk. The only indisputable truth that the past teaches us is that the future always throws up surprises. The very people who are certain that the Irish property market will continue to experience large rises in prices may well be the very people who will be most surprised when there 'certain' views turn out to have been optimistic and incorrect. Because of the uncertainties of the future and the possibility of an economic contraction in the US economy investors and commentators should remain humble in their forecasting and investors should carry some insurance in order to protect themselves financially from unforeseen eventualities. In the context of the merits of asset diversification and gold, Jim Power, the Chief Economist of Friends First Ireland recently said "I teach Financial Management on a part-time basis in Dublin City University and a central tenet of what I teach concerns the virtues of portfolio diversification. I am a firm believer and have argued in numerous presentations on the topic of Property v Equities that it is not a case of either/or, but a case of both. I would be a big fan of holding gold as part of a diversified portfolio and would feel more confident about it than any other asset class at the moment." Quotes of the Week "The United States of America's public finances are a shambles and they
are getting rapidly worse. . . . . The truth is that the United
States faces a long-term deficit that will only increase as the baby boomers
retire. The resulting fiscal imbalance will test the nation's spending and
tax policies. "The abandonment of the gold standard made it possible for the welfare statists
to use the banking system as a means to an unlimited expansion of credit...
In the absence of the gold standard, there is no way to protect savings from
confiscation through inflation. There is no safe store of value... Deficit
spending is simply a scheme for the hidden' confiscation of wealth. Gold stands
in the way of this insidious process. It stands as a protector of property
rights. If one grasps this, one has no difficulty in understanding the statists'
antagonism toward the gold standard." "Today, however, Mr. Greenspan has become one of those central planners
he once denounced, and his views on fiat currency have changed accordingly.
As the ultimate insider, he cannot or will not challenge the status quo,
no matter what the consequences to the American economy. To renounce the
fiat system now would mean renouncing the Fed itself, and his entire public
career with it. The only question is whether history will properly reflect
the destructive nature of Mr. Greenspan's tenure." "I think we have been remarkably successful, in my judgment ... mimicking
much of what the gold standard does... I think in that context so far we have
maintained a stable monetary system." "The US economy is headed toward crisis, and the political leadership of
the country--if it can be called leadership--is preoccupied with nonexistent
weapons of mass destruction in the Middle East. The US economy is failing.
The afflictions are serious. They could be fatal even if diagnosed and treated.
America is losing the purchasing power of its currency and its ability to
create middle class jobs. The dollar's sharp decline and projections of continuing
trade and budgetary red ink are undermining the dollar's role as reserve
currency. A number of central banks have announced that they will be diversifying
their currency holdings and will not be buying dollars at the same rate as
in the past. This will put more pressure on the dollar. At some point the
flight will begin. Instead of buying fewer dollars, central banks will sell
dollars hoping to get out before the dollar hits bottom. Suddenly, the advantage
of being the reserve currency becomes a nightmare as the world's accumulations
of dollars are brought to market. An enormous supply and weak demand mean
a very low exchange rate for the once almighty US dollar. A venal and self-important
Washington establishment combined with a globalized corporate mentality have
brought an end to America's rising living standards. America's days as a
superpower are rapidly coming to an end. Isolated by the nationalistic unilateralism
of the neoconservatives who control the Bush administration, the US can expect
no sympathy or help from former allies and rising new powers." "The Federal Reserve did a study four years ago that demonstrated that
any time a trade deficit rose above 5 percent of a national economy's GDP,
an inflection point had been created. We are now approaching 6 percent of
GDP. Obviously, I hope this does not result in crisis. That is, a debt crisis
because of the amount of money we have to borrow from overseas to support
our imports, nor a diminishment of our tax base through outsourcing to the
point that jobs become so poor-paying that we can't maintain our tax base.
But all of that is entirely possible unless people awaken to the dangers
that are being posed. I know this is dull stuff for many people, to talk
about external debt and currency devaluations. But the fact is, they're all
in prospect if we do not reverse these mindless policies. . . . . We simply
cannot sustain the path we're on." "Since the U.S government has been printing money like crazy to jump start
the economy and stave off deflation, there are more dollars chasing commodities,
and the demand for raw materials like oil and natural gas is soaring. However,
there has been limited production of raw materials over the past 20 years...so
you can imagine that with skyrocketing demand and limited supply, prices are
going through the roof." "Oil prices are too high. I'm not happy about oil prices one bit. .
. . . Clearly these energy prices create headwinds.
. . . High oil prices act like a tax on consumers." For anyone who doesn't think the stock and bond markets are currently hopelessly
distorted, I recommend taking a long cold look at the hedge fund industry.
It is a sobering spectacle. . . . . Like the
margin traders of the 1920s, but on a hugely larger scale, their activities
are propping up fashionable, hugely overpriced stocks. Unlike the margin traders
of the 1920s, they are also further inflating the housing bubble and depressing
the dollar by keeping long term interest rates artificially low. If Satan wanted
to destroy the U.S. economy, and ultimately the capitalist system, he would
devise an enormous mechanism whereby money would be poured into long bonds
and speculative stocks, distorting both markets, causing a huge misallocation
of capital, and leading to a crash that made 1929 look like a picnic. In the
unlikely event that Satan exists, hedge funds are thus unquestionably His instruments. "According to Greenspan problems with Fannie Mae and Freddie Mac, [Government
Sponsored Mortgage providers which have provided financing for some 75% of
US mortgages and are $2 Trillion in debt], are 'almost inevitable'. The truth
is he is worried because they are so big that they can't be allowed to fail. "The positive short-term economic outlook is playing out against a backdrop
of concern about the prospects for the federal budget, especially over the
longer run. Indeed, the unified budget is running deficits equal to about 3-1/2
percent of gross domestic product, and federal debt held by the public as a
percent of GDP has risen noticeably since it bottomed out in 2001. .
. . . as the latest projections from the Administration and
the Congressional Budget Office suggest, our budget position is unlikely to
improve substantially in the coming years unless major deficit-reducing actions
are taken. . . . . The combination of an aging population
and the soaring costs of its medical care is certain to place enormous demands
on our nation's resources and to exert pressure on the budget that economic
growth alone is unlikely to eliminate. So long as health-care costs continue
to grow faster than the economy as a whole, the additional resources needed
for such programs will exert pressure on the federal budget that seems increasingly
likely to make current fiscal policy unsustainable. The likelihood of escalating
unified budget deficits is of especially great concern because they would drain
an inexorably growing volume of real resources away from private capital formation
over time and cast an ever-larger shadow over the growth of living standards.
. . . . In the end, the consequences for the U.S. economy of doing
nothing could be severe. But the benefits of taking sound, timely action could
extend many decades into the future" Key events in the week ahead On Wednesday, the Federal Reserve releases its "Beige Book," an anecdotal survey of economic activity and conditions in 12 districts around the country. The survey plays a role in the central bank's decisions on interest rates. Early on Friday at 8:30 a.m.(1330 GMT), the January trade balance is due. Economists expect the deficit narrowed to $56.0 billion from $56.4 billion in the previous month. The huge U.S. trade deficit, which shows the gap between U.S. exports and imports, has weighed heavily on the dollar because it raises questions about the economy's strength. 
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Mark O'Byrne Brief Profile Gold & Silver Investments Limited is a precious metals brokerage company which sells and buys a wide variety of gold, silver and platinum numismatic and bullion products to all class of investor, companies and institutions in Ireland, the UK and internationally taking payment in all major currencies. We assist our clientele in diversifying their assets with a comprehensive range of precious metal coin and bar products and by allocated and unallocated precious metal storage facilities licensed by the Chicago Board of Trade (CBOT), Comex and Nymex and by other precious metal storage programs. Mission Statement Disclaimer -- Legal Notice: This article may be reproduced without the written permission of Gold & Silver Investments Limited as long as the author, Mark O'Byrne and the web sites www.goldassets.co.uk and www.gold.ie are acknowledged. Copyright © 2000 - 2008 www.goldassets.co.uk www.gold.ie Gold & Silver Investments Limited Image rendition and html coding Copyright © 2000-2008 SafeHaven.com « BullionVault.com
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