Gold on the rise?

The price of gold has risen strongly this week off the back of the US Federal Reserve's half point interest rate cut to reach 27 year highs. Ambrose Evans-Pritchard has produced another interesting piece in the Daily Telegraph and quotes analysts who say that there is clear blue sky above the current price right up to the all time high at US$850.

Gold & the Euro

Another interesting article in the Daily Telegraph by Andrew Evans-Pritchard.

In summary:

• Gold has been moving with risk appetite and speculative trading and correlated with global liquidity.
• He thinks that this may have begun to change in recent weeks, though too soon to tell.
• He speculates that if global markets crash, then gold will initially fall with them and then decouple and rise strongly.
• Euro not strong enough fundamentally to replace US Dollar.
• In his scenario Gold, Swiss Franc and Yen will rise.

Andrew speculates that this could play out in 2008.

I think September and October could be "interesting" months this year, especially after yesterday's profits warning from Countrywide Financial and the news that 23.71% of its sub prime loans were delinquent and 4.56% of its prime lending was in arrears. It doesn't see the US housing market improving until 2009.

Credit crunch will 'shred investment portfolios to ribbons'

Check out this article by Ambrose Evans-Pritchard in the Daily Telegraph and Robert Peston's latest blog 'Are markets hurricane-proof' on the BBC.

With the near-collapse of the two Bear Sterns hedge funds recently and the major downturn in the sub-prime lending market the spotlight is on the increasingly esoteric instruments being used by banks to 'gamble'. The two articles make some interesting points:

• The underlying debt assets may be mis-priced as the quality of the loans made by the banks may not be all it's cracked up to be - as they are bundling them up and selling the risk on and not holding it themselves.

• If the market starts to topple, there may be no buyers for these instruments and prices would collapse leading to a credit crunch.

• Investors portfolios would "be shredded".

• "This is a 100pc-proof government-created monster. Bureaucrats (yes, Alan Greenspan) have distorted market signals, leading to the warped behaviour we see all around us."

• The Bank of International Settlements notes that the Fed's strategy leads to serial bubbles, creates an addiction to easy money, and transfers wealth from savers to debtors, "sowing the seeds for more serious problems further ahead".

We already know what the Fed's response to any impending collapse will be. The Fed chairman 'Helicopter' Ben Bernanke has already said he would drop cash from helicopters if necessary. When the head of the world's most important central bank says that, you know you're in trouble.

Booms were made to go bust

I thought this was a good article on Yahoo Finance. Judging by the response, which is pretty overwhelmingly negative, it's very much a contrarian position but I think the point that the global boom in assets is driven by a credit bubble is pretty inescapable. The question of course is if and when it will burst - or whether it will gradually deflate. We've seen some glimpses of what could happen , back in February, if it does burst - rapid currency fluctuations, crashing stock and commodities markets and general financial mayhem. And it should be noted that gold went down too, as holders sold it off to cover their losses in less liquid areas.

The other side of the equation in this story, the huge current account surpluses of China and petro-countries, also appeared in the news today. The FT reports that the German government is considering setting up an agency to vet acquisitions by state-controlled foreign funds along the lines of the US Committee on Foreign Investment. In my opinion, it is a very sound idea. These acquisitions need to be vetted in all Western countries to ensure that the interests of the acquirers are aligned with consumers and national policy. In particular, I would highlight energy policy and the acquisition of supply companies by energy exporting countries - an area where there is a clear conflict of interest.

Sell in May and Go Away? Review

Well, looks like I was wrong along with the old adage. The Chinese indices do look very precarious at the moment with a couple of large falls this week.



However, The Economist reports that the Chinese government is setting up a $300 bln fund for investment purposes and given their concerns over what a stockmarket collapse might do for social stability in China, one wonders whether they might step in and prop up the market.

Rumours abound that they are out to buy natural resources companies globally, to satisfy their ever-increasing demands for industrial materials and energy, which should prop the sector up.

On that point, the Chinese bought out Rover, Britain's last mass market car maker last year, stripped out the factory, moved all the production lines to China and resumed production there. All that's now left here is an assembly plant employing 130 people - see this BBC article. One wonders if that might become a model for Chinese 'investment' in the West.

The Yen's on a knife edge at the moment too, right back at its previous lows in February, but may become irrelevant if the global liquidity spigot moves to China, Russia and the petroleum states and their governments' investment billions.

Sell in May and Go Away?

Are the stock markets closing in on a top? Here are my three concerns:

1. The share mania currently occurring in China. The chart below is a three year chart of the Shanghai Stock Exchange:


It has been rising exponentially for a couple of years and looks very overbought. Due a very large correction. As shown in February, this could spill over into other markets.

2. The Yen and the Carry Trade.

The Yen is almost back to where it was in February when it came off quite sharply. The Economist this week says that the Carry Trade has been unwinding and that the current weakening of the Yen is a result of Japanese individual investors moving their money offshore in search of higher returns. I, personally, don't buy that. The size of the Carry Trade is just too large to be offset by individual investors in such a short period of time and why would it be having such an effect now? So, I see the potential for a double top/bottom (depending how you look at it) and a trend change in the short/intermediate term. The worry for those of us invested in non-Yen related things, as shown in February, is that if positions have to be closed quickly then the most liquid assets get sold off first to cover those positions - e.g. stocks, precious metals, bonds, commodities. So, we could see a sell off across the board.

3. The company profits bonanza may be coming to an end.

HSBC says forecasts for 2007 earnings per share for S&P500 companies have fallen from $95 to $93 since the middle of last year. This follows years of double digit growth. If investors expectations of future performance turn down then share valuations will look very stretched on a forward earnings basis.

In the UK, rising interest rates, rising bankruptcies and a vulnerable housing market could have the same effect.

This will take longer to play out than the first two issues but if investor sentiment changes it could get nasty.

Oh, and the Sunday papers say not to sell up this May as it could be a bumper summer. If that isn't a contrarian signal, I don't know what is.

2 interesting charts for Gold investors

For anyone interested in Gold investments, I find this blog interesting:

http://www.biiwii.blogspot.com/

where Gary has summed up the market in a couple of charts.

My own personal take is that we are approaching an interim top in the gold price. The market looks overbought at the moment, though you wouldn't believe it from today's bullish action in gold stocks. The COTs (Commitment of Traders), a weekly report of longs v shorts in the market, have been showing for some weeks that we have entered the lower end of the range where the market historically turns down. But it's always a tough call when to get out as the most explosive gains often seem to come in the last gasp of the market.