Respected billion pound fund manager, Tim Price (PFP Wealth), has the perfect solution for UK investors: “Any sane investor who buys into the gold bull should be buying ……. – while it’s still relatively cheap. The rise in bullion prices could yet prove extraordinary by comparison to the recent past …….”
Just as the ink is drying on what could prove to be another disastrous European merger (British Iberian Airways! -although I hear International Airways Group has been chosen) I’ve been pondering how to lighten up this report as the fiscal situation globally worsens. With employment data looking bleak the only way I can add a little sparkle to the proceedings is to continue to suggest that GOLD and related investments are increased forthwith. Our beloved leader, his henchmen and the media continue to press upon us the speed of the recovery but it seems only a smokescreen to protect the status quo. With the 1Q10 UK GDP growth number remaining at +0.4% markets remain buoyant but it’s questionable if the party can continue much longer.
I’m trying very hard to put anything in the Pro column right now for most domestic, all fixed income and a great many international securities as p/e’s look around 20% too expensive to me. As you know I have been recommending that investors focus on precious metals and oil stocks for some years now. On the Against side I continue to scribe the usual suspects (banks, builders, retails, service groups, in fact anything consumer orientated). Like many of us with a few grey hairs I’ve missed most of the rally we’ve been having on FTSE100 (ex-Randgold, BP & Royal Dutch of course) since March 2009. Isn’t this just a great tonic and confirmation of the great success of the stumulae that our great leaders, regulators, chancellors, bankers et al have undertaken on all our behalves? It’s fixed! I’m referring to the economies of course although reading the varying reports that cross my desk from market analysts I’m beginning to hear my builder “Chappers” who’s doing such a splendid job on my barn roof shout “wolf, wolf Hoblyn” from on high when I regularly return to my desk after having delivered him his regular cuppa and good news about the few stocks he owns. But for these people who actually work for a living and the regular missives from Mr Bonner and his colleagues at the “Daily Reckoning” I’m sure that I would be spoon feeding everyone with tales of fortune and great hope in the stock market. Except of course my judgment suggests that despite billions of $’s, Euros & £pounds later many of the balance sheets of these (banking) establishments are in fact still encumbered with large amounts of debt, toxic derivatives and who knows what. Now in addition to this many of our household blue chip companies are still looking very sick around the edges. They might be able to persuade us by their recently improved profits but looking a little closer many things don’t appear that rosy. After the bedlum of 4Q08 all market analysts went very quiet and slashed their forecasts (the Americans call this low-balling, a baseball expression) only to see many companies exceed these forecasts in 2Q09, 3Q09, 4Q09, 1Q10 but as we approach the summer there are many pundits now suggesting that the current “high-balling” (where analysts have upgraded and are ahead of real events) is going to leave the markets looking very flat sometime very soon. China itself is a major bubble (stocks, property and you guessed it CREDIT) and with current GDP growth at a staggering 11.9% the debate re the revaluation of the Yuen will likely recommence. The possible fall out and trade war could well be the trigger for a market correction of 10-25% replicating the events that unfolded back in the ‘30s when everyone back then thought that the bull rally that started after ‘29 had all the answers.
It’s clear that the Yuen/US Treasuries issue (the Chinese own $2.4trillion of treasuries) is the big storm cloud on the horizon and yet there are so many other storm clouds appearing too. I described the juggernauts heading in different directions and yet all meeting at the same crossroads scenario to one or two people recently and everyone seems to agree on this and yet no-one can predict which juggernaut or storm cloud will arrive first. The Greek debt issue and the extraordinary entanglement between the Greeks, the EU (Trichet just looks utterly out of depth to me!), the IMF and bond markets is clearly fazing currency dealers. Recently the Euro has taken some punishment and instead of speculators rushing to reserve currencies it would appear that many singled out GOLD, the new (actually it’s the oldest) currency, as the best bet driving it back to around $1,150pto. The key level to look for is $1,163 then $1,332, $1,461 but why should most of us worry about these moves? It is very early days for GOLD, very very early days in my professional opinion. One pundit recently predicted $15,000pto for the yellow metal once the entire unwinding process pans out and investors globally throw in the towel on paper currencies and many over-leveraged equities.
Inflation at (rising) c.3% in UK and the extraordinary core deposit rates for cash investors in UK is a honey trap that many will regret. I can see the flaw in these absurd Cash ISA rates (1.90% up to 2.67% at C&G for variable & a staggering 3.44% to 4.46% for fixed term ISAs) as there is something seriously wrong with the banking system when rates obtainable to the public exceed the current ½% Bank Rate and exceed the purile base deposit rates provided commercially which are on Call money circa 0.4% and on Short Term circa 0.85% (note 3 month LIBOR is 0.6484%). Depositors (“the public”) are being over optimistic with regard to the support programs and fail to take on board that a systemic risk is still intact. Another IceSave/Northern Rock could easily occur at some juncture so investors do need to wise up (the old wives tale “you don’t get something for nought”) to what really is on offer and FSA really should (but of course they wont) instruct financial institutions to publish clear health warnings on deposits that can apply rates over and above centuries obtained commercial reality. The counter argument may be that banks can take these deposits in at these rates and lend at 8%+ (all the way up to 20-25% I hear) but the actual lending levels are marginal I suspect and the true derivatives mix is allowing for some splendid creativity inside the banking halls. Albeit interest rates have been held last week (1/2% UK & 1% for Eurozone) although should inflation surface I can see a rude awakening. So is there any great merit in depositing funds at 2/3 ½% when inflation is at 3%?
Other future calamitous issues which markets and voters (ahead of what could well be a disastrous hung parliament and low turnout on 6th May) should be aware are (in very approximate chronological order);-
• Increasing likelihood of a stalemate in the Greek baleout leading to possible default
• California solvency issues (Los Angeles County too)
• Likelihood of a credit downgrade on UK (after 6th May) leading to severe test for £stg. UniCredit has alerted investors in a client note that Britain is at serious risk of a bond market and sterling debacle and faces even more intractable budget woes than Greece
• An increase in Quantative Easing beyond the existing £200billion level
• Continual fraction within EU on the back of EU debt worries
• Chinese inflation rate increases and China continues to build up Gold Reserves
• Chinese rate hike knocking the stuffing out of stock & property markets
• Chinese CREDIT bubble pricked leading to realization that Emerging Markets are no longer immune to downturns
• Ongoing stress within Eurozone (Portugal, Spain, Ireland & smaller zones)
• US Government stalls on Citigroup $35bn 7.7 billion shares sale IPO and triggers concerns as to how US & UK governments can sell/reduce their stockholdings (why should investors buy into banks when governments sell & withdraw support?)
• More forensic detailed evidence that Lehman and other banks used “balance sheet manipulation” to mislead investors and regulators (Goldman’s & JPMorgan under the spotlight more as the year unfolds). Note the City of Milan has filed irregularities against 3 int’l banks for the sale of derivatives (just the tip of the iceberg)SEE ***STOP PRESS BELOW***
• A complete failure by regulators to get to grips with the derivatives market that is still around $500 trillion exposure
• EU’s Directive on hedge fund and private equity firms blows up in everyone’s face (war of words between the anglo’s & Sarkozy/Merkel)
• More pain for householders in US & elsewhere (Spain & quite possibly UK) as mortgage defaults rise against a higher tax universe
• Oil to retest $100pbo 2nd & 3rd Q’s ; leads to slowdown and dip (note petrol in UK is already 120p per litre)
• Scrutiny over IMF’s role and it’s financial expertise after Greece
• Detroit rescue plan derails as consumers stay away from hybrid motors & especially US motors
• Facebook IPO plans disappoint as serious flaws in advertising revenue emerge for Google and other social networking sites
• Microsoft continues to lose ground to Apple and serious concerns surround those companies that sell add-on’s to Microsoft universe
• Institute for Fiscal Studies issue ongoing reports that debt interest payments will exceed by some margin the £73.8bn figure by 2014/15 as reported in the recent Darling Budget (or 10p in the pound of all UK earnings)
• Public sector net debt (excluding financial interventions) was £741.6 billion (equivalent to 52.6 per cent of GDP) at the end of February 2010 with forecasts approaching £1trillion prevalent
• Pension burden on the UK taxpayers will stand at an unaffordable £1trn (this is going to come to a head alongside compensation for Equitable Life policyholders)
If one has managed to digest just some of these (potential) headaches then need I mention the 8m Americans (several million in UK) out of work with no job prospects, the extraordinary tax burden on US taxpayers after Obama’s HeathPlan, the increasing likelihood that more Public Sector jobs will be created everywhere thus penalizing hard working people through accelerating income tax and other (stealth) tax rises, excessive and unnecessary regulation which will stop entrepreneurs and investors from making decisions that might just create job opportunities, the ongoing dramas unfolding with Iran/Israel/North Korea, the realization that UN aid and response programs are ineffective and very costly and that world food shortages are going to get worse, further climate change tensions, global water supply and purification issues, african AIDS HIV timebomb clicks……..it all seems an uphill struggle as politicians and power players try to dampen the grip that youngsters have on the Internet which used properly and openly could create more opportunities and just possibly solve many of the world’s problems.
Looking again at GOLD I notice that Hinde Capital, a precious metals specialist, has been telling its clients that it expects GOLD to climb to $5,000pto over the next few years. Interestingly there are 160,000 tonnes above ground and this is split roughly as follows; governments 30,000**, private sector as bullion/jewellery 110,000, industrial use 20,000. Another 50,000 is accounted as mining reserves (around 2,500 tonnes is recovered each year). In financial markets ETF’s (Exchange Traded Funds) are becoming more popular and the largest ETF, Spyder Gold Shares now accounts for 1,140.43 tonnes increasing roughly 10 tonnes per day. Central banks** exact figure is 30,116.9 tonnes with China, Russia and India being the biggest buyers. It seems to me that sovereign states are beginning to recognize that GOLD can underpin their currencies more and more and although there is no need for a return to the Gold Standard some nations have taken it upon themselves to safeguard their economies by hoarding for a rainy day. As for the price I still believe that a range of $2,000-2,500 can be achieved over the next year.
I reiterate that one should focus on oils, precious metals and companies that have relative low gearing and intact business models. Domestically the UK is far too exposed to a severe downturn when one factors in the scale of the UK government’s problems. Stockpicking in 2nd & 3rd quarters should remain selective and mainly international and special situations focused. I continue to hold BP and Royal Dutch Shell ‘B’ (safe dividends), Yamana Gold, Randgold (selling into strength circa £60 as the p/e is very high), Newmont Mining and ASA (US listed closed-end fund focusing on precious metals). UK equities such as GlaxoSmithKline (buy below £12, yield 4.8%), Sainsbury (yield 3.9%), Greene King (yield 4.9%), Marstons (yield 7.3%), Standard Life (yield 6%), Foreign & Colonial Asset (yield 8.8%) and Tullett Prebon (bid situation, yield 4.2%) could be examined for income (inside ISA’s) whilst Dana Petroleum, Heritage Oil, Dominion Petroleum appear attractive for appreciation alongside the recently listed miner African Barrick (Mkt Cap £2.5bn). The recent recommendation regarding WisdomTree Emerging Markets Currencies Fund ETF listed on NYSE epic: CEW $22.39 appears to be working as a hedge against western currencies whilst Ashmore Global Opportunities Trust is an interesting play on sovereign and corporate debt. To hedge one’s portfolio Proshares Ultra SHORT China also listed on NYSE epic: FXP $7.23 could still reap terrific rewards should China top out. Like many out there I think the surge in precious metals mining could be the one area that really blossoms out of the ’08 crisis and subsequent recession which many are still calling The Greater Depression.
I recently asked a friend what life was like in Thailand. Marvellous was the reply. There was no mention of unrest which is all that the UK media want to project to us. Indeed he described how his satellite dish (a South African system that sits in his garden) was erected in 1 day; he ordered in at 10am in the morning, men came to his house in Chiang Mai that afternoon and it was up & running by 3pm. Everyone is very courteous and everything works. People are happy and their Income Tax rate is 1%. If they want a doctor they pay for it from their savings. Everything is driven from the belief that people matter. It seems to me that the Welfare State has forgotten this and the sooner the West reverses this trend the better. It may be that the early cracks in this process are coming to fruition.
The sun has just come out and a hot summer is predicted in Western Europe by the farmers. I think a sound investment in new deckchairs is necessary and having read this ghastly review a soft drink or something stronger may be tempting. Best wishes!
*********STOP PRESS***********
This quarterly report has been delayed due to my having to assist in some funeral arrangements in UK last week followed by a bout of severe flu so please accept my apologies for any inconvenience caused. Of course the events that unfolded on Friday regarding Goldman Sachs have only confirmed my cautious stance hereon.
