FXIS Market Insights

A remarkable story of growth and expansion lead China to the current number 2 spot in the world.  Please consider: China overtakes Japan as No.2 economy

China's economy expanded 11.1 percent in the first half of 2010, from a year earlier, and is likely to log growth of more than 9 percent for the whole year, according to Yi. China has averaged more than 9.5 percent growth annually since it embarked on market reforms in 1978. But that pace was bound to slow over time as a matter of arithmetic, Yi said.

If China could chalk up growth this decade of 7-8 percent annually, that would still be a strong performance. The issue was whether the pace could be sustained, Yi said, not least because of the environmental constraints China faces.

Is that kind of growth really sustainable?  It is sometimes remarkable to see the inability of even highly educated people when it comes to understanding exponential growth. So then let's take a brief  look at the arithmetic. 

Using the good old Rule of 72  we can approximate the time it takes for any given quantity to double in size or in value.  At a rate of 10%, China's economy would double from the current estimate of $5 trillion to $10 trillion in about 7 years.  In 14 years it would be at approximately $20 trillion; in 21 years at $ 40 trillion and in 28 years, which is roughly one human generation, it would have doubled again to $80 trillion.  The arithmetic is sound but is a 10% growth rate sustainable?   See the chart below for an exact calculation of growth at a compounded annual rate of 10%.

At 7% annual growth, China's economy would still double approximately every 10 years.  Is that still growth rate still sustainable?  In an attempt towards formulating an answer, I would like to refer to the following articles: A Wake-up Call From Greece  and  Privates Eye.

In closing, let me refer to someone who did understand the exponential function very well indeed:

"The greatest shortcoming of the human race is our inability to understand the exponential function." - Prof. Al Bartlett  http://www.albartlett.org/

Noteworthy... 
• US GDP grew at an annual rate of 2.4% in the second quarter of 2010 (ESA)
• US Consumer sentiment plunged in July to its lowest level in 9 months (Reuters)
• Euro area unemployment rate remains at 10.0% (Eurostat)
• China overtakes Japan as No.2 economy in the world (Reuters)
• Euro area inflation is estimated at 1.7% in July, up from 1.4% in June (Eurostat)
• New Zealand's central bank hiked interest rates, lifting the cash rate to 3% (AP)
• Australia's CPI rose 0.6% in Q2 compared with a rise of 0.9% in Q1 of 2010 (WSJ)
• Germany's unemployment rate fell by 0.1% to 7.6% in July (Economy.com)
• The Reserve Bank of India raised interest rates by 25 basis points to 5.75% (Economist)
• US 30-year mortgage rates hit yet another low of 4.54% - lowest on record since 1971 (AP)
• US durable goods orders in June 2010 fell 1.0%, to $190.5 billion (ESA)
• Home vacancies rise as US ownership falls to 66.9% - lowest in decade (Bloomberg)
• BP reported a quarterly loss of $17bn, including a $32.2bn charge for the oil spill (AP)
• US consumer confidence for July fell to 50.4 (1985=100), down from 54.3 in June (AP)

Weekly Market Barometers

Chart Of The Week
Working hard to have your own home - the American Dream - has been a driver for much of the economic growth in the past few decades.  When you own your home, “you have arrived”. That said, it is debatable how much home in terms of net equity is really owned by the US home owner.  The home ownership rate peaked in 2004 at 69% but it has since fallen to just under 67%.  The historic average since 1965 is about 65% – just under two thirds.  If this trend is in line with general tendencies to revert to the mean, we may be facing a few more years of declines in the home ownership rate.  Given the persistently high foreclosure rates and growing vacancy rates, the home ownership rate is in danger of slipping below the historic average.  Mortgage rates at historic lows have not made a significant impact on the housing market.  If rates were to rise at some point, would a two/thirds home ownership rate still be viable?

Recommended Read
Please consider: Three years on, the markets are masters again by Philip Stephens.  Here is a bit of a taste:

With a little help from the regulators, the big banks can now declare themselves duly stress-tested, but the systemic instabilities remain. International markets have moved far ahead of the capacity of political leaders to understand, let alone properly oversee them. This failure of political governance to keep pace with global economic integration is as apparent now as it was in 2007.

Even if politicians better recognise the risks of interdependence and the vulnerabilities of particular institutions and financial instruments, they are far from any consensus on how to share responsibility for global oversight. So, three years on, things are much as they were – except that most of us are poorer. The markets rule. OK?

Source: www.ft.com

Good luck and good investing!

Disclaimer
Neither the information nor any opinion contained in this communication constitutes a solicitation or offer by us to buy or to sell any securities, futures, options or other financial instruments or to provide any investment advice or service. Each decision by you to do any investment transactions and each decision whether a particular investment is appropriate or proper for you is an independent decision to be taken by you. In no event should the content of this communication be construed as an express or an implied promise, guarantee or implication by or from us that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance. Please note that there is no requirement and no commitment to make any payments to FX Investment Strategies LLC in order to access our published information be it via email or via website publication. All information is publicly available without any required monetary consideration.  Any payments or donations made by you are deemed to be voluntary and cannot be considered as payments for investment advice given to you.

The notion of "it's a small world" is getting more and more traction in the world of finance these days.  The impact can be seen in ever closer correlations of various stock indices but as John Authors points out in his recent Financial Times article Investors face a world of correlation, the correlation of individual stocks compared to the entire market has been on the rise as well. 

We have long been questioning the concept of stock picking. The idea that the average individual investor would have some special skill or insight into specific companies allowing them to outsmart other individual investors is flawed from the outset.  An average investor is simply that: average; by definition the average cannot outperform the average.  John Authors also points out another recent development, making successful stock picking increasingly difficult.

The problem is that as ETFs account for a greater share of each day’s turnover, so they become more critical in setting the price. If there are big sales of an ETF, it does not sell the stocks that seem most overvalued; it sells stocks in proportion to the index. Hence stocks tend to rise and fall together.

But despite this trend, the financial services industry and its media instigators/collaborators will be adamant and increasingly innovative in generating ideas and trends trying to separate the proverbial wheat from the chaff trying to keep the idea of stock picking alive.  After all, they need you the investor to transact and not just passively sit there enjoying an index fund.  While you consider whether or not to filter out the noise from the financial news channels and just follow a passive index tracking strategy, here's another look at how closely correlated some international markets have been in recent years.  Chances are, we might see increasingly similar correlations among large groups of stocks in coming years.

Source: www.economist.com

The latest exchange-rate scorecard, the so-called "Big Mac index" came out this week.  Published by the Economist twice a year, "it is based on the theory of purchasing-power parity (PPP), which argues that in the long run exchange rates should move to equalise the price of an identical basket of goods between two countries." The most recent reading of this index suggests that several European currencies along with the Brazilian Real, Canadian Dollar and Australian Dollar are still overvalued in comparison to the US Dollar.  By contrast, some emerging market currencies including the Chinese Yuan are said to be undervalued.   This Index, while somewhat of a rough indicator, has many flaws and should be taken with more than just a grain of salt.  While the concept of purchasing power parity makes sense when comparing a basket of goods that gives a broad range of comparable products among the list of surveyed countries, limiting the concept of PPP to just one product does not make much sense. As the Economist puts it: ”The index is a lighthearted attempt to gauge how far currencies are from their fair value.” In view of the ongoing debate as to how much the Chinese Yuan is undervalued, perhaps someone should suggest to certain elected officials  that the Big Mac Index is only a “lighthearted attempt”, not a realistic assessment of a country’s fair currency value.   In case some of these officials from the West were visiting China they should enjoy the immense variety of the local cuisine rather than “chowing” down a burger and wonder about the price difference with regard to the US Dollar. As far as I am concerned, the last thing I would want to do in China is eat a Big Mac whatever the price may be - when in Rome...

Noteworthy... 
• Just 7 of 91 European banks failed a stress test and were ordered to raise their capital (Reuters)
• The U.K.'s economy grew a much stronger-than-expected 1.1% in Q2 (FT)
• German business sentiment hits three year high of 106.2 in July, up from 101.8 in June (FT)
• China overtakes the United States to become world’s largest energy consumer (IEA)
• Industrial new orders are up by 3.8% in the Euro area (Eurostat)
• US existing home sales fell 5.1% in June and are expected to keep sinking (AP)
• US 30-year mortgage rates hit new record low of 4.56% (AP)
• US Leading Economic Index declined 0.2% in June to 109.8 (Conference Board)
• Ben Bernanke said the US economic outlook remains unusually uncertain (AP)
• US President Obama signs the financial overhaul bill into law (Reuters)
• US housing starts declined 5.0% from the prior month, to 549,000 (ESA)
• Moody's lowered Ireland's credit rating to Aa2 from Aa1 (WSJ)

Weekly Market Barometers

Charts Of The Week
After passing the new financial overhaul bill, good company earnings reports (for the most part), a successful Bank Stress Test in Europe, and a fairly good week for the stock markets one could think that some level of confidence in our leaders and institutions would return in the view of the general public – or is it?  According to a recent Gallup Poll, the majority of Americans don’t have much confidence in some of the public institutions.  The bottom of the list is the Congress:

Gallup's 2010 Confidence in Institutions poll finds Congress ranking dead last out of the 16 institutions rated this year. Eleven percent of Americans say they have "a great deal" or "quite a lot" of confidence in Congress, down from 17% in 2009 and a percentage point lower than the previous low for Congress, recorded in 2008.

Source: www.gallup.com

Speaking Of Ratings
US President Obama signed the financial overhaul bill into law this week.  While nobody can possibly predict all of the far reaching effects of this new law, the financial news media will speculate on the intended as well as unintended consequences ad nauseum in coming weeks. 

One group that received much of the blame for the severity of the credit crisis was the Trio of US Credit Rating Agencies.  The much debated aspect of their involvement in certain financial debt instruments receiving AAA ratings has been at the center of the controversy. The root of the much heated debate lies in the fact that the companies issuing these controversial debt instruments paid the ratings agencies to rate their securities, leading to an undeniable conflict of interest.

Meanwhile, the ratings agencies have taken measures into their own hands and practiced some preventative risk management.  Please consider Bond Sale? Don't Quote Us, Request Credit Firms  

The nation's three dominant credit-ratings providers have made an urgent new request of their clients: Please don't use our credit ratings.  Standard & Poor's, Moody's Investors Service and Fitch Ratings are all refusing to allow their ratings to be used in documentation for new bond sales, each said in statements in recent days. Each says it fears being exposed to new legal liability created by the landmark Dodd-Frank financial reform law.

How about that?  This is along the lines of:  “Please pay me to give you an opinion, but please keep that opinion to yourself.”  Curious to see how the business of credit ratings will flourish in coming years...

Good luck and good investing!

Disclaimer
Neither the information nor any opinion contained in this communication constitutes a solicitation or offer by us to buy or to sell any securities, futures, options or other financial instruments or to provide any investment advice or service. Each decision by you to do any investment transactions and each decision whether a particular investment is appropriate or proper for you is an independent decision to be taken by you. In no event should the content of this communication be construed as an express or an implied promise, guarantee or implication by or from us that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance. Please note that there is no requirement and no commitment to make any payments to FX Investment Strategies LLC in order to access our published information be it via email or via website publication. All information is publicly available without any required monetary consideration.  Any payments or donations made by you are deemed to be voluntary and cannot be considered as payments for investment advice given to you.

Confused about inflation/deflation? Don't know whether to jump on the bandwagon and buy Gold as everyone else seems to be doing these days? To be honest, I am confused about it just as well.

There is absolutely no question that Gold has had an enormous bull run in the past 10 years. If you had bought Gold say in 2005 at around $450 and kept it until now at around $1200 the price appreciation would be a handsome 1 2/3 or 166.67%. So should you buy now before Gold reaches yet another all-time high?

Jim Kramer of CNBC's Mad Money touted Gold as a must have investment. In no uncertain terms, he said: "Every single person out there should own some Gold." More to the point, he declared that "You must have at least 1/10 of your portfolio in Gold."   “Really?” I thought...

Again, I am not debating that Gold has had a great run in the past few years nor do I question the possibility of Gold having further upside movement – the momentum is certainly there.

But to make a cookie-cutter announcement of a minimum portfolio allocation for Gold is not just questionable, it is dangerous and completely inappropriate for certain types of investors. Short term investors who only have a 2-3 time frame come to mind. Or take retired investors, who rely heavily on generating a safe and regular income, may see themselves loosing out. As a simple insurance policy, 10% seems like a rather high allocation too. More importantly, one should remember that Gold is a commodity, not necessarily an investment, and it “trades” like a commodity meaning, it can be quite volatile at times.

Then there is the cost of holding Gold.  No matter what format you choose for your gold investment - ETF, Gold coins, Gold bullion, Spot Gold, Gold futures etc. - they all carry a cost to hold the commodity.  That cost can range anywhere from a rather inexpensive 0.25% per annum for an ETF (The Gold ETF: IAU just lowered their expense ratio from 0.4% to 0.25%) to one-off fees of 8-10% or even higher for purchases of Gold coins and Gold bullion.  Those fees, along with your investment time frame should be considered when determining what type of Gold investment is selected.

But all of this is purely an academic exercise and the real question still remains as to where the price of Gold is heading.

Jim Kramer, confident as ever, announced that $2000 is the price target.  By contrast, some commentators suggest that Gold has peaked and is about to crash in line with other assets whose prices are threatened by deflation.  James Altucher made some controversial comments in a recent WSJ article when he explained Why Gold Is the Worst Investment Right Now.

The best answer to me came from Adrian Ash, head of research at BullionVault.com:

If I knew a price, I would be doubling up tomorrow.

That element of caution, coming from someone who works for a firm that should be touting Gold, gives me the right sense of how investing in, or as some say “holding” Gold should be approached.  Despite its allure and glamour, it is a commodity and should be “traded” as such.

Disclaimer
Neither the information nor any opinion contained in this communication constitutes a solicitation or offer by us to buy or to sell any securities, futures, options or other financial instruments or to provide any investment advice or service. Each decision by you to do any investment transactions and each decision whether a particular investment is appropriate or proper for you is an independent decision to be taken by you. In no event should the content of this communication be construed as an express or an implied promise, guarantee or implication by or from us that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance. Please note that there is no requirement and no commitment to make any payments to FX Investment Strategies LLC in order to access our published information be it via email or via website publication. All information is publicly available without any required monetary consideration.  Any payments or donations made by you are deemed to be voluntary and cannot be considered as payments for investment advice given to you.

Noteworthy... 
• US consumer sentiment fell from 76.0 in June to 66.5 in July, lowest since Aug-09
• US Consumer Price Index declined 0.1% in June on a seasonally adjusted basis (BLS)
• US Senate passes bill to overhaul the US financial system and its regulators (FT)
• US industrial production edged up 0.1% in June after having risen 1.3% in May (NBER)
• US producer price index fell 0.5% in June on a seasonally adjusted basis (BLS)
• Bank of Japan held its key rate at 0.1%, and raised its economic outlook (MarketWatch)
• Fed lowers 2010 growth forecast to a range of 3% - 3.5% (FT)
• Consumer prices in the Eurozone grew 1.4% y/y compared with a 1.6% rise in May (Economy.com)
• Industrial production in the Eurozone area up by 0.9% in May from previous month (Eurostat)
• Indian inflation stays above 10%; prices are up 10.55% in June from a year earlier (FT)
• Singapore economy grows at record pace of 18.1% in the first half of 2010 (FT)
• 25.5% of US consumers, nearly 43.4M people, now have a credit score of 599 or lower (AP)
• Prices of US imports fell 1.3% in June after a 0.5% drop the previous month (BLS)
• Chinese GDP growth was 10.3% y/y in Q2, down from 11.9% y/y in Q1 (Economy.com)
• US retail sales in June down 0.5% from the prior month but up 4.8% from last year (ESA)
• The US trade deficit in May 2010 increased 4.8%, to $42.3 billion (ESA)
• Moody's downgraded Portugal by two notches to A1 from Aa2 (MarketWatch)
• China's exports jumped 44% compared to June-09, leading to a trade surplus of $20B (FT)

Weekly Market Barometers

Charts Of The Week
A week that started out so well ended on a sour note leading the major market indexes into negative territory.  In terms of the US, much of the economic concerns are still with the consumer.  Two particularly concerning developments surfaced again this week.  Consumer sentiment took a dive for the worse; but we must also be worried that about a quarter of US consumers have now fallen into the category of the highest credit risk.  Do we really need to encourage consumers to take on more debt? 

Recommended Video
Please consider this interview with Niall Ferguson; in addition to some sobering observations about the prospects for economic improvement, he argues that the current crisis is much more a political problem than an economic one. Enjoy!

Good luck and good investing!

Disclaimer
Neither the information nor any opinion contained in this communication constitutes a solicitation or offer by us to buy or to sell any securities, futures, options or other financial instruments or to provide any investment advice or service. Each decision by you to do any investment transactions and each decision whether a particular investment is appropriate or proper for you is an independent decision to be taken by you. In no event should the content of this communication be construed as an express or an implied promise, guarantee or implication by or from us that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance. Please note that there is no requirement and no commitment to make any payments to FX Investment Strategies LLC in order to access our published information be it via email or via website publication. All information is publicly available without any required monetary consideration.  Any payments or donations made by you are deemed to be voluntary and cannot be considered as payments for investment advice given to you.

Just in time before the US Senate passed financial overhaul bill, your favorite friendly investment bank did it again. Goldman Sachs agreed to pay a record $550 Million to settle SEC charges related to Subprime Mortgage CDO.

From the Press Release:
Washington, D.C., July 15, 2010 — The Securities and Exchange Commission today announced that Goldman, Sachs & Co. will pay $550 million and reform its business practices to settle SEC charges that Goldman misled investors in a subprime mortgage product just as the U.S. housing market was starting to collapse.

In agreeing to the SEC's largest-ever penalty paid by a Wall Street firm, Goldman also acknowledged that its marketing materials for the subprime product contained incomplete information.

In his article Goldman Agrees to Carry On as Usual, Felix Salmon said it best when he wrote:

Well, that’s reassuring, knowing that from now on Goldman has promised not to break the law. Goldman (GS) has also consented to an agreement that when it puts together new mortgage securities, it’ll run any prospectuses or term sheets by its legal or compliance departments. As if it wasn’t doing that already. And there’s lots more like that: people on the mortgage desk have to attend training seminars on disclosure! Goldman “shall provide for appropriate record keeping”!

$550M is apparently the largest settlement ever paid on Wall Street.  Putting things in perspective though, that's about two week's worth of net income for the investment bank.  Here are the numbers:

As per latest financial statements, Goldman Sachs had a Gross Profit of $12.78 Billion with a Net Income of $3.46Billion in the first quarter of this year.  In the period from January 1st to March 31st of this year, we had 64 working days.  $3.46 Billion ÷ 64 = $54 Million. Therefore, it would take about 10 working days to rake in the entire amount of this record settlement. 

As Felix Salmon said:  Well that's reassuring...

We have had numerous inquiries as to our view on the Euro in recent weeks.  Our stance has turned from neutral to moderately bullish since the beginning of summer mainly for a number of technical reasons I would like to point out now.

a) The massive Euro trashing since the beginning of the credit crisis prompted a herd of speculators to short the Euro.  In addition, institutional investors began reducing their Euro exposure in various ways heading for “safer” currencies such as the Swiss Franc or heading home to the “safety” of the US Dollar altogether.  That created a massive shift towards short positions, many of which would eventually have to be covered.  Some profit taking did occur indeed and as we pointed out a few weeks ago, the contrarians started to get back at buying Euros.  Jim Rogers, the famous hedge fund manager, announced his contrarian move exactly one month ago:

“Everybody is so bearish about the euro that it looks like now is a good time to buy the single European currency.”

b) We examined the downward sloping trend line a few weeks back as well.  The Euro which clearly oversold at some point not only made its way back into the still downward sloping medium-term trend channel, but it has now also started to test the upper boundary of the channel.  The coming weeks will shed some light as to whether the trend is actually changing from bearish to bullish for good.  Hold on to your horses for now...

c) The Euro decline appeared too fast and too drastic IMHO.  Despite the massive debt problems of the Club Med countries (Greece, Portugal, Spain, Italy) and the resulting austerity measures which will put a financial strain on all of the Eurozone countries, a major currency does not just loose 20% of its value without some re-adjustments.  At some price levels, enough buyers will come in taking advantage of relatively good values thereby causing a retracement in prices. Looking at the massive decline from about 1.51 to 1.18 level, a technical reversal based on Fibonacci retracements levels could see the Euro go to at least 1.3125 (38.2% retracement) without changing the underlying trend.  That gives us still about 400 points of good potential short-term upside.

d) A look at basic moving averages further exemplifies the severity of the Euro decline this year.  Since the beginning of July however, we broke through the 50 day moving average (red line).  The 200 day moving average (blue line) is still quite a ways ahead and it may take some time to get there but it is a target on the horizon.  

These basic technical factors have been our main rationale for being moderately bullish in the medium term.  

In addition, we believe that the mood has shifted from “the Euro is toast” to “there are plenty of dark clouds ahead”; at least that is our sentiment from some of the discussions with traders.  Whether the Euro will make it long-term is yet another question.  However, unlike some commentators, we believe that the notion of “taking the pain now” via the various European austerity measures is the right way of dealing with the economic challenges ahead.  Too much debt and too much leverage was one of the key factors that brought about the worst economic crisis since WWII.  The US solution of using yet more debt and more leverage cannot possibly be the right approach for a sustainable recovery.  For now, we are just delaying the inevitable by “kicking the can further down the road” and hope that whoever needs to kick next has a rather mighty kick.  In view of the upcoming Worldcup final tomorrow, maybe we should consider some soccer players to become the next political leaders...

Disclaimer
Neither the information nor any opinion contained in this communication constitutes a solicitation or offer by us to buy or to sell any securities, futures, options or other financial instruments or to provide any investment advice or service. Each decision by you to do any investment transactions and each decision whether a particular investment is appropriate or proper for you is an independent decision to be taken by you. In no event should the content of this communication be construed as an express or an implied promise, guarantee or implication by or from us that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance. Please note that there is no requirement and no commitment to make any payments to FX Investment Strategies LLC in order to access our published information be it via email or via website publication. All information is publicly available without any required monetary consideration.  Any payments or donations made by you are deemed to be voluntary and cannot be considered as payments for investment advice given to you.

Noteworthy... 
• Canada adds 93,200 jobs vs 15,000 forecast; unemployment rate drops to 7.9% (Reuters)
• China bought a record amount of Japanese government bonds in May (FT)
• German exports rose by 9.2% in May-strong demand from China (AP)
• Strong Australian jobs data boost Aussie Dollar, up 4% for the week (FT)
• U.K. rates remain on hold at 0.5%; ECB leaves rates unchanged at 1.0% (Economy.com)
• Results of the stress tests of the 91 largest EU banks will be released on July 23rd (Economist)
• The IMF raised its global growth forecast , expects the world economy to expand 4.6% this year (WSJ)
• China rules out the "nuclear" option of dumping its vast holdings of U.S. Treasuries (Reuters)
• US mortgage rates drop to a fresh low of 4.57% (AP)
• AgBank of China sold $19.2 billion of stock in Hong Kong and Shanghai (NY Times)
• China plans to impose a new tax on coal, oil and gas extraction in western provinces (Bloomberg)
• US mortgage applications rise 6.7% as rates fall to record lows (AP)

Weekly Market Barometers

Chart Of The Week
US conventional 30 year mortgage rates through June 2010 were at an all-time low of 4.74%.  The rates have been dropping further to a new low of 4.57% this week. Combine that with a decline in home prices and housing has become somewhat affordable again.  Time to start looking at real estate again?

Recommended Video
Please consider this excellent interview with Dan Alpert;  he suggests that despite greater housing affordability and ultra-low financing rates home buyers do not need to rush in.

Good luck and good investing!

Disclaimer
Neither the information nor any opinion contained in this communication constitutes a solicitation or offer by us to buy or to sell any securities, futures, options or other financial instruments or to provide any investment advice or service. Each decision by you to do any investment transactions and each decision whether a particular investment is appropriate or proper for you is an independent decision to be taken by you. In no event should the content of this communication be construed as an express or an implied promise, guarantee or implication by or from us that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance. Please note that there is no requirement and no commitment to make any payments to FX Investment Strategies LLC in order to access our published information be it via email or via website publication. All information is publicly available without any required monetary consideration.  Any payments or donations made by you are deemed to be voluntary and cannot be considered as payments for investment advice given to you.

After the gold rush is the title of an article published by The Economist featuring a chart with inflation adjusted Gold prices all the way back to 1800.

Source: www.economist.com

The Subtitle "Gold is not as expensive as it seems" implies further price rises are in the making. However, the article also suggests:

“Perhaps now is the time to sell. After the January 1980 peak, the price fell by 55% over the following two years.”

So what is it then?  Is Gold cheap/expensive?  Will it rise all the way to $2,000, $3,000 or even $5,000 as some gold bugs have previously suggested?

Sorry, I don’t have the crystal ball to give you that answer.  However, we can look at a few things that are sometimes left out when evaluating Gold as an investment.

One important factor supporting the Gold price right now is the fact that Gold does relatively well when real rates of return are low and when investors typically shun other risky assets.  As long as short term rates remain near zero, the cost of holding gold is also relatively low; and with very few alternatives for higher returns, Gold will remain an asset high up on the demand list of investors.  Higher rates will do the opposite.  If and when rates will increase (any ideas as to when?), investors will increasingly seek higher risk assets and start chasing higher returns again.

But here’s the dilemma I have... Gold is often perceived as a safe-haven investment but most people forget that Gold is a commodity and it trades just like a commodity.  That means, it has no built-in returns or dividends other than price appreciation.  On the contrary, the cost of holding Gold substantially reduces returns over a longer period of time.  From that perspective, Gold cannot be considered a must-have long-term asset.  It also has a rather mixed record in terms of providing a real inflation hedge as the cost of holding gold reduces that hedge further. 

Gold does however provide a sort of feel-good or feel-safe factor.  Its luster has not diminished over the millennia and in times of economic uncertainty, the shiny metal continues to attract the weary and panic-stricken investors.  Who knows where the price of gold might be one year from now...

But investors should remember that just like any other commodity, Gold prices can move up and down rather violently. It is not all that unusual that Gold prices could rise or fall 5% or more within a day.  Long-term investors should remember this: There is a reason it's called commodity "trading", not commodity investing! 

Noteworthy... 
• The US economy lost 125,000 jobs in June; -225,000 Census, +83,000 private sector (BLS)
• US unemployment rate fell as to 9.5% as 652,000 people gave up on their job search (AP)
• Unemployment in the 16-nation euro zone held stable at 10% in May (Reuters)
• Australian PM Julia Gillard scaled back the country's controversial mining tax (Bloomberg)
• July 1st is the 20th anniversary of the introduction of the D-mark in East Germany (FAZ)
• Euro area inflation estimated at 1.4% (Eurostat)
• Rates on 30-year fixed mortgages fall to 4.58%, lowest level since mid-1950s (AP)
• US pending homes sales dropped 30% in May to lowest level on record (AP)
• The yield on the US 10-year Treasury below at 2.9% lowest level in 14 months (Reuters)
• Foreclosed properties accounted for 31% of US home sales in Q1 of 2010 (Reuters)
• Average price for foreclosed properties was 27% below that of regular sales (Reuters)
• US consumer confidence declined sharply in June to 52.9 (Conference Board)
• US home prices rose 0.8% in April, no sustained rise in sight yet (S&P)
• US Personal income in May 2010 increased 0.4% from April 2010 (ESA)

Weekly Market Barometers

Chart Of The Week
If you have been investing for a number of years, chances are that you experienced all of the emotions described in this neat chart below.  Enjoy!

Source:  http://www.wallstreetcheatsheet.com/

Best wishes for a Happy 4th of July week-end! 

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Neither the information nor any opinion contained in this communication constitutes a solicitation or offer by us to buy or to sell any securities, futures, options or other financial instruments or to provide any investment advice or service. Each decision by you to do any investment transactions and each decision whether a particular investment is appropriate or proper for you is an independent decision to be taken by you. In no event should the content of this communication be construed as an express or an implied promise, guarantee or implication by or from us that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance. Please note that there is no requirement and no commitment to make any payments to FX Investment Strategies LLC in order to access our published information be it via email or via website publication. All information is publicly available without any required monetary consideration.  Any payments or donations made by you are deemed to be voluntary and cannot be considered as payments for investment advice given to you.

What started out as a promising year for equity returns, could transform into a mirage after all. The major markets turned south ever since the beginning of May.  So far, the old “Sell in May” rule looks like very good advice given the more than 14% decline of the S&P 500 since the beginning of May.

The S&P 500 is in good company though.  All major stock markets, with the exception of India which was essentially flat (+0.81%), showed a decline for the first six months in 2010.  The next best in a crowded field of losers was Germany’s Dax which declined only 1.37% so far this year.  All others, China leading the crowd, showed poor results at half-time in 2010.

Taking a closer look at the individual markets, we noticed that most of them have been trading below the 200-day moving averages (red line graph in charts below; the traditional bear market signal occurs when the prices fall below the 200 day moving average).  Notable exceptions, albeit potential late-runners: India and Germany.

S&P 500 (USA)		Dow (USA)
FTSE (UK)		DAX (Germany)
All Ordinaries (Australia)		Nikkei (Japan)
Hang Seng (Hong Kong)		SSEC (China)
BSE (India)		Bovespa (Brazil)

 

On the currency and commodities front, things have not been all that rosy either.  Despite questionable economic prospects, the US Dollar has again become the de-facto safe haven currency.  Other strong performers were Gold & Silver as well as the Japanese Yen.  The worst performer of the major currencies has been the Euro which fell over 15% during the first half of this year.

Add the recent drop in US-Treasury yields and I can see memories of 2008 are resurfacing...

10-year US T-Note		30-year US T-Bond

In view of the less than encouraging US employment report that just came in, we are entering murky waters for the remainder of the year.

Good luck and good investing!

The updated Long-Term Budget Outlook from the Congressional Budget Office (CBO) is out.

What a surprise, the previously optimistic forecasts by the US administration do not appear to come to fruition.
The CBO is hedging their bets now with what they call an "alternative fiscal scenario".

The budget outlook is much bleaker under the alternative fiscal scenario.
Debt as a share of GDP would exceed its historical peak of 109 percent by 2025 and would reach 185 percent in 2035.

A very gloomy picture is starting to emerge, looking at the projections.

Source: www.cbo.gov

We are not quite there yet, the current numbers are still somewhat better than other debt-ridden economies.

 

USA	Greece
External debt (as % of GDP): 96.5%   Gross external debt: $13.77 trillion (2009 Q3)   2009 GDP (est): $14.26 trillion	External debt (as % of GDP): 170.5%   Gross external debt: $581.68 billion   2009 GDP (est): $341 billion

Source: http://www.cnbc.com/id/30308959/The_World_s_Biggest_Debtor_Nations

 

However, given the projections under the “alternative scenario”, should anyone still be laughing at Greece?

As I mentioned a few backs back, we should heed the wake up call from Greece.

Good luck and good investing!