It is the New Year and we are all looking for new beginnings. Well all I can say is…
SO FAR SO GOOD
Thus far in 2006 most major stock markets and many secondary stock markets are rising steadily. This reflects, in our opinion, a continued creation of global liquidity and a move of this liquidity, which totals about $45 to $50 Trillion. Some of this massive liquidity is moving out of speculative real estate and into precious metals, industrial commodities and stocks.
Our large commitment to gold, especially royalties companies, has paid handsome dividends. Yet, we think that the long-term bull case for gold will continue:
1. Strength in commodities, which are somewhat correlated to gold. Strength in industrial commodities, especially metals, is bullish for gold. Industrial metals are in demand from the emerging world to build the infrastructure needed to create new economic growth. This ongoing demand for copper, nickel, zinc, steel coal oil, natural gas and many other industrial commodities is part of the reason that gold share and the gold price have moved so rapidly.
2 The economic backdrop is becoming more bullish for foreign currencies and less bullish for the dollar. We believe we are near the end of rising U.S. interest rates, and the beginning of the rise in the interest rates in Europe, Japan and elsewhere. This combined with the wish of many foreign nations to diversify their major holdings away from the U.S. dollar into more attractive vehicles is good for gold. This is bullish for gold, which is viewed by many dollar holders as an alternative to holding dollars.
3. The rising economic influence of independent nations not aligned with the G-8 nations, like Brazil, Argentina, India, etc, combined with their desire to have a role in world economic affairs sends foreign increases gold’s attractiveness. For these countries, a strong dollar and the continuation of the US dollar as the world reserve currency is not in their best interest. They will work to moderate the dollars’ influence and to eventually create a new reserve currency more aligned with their best interests.
4. The incredible growth in global liquidity, as many nations add to their liquidity is good for gold. As we have been repeatedly saying, this global liquidity is finding its way out of real estate and into gold, stocks, and commodities worldwide. For more see global economics section below.
U.S. DOLLAR WEAKNESS
U.S. rates are approaching a peak and European rates may be starting to rise after a long hiatus. Secondly, China is once again hinting that they may stat diversifying their assets away from U.S. bonds into alternative bonds, commodities and precious metals.
CHINA IS CULTURING THE EMERGING ECONOMIC LEADERS. THE U.S. SHOULD DO SO AS WELL.
Brazil, Argentina, Russia and others who have in the past borrowed from the World Bank, and are repaying the loans, want more voice in global economic decision-making. U.S. hegemony is being questioned, and the U.S. must learn to work with these nations, as they begin to enter the top levels of global economic power.
Since 1989, Japanese GDP and corporate profits has grown by about 40% and the stock market fell by 60%. Thus, Japanese P/E ratios are at about one third of the level in 1989. We continue to see Japan as very cheap. We have about 20% of our client’s capital in Japan and will increase our presence as corrections occur. We continue to be very bullish on Japan.
Value stocks denominated in the Hong Kong dollar remain a focus of ours. We prefer old-line, established Hong Kong companies with large property holdings and income from Hong Kong that are cautiously and gradually entering the market in China by building high end shopping centers in major Chinese cities. They will get large and growing rents as demand for luxury good soars in China in coming years.
European insurance, investment management companies, and major banks are attractive for investment. We are about 15% invested in this area. Insurance companies are raising insurance premiums. Investment management companies will grow as liquidity finds its way into their investment vehicles, and banks will increase their spreads on their loans and increase their investment banking fees. In addition, the European stocks are denominated in European currencies such as the Euro, British Pound, and Swiss Franc will rise in value versus the dollar, in our opinion.
We expect volatility in U.S. stocks in 2006. Fallout from the Jack Abramoff scandal, and the potential for new problems in Iraq may make the U.S. market look like a roller coaster during the year. I am concerned to hear that Iraqi oil output has declined. It was at a new low last month as sabotage of the infrastructure has continued. The only oil refinery in Iraq has shut down because of terrorism, and this leaves the Iraqi people with only imported gasoline at much higher prices. The fortunes of President Bush are tied to the fortunes of Iraq, so this is not good news for him.
Some sectors of the U.S. market will do well in 2006. We particularly favor the medical related theme as well as the equipment and capital spending themes.
In other words, companies that provide medical products and services, and companies that produce heavy equipment or other capital goods. Financial stocks may do well as interest rates peak before the election. Because of the expected volatility we will use market declines as buying opportunities focusing in the above areas. To summarize, in our opinion, there will be opportunity in the U.S., but there maybe greater opportunity elsewhere in the world.
World economic activity continues to proceed ahead. There is a solid recognition among the better investors globally, that it pays to be in the markets today. Many world markets are rising due to the outpouring of liquidity that still continues in the U.S., Japan, Europe and many other parts of the globe.
Just today, I was informed by the well-respected publication, The Institutional Strategist that on January 5th 2006 [after the year end-period when the Fed often adds liquidity] the Fed added $448 million in a coupon pass in TIPS, $5.75 billion in overnight repos, and $11 billion in 14-day repos. This is a lot of liquidity being added to the U.S. economy!
The Institutional Strategist further points out that M3, which will soon no longer be published for public observation and analysis, grew at a 12% annual rate between early November and mid December. No wonder the price of gold took off at the same time. This is yet another reason for continued gold strength.
As Jim Sinclair of www.JSMINESET.com has very articulately stated in the past, why should the U.S. not publish M3 when every other major country does publish it?
THE FED IS DECREASING THE TRANSPARENCY OF THEIR ACTIVITIES–THIS IS BEARISH FOR THE US DOLLAR.
Maybe the Fed wants to increase opacity and diminish the transparency of their activities. This is a bad for the value of the U.S. dollar. Historically, In the case of countries and companies where transparency is less, valuations of stocks in their stock markets is lower than it is in countries where the transparency of government and company records is greater.
If, as the brilliant Jim Sinclair often says, the dollar is the common stock of the U.S., why should the dollar not fall when the central bank becomes less transparent in its behavior?
We think that the U.S. dollar should fall and that it will fall in value versus commodities and versus the world’s major currencies.
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You can also read Monty Guild’s past periodic market and economic commentary articles by going to the Commentary Archive on our web site www.guildinvestment.com.
Monty Guild is Chairman and CEO of Guild Investment Management, Inc., a registered investment advisor. All material presented herein is believed to be reliable. Investment recommendations and opinions expressed in these reports may change without prior notice.