Under The Radar Screen:
Big Developments Getting Little Attention
Two developments of great significance — in China and Russia — have attracted little attention from the Western financial media that is totally obsessed with calamitous fiscal crises at home. We think you should know about them.
The Pan Asia Gold Exchange (PAGE)
The Pan Asia Gold Exchange (PAGE), backed by the Chinese Government, opens for business in the next few months and is expected to be fully operational by the end of 2011. This development represents an unprecedented challenge to the entrenched institutions that effect the price of gold and at the same time supports Beijing’s ambitions for world currency reserve status. In short, there is a new gold trading market in the wings with the potential to change global supply and demand dynamics and how gold can be traded.
Here’s the background:
PAGE will allow individuals to buy physical gold from their computer at home. Initially, the 200 million or so clients of Agriculture Bank of China will be able to buy 10-ounce mini contracts on the PAGE. Later, non-Chinese will be able to purchase International Spot Contracts through the exchange.
Ultimately, PAGE will provide an alternative playing field for global gold investors who hitherto have had to rely on unsecured gold futures contracts and the bullion banks to determine the price for gold. With PAGE, a gold buyer will be able to receive a 90-day International Spot Contract and actual title to the gold he/she buys, not just a futures contract or an unsecured note from a bullion bank, or certain international banking institution. The PAGE gold’s in 10 ounce bars can be delivered to the customer with little effort. The international bullion banks, have been accused for years of manipulating the gold price. Such manipulation will now be more difficult.
PAGE could pose a challenge to the near monopoly on gold price discovery currently held by the members of the London Bullion Market Association (LBMA) that include many large banks.
For years, their practice has included leasing gold often from central banks and then selling it into the market to drive the price down. Leasing and selling of gold has been a profitable game for the savvy players involved. Every game has a loser, however, and in this case it has been less sophisticated gold investors. The selling activity has often created panic among gold investors who sell at the wrong time allowing the short sellers to buy back the bullion at low prices.
PAGE provides an alternative route that bypasses the bullion banks of the LBMA.
PAGE also provides a new way for international investors to own Chinese currency — the Renminbi (RMB). Here’s how: The buyers will purchase gold contracts denominated in RMB. They can then hedge out the gold in the dollar-based gold markets. As a result, they effectively own RMB.
We see here yet another example of multiple Beijing initiatives opening the RMB to world investors. Over time, these innovations will enhance the value of the RMB and create a deeper, more liquid foreign exchange presence for the Chinese currency. PAGE is another internationalization step forward for the RMB in the direction of world reserve currency status.
The advantages of being the world reserve currency, as well as the responsibilities involved, have not been lost in the Chinese government. They won’t rush the process, but they clearly have a long term plan.
Meanwhile, In Russia…
As the Chinese continue to lay the groundwork to be the world’s next reserve currency, Russian Prime Minister Putin is pursuing plans for his own region. A year ago he created a union between Russia, Belarus and Kazakhstan that removed tariff and custom controls along their internal borders. According to a recent article in the Financial Times, his arrangement will expand in January into a “common economic space” with freedom of goods, services and capital. A market of 165 million people — or 60 percent of the former Soviet Union’s population — will be created. The leaders of the three countries envision a Eurasian economic union by 2013 and have even discussed a common currency at a later date.
For those who would like to know more about Mr. Putin’s ambitious plans, please refer to the following article.
Guild Basic Needs IndexTM
Many of our subscribers have asked and inquired about the lastest update in regards to Guild Basic Needs IndexTM. Please see below for July’s results. We will be posting August results shortly, please visit our website regularly for updates.
Finally, High-Frequency Trading Under Scrutiny
Belatedly, U.S. regulators are finally taking a long-overdue look at the high-frequency trading. We have brought your attention in the past to this abuse of power by large, well-connected companies that create what many believe to be unfair, manipulated, and volatile markets. Please refer to the following link on this important subject.
Investment Trends To Keep In Mind
As you compile your buy list for the next rally, we would like to make you aware of headwinds and tailwinds to reckon with in your calculations.
For the decade ahead, U.S. investors need to understand that there will be cuts in social programs, defense spending, and government employment on the federal, state, and local levels. By comparison, defense spending in China, India, and Russia will increase. Investors in sectors and industries dependent on government spending should be cautious. To learn more, we suggest reading an excellent in-depth report on defense spending in Bloomberg Businessweek in the September 5, 2011 edition.
Longer term, U.S.-oriented investors also need to be conscious of headwinds for suppliers to the following sectors: medical, banking, for-profit education, and all types of services (including personal, business, and military). Instead, you may want to set your sights on buying beneficiaries of what may be a massive infrastructure spending increase.
Education is likely to shift out of the classroom and into the home setting where students will be increasingly educated via the internet. If you are not familiar with this trend, check out the website of the Khan Academy at www.khanacademy.org. This is the most visited educational website in the world. It offers a dazzling array of free, simply-communicated and well-taught video classes in math, science, history, economics, finance, and banking. More areas of learning are constantly being added.
You may want to look to Europe for some ideas. When the inevitable bond buying by the European governments takes place probably through the EFSF (European Financial Stability Fund), the European stock markets could rocket up as people cover their short sales and look for undervalued growth stocks. Technology, software, and other fast growing industries could benefit as investors make initial forays into European equities. We think this may possibly happen between now and the end of October.
Asia and the emerging world should definitely figure in your buy list. Real opportunity exists in China, Brazil, India, Indonesia, and other countries once liquidity is added to the markets and European fears die down. Focus on long-term growth stocks that have highly-visible tailwinds. For example, we are investigating some deep cyclical, suppliers of raw materials, and fast-growing consumer stocks in countries where consumers are discovering the experience of shopping.
Gold shares have underperformed gold for months. If gold stays in the current price range or rises, we expect gold shares to attract much more attention as two events take place.1. Hedge funds that have gone long gold bullion and short the shares as a hedge may now take profits on their bullion position and re-buy the shares to cover short sales. 2. If gold stays above $1,500 per ounce for a prolonged period many gold mining companies will enjoy record cash flow and profits. At that time larger companies will take over smaller reserve rich mining companies.
We thank you for reading our newsletter and look forward to hearing from you. To request information about Guild Investment Management services and offerings please call (310) 826-8600 or email us at email@example.com.
|Investment||Recommended||Closed||in U.S. Dollars|
|Commodity Market Recommendations|
|Chinese Yuan||9/13/2010||Open||+ 5.6%|
|30 YR Long Term|
|U.S. Treasury Bond||8/27/2010||10/20/2010||0.0%|