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Gold—Playing with The House’s Money is a Good Thing

Gold—Playing with The House’s Money is a Good Thing

Crises Ahead As U.S. Banks Fight Against Needed Overhaul

Those of you who have followed our newsletter for some years know that we predicted the derivative-based banking crisis well before it happened.  We saw it developing and repeatedly predicted a looming disaster. When the crash occurred, we explained the most egregious causes, one of which was the un-bank like speculative behavior of banking institutions. Leading up to the crash, they were acting more like wild speculators than sober lenders and traders of government bonds.

Banks are supposed to be conservative institutions that do prudent analysis of credit risk, make loans accordingly, and buy government bonds. In the initial years of the 21st century, the banks were far from prudent and conservative. They were gamblers, and when they lost, the taxpayer had to bail them out.

The door to such risky and adventuresome behavior was opened when Congress and President Clinton effectively repealed the Glass-Steagall Act of 1933, a law targeting the gambling behavior of banks that contributed to the Great Depression. By separating commercial banking from speculative activity and investment banking, Glass-Steagall served as an effective anti-depression tonic for decades. That changed after 1999, with the enactment of the Gramm-Leach-Bliley Act, that allowed a merger of investment banks (that engage in trading and issue securities) and commercial banks (that take deposits and make loans). Freed from restraint, elated bankers proceeded to lever up and gamble with depositor and shareholder money, and eventually with taxpayer money.

Initially, there were a few years of exceptional profits. But the bankers became blinded by greed, employed too much leverage, did too little research on their speculations, and, by 2007, were precariously teetering in the direction of collapse.  A total wipe-out was narrowly averted at the last minute by emergency transfusions of massive taxpayer money in the form of loans and investments into many poorly-managed banks.

In short, in the few years after Glass-Steagall was torpedoed in favor of the Gramm-Leach-Bliley Act, the bank bubble built up and then blew up.  The severe aftershocks are still being felt.

Unfortunately, the self-interest continue unabated. The banking sector is currently hard at work trying to stop implementation of the Volcker rule, a key provision in a needed financial overhaul legislation targeting the over-speculation madness. Named after the former Federal Reserve chairman, the provision seeks to bring back prudent risk-taking and less taxpayer liability to banking.  A recent article in the Wall Street Journal explains the latest banking shenanigans.  To read the article, click the following link: Volcker Rule Delay Is Likely

There are politicians financially supported by the banking industry. Their allegiance to their backers may trump national interest and result in the Volcker rule being delayed or ignored. If such tactics prevail, you can expect crisis after crisis ahead within the banking system, along with taxpayer bailouts, until such a rule is fully and finally implemented.

Asia Watch: Banking, Exports, And Currency

  • During a recent review of Asian economic developments, we came to a number of conclusions:
  • Industrial production throughout most of the region looks promising.
  • Domestic demand continues to be supportive of economic growth.  China in particular looks strong.
  • Even with a serious crisis in European banking, we do not see an economic decline in India, China or emerging Asia. There might be some slowing in the GDP growth rates, but we believe they will perform quite respectably against overall global growth.
  • The language expressed these days by regional central bankers has had an appreciable “dovish” tone.  They appear to be putting the brakes on interest rate hikes probably because they see risk to growth with any continued rate hikes even within a climate of uncomfortably high inflation. Most economists believe that interest rates throughout the region — with the exception of China and India — will be on hold throughout the remainder of 2011. Indonesia, Korea, the Philippines, and Malaysia have demonstrated their dovish approach by lowering the floor of their policy rates. Along with Singapore, these countries are more focused on export growth and strengthening domestic business conditions, which are growing at a steady but more modest rate than in India and China. These two countries may continue to raise rates because of strong domestic demand.  We expect them to continue enjoying strong economic growth.
  • We have become more conservative about appreciation prospects for some Asian currencies. History has shown that exports growing at less than 10 percent a year in emerging countries lead to declines in the local currency.

We recently took profits in the Thai baht and Singapore dollar. They have pulled back versus the U.S. dollar since our sell recommendation. The only Asian currency we remain long on is the Chinese Yuan.  Please see our currency recommendations in the summary section below.

 

Singapore Dollar – 1 year Chart

 

Thai  – 1 year Chart

 

Russia Watch: Pessimism over Putin

For some time we have been expressing pessimism about Russia’s ‘democracy” or lack of rule of law. Our opinion is apparently shared by The Economist.  A major article this week about Russia under Vladimir Putin suggests that the Russian people express little optimism about the future. Many of the young and educated class are heading for the exits, while those trained abroad do not return.  To read the article, click the following link: Time to Shove Off

We find it sad because Russia has been such a powerhouse in math and science for the world. The country has a huge cache of natural resources, talent and brainpower, and should be prospering, but its citizenry has little incentive to start families and work to build a better tomorrow.

 
Gold—Playing with The House’s Money is a Good Thing

We have been recommending gold since it sold at about $325 per ounce in June 2002.  As it now approaches $1,900, we strongly suggest that investors examine their strategy going forward.

One smart strategy over the years is that when you are riding a big winning investment, sell enough to get your cost back, and then go forward on the house’s money. This is exactly our plan when gold hits $1,880.  At that point we will sell off 20 percent of our long term position and keep 80 percent. Selling one-fifth of our position will recoup slightly more than what we paid for the entire investment. You may want to consider doing the same: recoup your cost and ride forward on the profits.

Don’t misunderstand. We are not bearish on gold. In fact, we believe that gold will move higher and cross the $2,000 mark in the future. We simply view the process of selling and reducing our cost basis to zero as prudent and professional behavior. As any experienced professional will confirm, selling enough to recoup your initial investment and riding on the profits is smart, and especially so after such a prolonged price rise.

 
U.S. Stock Market

We believe that now is the season for a rally in U.S. stocks, especially technology stocks.  We are adding the U.S. to our buy list.  This is not a long term recommendation, but we expect to hold it for a few months.

QE 3 from Europe, U.S., Japan (in a small way), and possibly China is forthcoming.

 
Tracking the Real Rising Cost of Living 

Many readers have inquired about our Guild Basic Needs IndexTM, a simple at-a-glance cost-of-living feature designed to track changes in the price of basic necessities needed by all Americans. We created the index because the existing yardsticks used by the government, such as the Consumer Price Index (CPI), are constantly manipulated and thus provide misleading information.

By comparison, the Guild Basic Needs IndexTM concentrates on four fixed categories of primary and essential living needs. Each category is assigned a specific percentage of the overall index:

1. Food   30%
2. Clothing 10%
3. Shelter  30%
4. Energy  30%

Food, clothing, and shelter are self-explanatory and energy is needed for basic heating, electricity, cooking, and transportation.

GBNI_Table_July2011-1.png

 

The categories and their values within the Guild Basic Needs IndexTM are fixed, unlike the government indices. There is no tampering — no seasonal adjusting, smoothing, or replacing of components.

 
Our Humble Thanks

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 guild@guildinvestment.com.

 

  Date         Date        Appreciation/Depreciation
Investment Recommended Closed in U.S. Dollars
Commodity Market Recommendations      
Gold 6/25/2002 Open +61.0%
Corn 4/20/2011 8/3/2011 -6.3%
Oil 2/11/2009 8/3/2011 +157.1%
Corn 12/31/2008 3/3/2011 +81.0%
Soybeans 12/31/2008 3/3/2011 +44.1%
Wheat 12/31/2008  3/3/2011  +35.0% 
Currency
Recommendations
     
Long       
Canadian Dollar 9/13/2010 Open +3.8%
Long       
Chinese Yuan 9/13/2010 Open +5.5%
Long       
Swiss Franc 9/13/2010 Open +15.1%
Long       
Brazilian Real 9/13/2010 9/1/2011 +6.4%
Long       
Singapore Dollar 9/13/2010 8/3/2011 +10.9%
Long       
Australian Dollar 9/13/2010 6/29/2011 +14.1%
Long       
Thai Baht 9/13/2010 6/22/2011 +6.5%
Short       
Japanese Yen 4/6/2011 7/27/2011 -9.7%
Short       
Japanese Yen 9/14/2010 10/20/2010 -3.3%
Equity Market
Recommendations
     
U.S. 9/14/2011 NEW NEW
India 4/6/2011 Open -22.1%
Malaysia 6/29/2011 8/3/2011 +0.1%
U.S. 6/29/2011 8/3/2011 -4.6%
Japan 2/15/2011 8/3/2011 -9.5%
Australia 2/15/2011 6/22/2011 -0.9%
Canada 3/24/2011 6/22/2011 -7.1%
Colombia 9/13/2010 6/22/2011 +2.6%
Malaysia 4/6/2011 6/22/2011 +0.8%
Canada 12/16/2010 3/11/2011 +7.9%
U.S. 9/9/2010 3/11/2011 +18.1%
South Korea 1/6/2011 3/3/2011 -2.9%
Colombia 9/13/2010 2/2/2011 +3.9%
China 9/13/2010 1/27/2011 +5.0%
India 9/13/2010 1/6/2011 +7.9%
Chile 9/13/2010 12/16/2010 +8.9%
Indonesia 9/13/2010 12/16/2010 +9.5%
Malaysia 9/13/2010 12/16/2010 +1.3%
Peru 9/13/2010 12/16/2010 +32.2%
Singapore 9/13/2010 12/16/2010 +4.8%
Thailand 9/13/2010 12/16/2010 +11.9%
       
Bond Market
Recommendations
     
       
 30 YR Long Term      
U.S. Treasury Bond   8/27/2010 10/20/2010 0.0%