|September – An Important Month for Europe
As the August European holidays draw to a close many are nervous about upcoming European events that will test the German and other European nations’ commitment to a stable Euro currency. Some observers are concerned that Germany will opt for a Euro without Greece. If Greece were to drop out of the Euro, we would see a rapidly implemented and massive QE program initiated by the European Central Bank (ECB), with aid from central banks in the U.S., U.K., Japan, Canada, and elsewhere. In our opinion, this QE would cause a rather substantial rally in European stocks.
The bottom line is that all major central banks have made it clear by their actions, and in some case by their words, that they are willing to do whatever it takes to keep the current world banking system solvent. Over the next few years QE (money printing) will be the answer to liquidity or crises of confidence in Europe, the U.S., or elsewhere in the developed world.
As September’s events take shape, we will keep our readers apprised.
Gold Gains Wider Acceptance as Collateral in Financial Exchanges — and as Money
Four points of interest demonstrate increased global acceptance of gold as a currency rather than a commodity:
1. Several commodity exchanges have recently begun to accept gold bullion as collateral for margin accounts.
2. Should recent proposals be approved, cash has been joined by gold bullion as a zero-percent-risk-weighted asset for Basel III capital requirements…
The new Basel III requirements require that banks’ capital must rise from 4 percent to 6 percent of assets. Therefore, we expect that more of a bank’s capital will be comprised of gold, in addition to its cash and other assets.
3. Reports last week hinted that Republican politicians are adding a gold related clause to the Republican platform for the first time in two decades. This clause mentions that gold should be part of the U.S. monetary system, and is in response to the popularity of Congressman Ron Paul’s push for a gold standard backing at least in part for the U.S. dollar. It has not yet been adopted as part of the platform.
4. In the second quarter of 2012, central bank purchases of gold made up 16 percent of all gold demand, according to the World Gold Council. This is significant proof that central banks are adding gold to their reserves as they tire of concentrating their reserves in U.S. dollars and Euros.
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Neither China’s Economic Health Nor Global Economic Health can be Measured by Monitoring the Shanghai Stock Market Index
We note that many investors believe that China must grow for the world to grow. While this is a simplistic view, we agree that Chinese growth — currently about 7.5 percent per annum — is important to world economic growth. However, another fixation of investors strikes us as bizarre — the use of the Shanghai Composite Index as the barometer for how fast the Chinese economy is growing. We find this basically incorrect.
For the world in general, we have often said that in most developed and developing countries, economic growth leads to higher corporate profits. Historically it is also true for the world in general that higher GDP leads to higher stock prices.
However, in China’s case, economic growth does not correlate highly with the Chinese stock prices…
Why Does Shanghai’s Index Lack Correlation to GDP?…
Speaking of P/E Ratios…
Inspired by Success in America, Shell Bets a Billion Dollars a Year on China’s Shale Gas
Just as the U.S. manufacturing sector is experiencing benefits from the availability of abundant and relatively cheap energy, China recognizes it should do the same. This is why the country has opened its borders to international oil companies, and Royal Dutch Shell has grabbed the early lead.
Earlier this year, Shell singed a joint production-sharing agreement with China to tap China’s immense unconventional energy resources. The Anglo-Dutch oil giant is on record this past week saying that it plans to spend a billion dollars a year for several years on its efforts in China. Shell is not alone. Other global energy companies — Exxon, Total, BP, and Chevron — are among those trying to unlock what many believe to be the largest unconventional gas reserves on the planet. Shell is ahead of the competition, having drilled more wells than any other international firm thus far (11), and Shell’s partner in the effort, CNPC (China National Petroleum Corp) is the parent of PetroChina, the company responsible for producing almost 60 percent of China’s oil and almost 75 percent of China’s natural gas.
We have discussed in these letters many times that China has been acquiring natural resources around the world for years — and sometimes staking questionable claims to resources outside its borders (see Malaysia section above). These latest deals with international players help China tap resources within its borders. China may own the acreage, but they currently lack the technical expertise. By working with experienced global companies they gain expertise and access to capital resources…
Just as shale gas has been a game-changer for North America, China tapping its internal energy resources could cause a global energy power shift. We know that Russian and middle-eastern oil suppliers must be paying close attention.
Malaysia has been Viewed as a Safe Haven for Some Investors, but with Elections on the Horizon…
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Preparing for Higher Prices
As we wrote two weeks ago, warning signs of coming inflation are more evident. The most obvious canary in the coal mine for upcoming price increases is commodity prices. Global energy prices are elevated as a result of supply concerns and continued growth in demand. Food prices are rising due to marginal-to-poor crop production around the globe. Real estate prices appear to have bottomed in many developed markets and remain elevated in some emerging markets.
There are those who are convinced that inflation will not be a problem for a long time. They point to slack in labor markets, stagnant consumer demand, and deleveraging in the developed economies. Our view is that the same items they cite indicate that governments will respond by introduced more monetary system stimulus.
The printing of money continues to provide wind to the sails of asset prices around the globe. When prices rise, not all assets rise commensurately. Assets that are more likely to rise in price include those that are either in limited supply, or that represent basic, essential needs. These are the prices that our Guild Basic Needs IndexTM tracks.
We believe that the world will experience price rises in the future as increased global money supply and liquidity find their way into commodities which are fungible and which represent a store of value for the citizenry. If a commodity can be eaten, used for apparel, shelter or as a means of adornment people will acquire and hoard such assets in times of economic distress. This is even more true if the commodity has the attributes of a currency and can be used as a medium of exchange. It does not matter whether the distress is caused by inflation or deflation/ depression commodities with currency attributes will be in demand.
Higher prices for basic needs are the result of: more liquidity ( money printing), improved diets in many countries, improved ability to buy apparel, upgraded living conditions, and the use of more energy to sustain their lifestyles. Our expectation is that the inflation rate of basic needs will continue to substantially exceed the rate of inflation published by official sources.
We publish our Guild Basic Needs IndexTM (GBNI) as a public service. Pay attention to the data as it appears semi monthly or check the website. www.gbni.info. People who choose not to pay attention to the prices of basic needs will be late in realizing that inflation is upon them — and the proverbial ‘canary’ that represents their savings may succumb to the poisonous environment.
Track the price of basic needs www.gbni.info
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