Is Gold the Sponge that Absorbs All Perceived Risks?

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Gold prices closed at $1,458.80 an ounce today. The demand for gold continues to rise as investors seek shelter from volatile equity markets. According to The Wall Street Journal, despite record high prices the price of gold is still below the inflation-adjusted price of $2,348.21 reached in 1980. Gold prices have increased by 146.58% in the last five years in US dollar terms.

Investors have poured billions into physical gold and other gold-related assets in recent years. For example, the SPDR Gold Shares ETF(GLD),the largest gold ETF in the world holds 1,217 tonnes of the yellow metal in its trust valued at over $57.0 billion.

In spite of the rise in gold prices in recent years, Emmanuel Painchault, deputy director and head of commodities and infrastructure, at Edmond de Rothschild Asset Management believes that gold prices will rise further. From an interview in The Asset magazine of Hong Kong:

What do you forecast for 2011?

The start of the year saw two trends. After ending 2010 on a high note (USD1,421/oz), gold price corrected quickly to USD1,313.9/oz in less than a month. It has since rebounded above USD1,400/oz and even reached a new nominal high of USD1,444.95/oz on March 7 2011. This is because the excessive public debt in developed countries does not militate for higher interest rates; the economy has improved but it remains fragile. Besides, inflation is clearly looming: oil is back above USD100/ barrel and soft commodity prices are above their highs seen in 2007 and 2008 when food riots broke out.

These factors contradict the consensus view at the start of 2011 that we would enjoy an inflation-free recovery, which meant that real interest rates could be soon on the rise. In fact, we might stay in a low interest rate environment for longer than expected and in any case, if interest rates were to be raised, it would be to fight inflation. The net effect is that real interest rates are set to stay low -and even negative, as is currently the case in the US — and this has always been bullish for gold prices.

Gold is a safe haven, and the rebound in its price has also been driven by the current upheaval in North Africa and the risk of contagion in other countries like Algeria and Morocco. It will eventually abate, but there will be other geopolitical events that will take the price of gold higher. Our world is certainly not as safe as we previously thought.

Gold is a sponge that absorbs all the perceived risks on this planet, whether they are financial or geopolitical.

Many gold bulls would agree with Emmanuel’s views on gold. Gold prices may continue to rise over the long-term with occasional downs. Some expect prices to reach $2,000 an ounce soon. In an interview last year investment guru Jim Rogers mentioned that he plans to own gold till it reaches $2,000 an ounce.

Update: MoneyWeek article The next big driver of gold’s bull market – China’s middle classes notes that in addition to rising Chinese demand for gold, demand is outstripping supply for many years now as shown in the chart below:

Gold-Demand-Supply-Comparison

Disclosure: No Positions

Another Take on Why Diversification is Important

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In an earlier post we reviewed about why diversification matters in building a portfolio. In this post let us take another look at a two charts that show the importance of diversification across various asset classes and sectors.

The period table of investment return below shows the performance of various asset classes from 1991 to 2010:

Click to enlarge

Asset-Class-Returns-1991-2010

asset-class-defns.jpg

At the depth of the Global Financial Crisis(GFC) in 2008, emerging markets fell 41.4% and BRIC equities crashed almost by 50%. However U.S. large caps fell just 21.4% and U.S. bonds were the best performers with a return of 31.6%. In four out of the five prior to 2008, BRIC equities were the top asset class earning high double digit returns each year.

Note: All returns noted in the above chart are in Canadian $ terms.

In addition to diversifying across various asset classes as noted above, it is also essential to diversify across sectors. Since top performing sectors rotate in and out of favor, this strategy will help an investor to avoid predicting which sector will be the winner each year.

annual-sector-performance.jpg

Source: Why Diversify?, Franklin Templeton Investments

Related ETFs:
Vanguard Emerging Markets ETF (VWO)
SPDR S&P 500 ETF (SPY)
SPDR STOXX Europe 50 ETF (FEU)

Disclosure: No Positions

Foreign Chemical Makers Offer Investment Opportunities

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chemicals.jpgIn the most recent M&A deal in the chemical industry, Belgian chemical and plastics maker Solvay (SVYZY) agreed to buy French speciality chemical maker Rhodia(RHAYY) for 3.3 billion Euros. This represents premium of 50% to Rhodia’s closing price on April 1, 2011.  This is an all-cash deal with Solvay offering 31.60 Euros for each Rhodia share.

Solvay’s footprint in the emerging markets of China, Brazil and India is set to increase with this deal. In addition it will beef up its R&D capabilities and innovation of new products. Solvay’s OTC-listed ADR closed at $12.80 today. While Solvay has paid a rich premium for Rhodia, the deal should benefit Solvay tremendously in the long run since demand for chemicals continues to rise in emerging markets. Investors looking to gain some exposure to the chemical sector may want to add Solvay at current levels.

Unlike other industries, acquirers in chemical sector usually pay a nice premium for their targets. Some of the past notable takeovers include the acquisition of UK’s paint maker ICI by Dutuch chemical giant Akzo Noble (AKZOY) in 2007, Dow Chemical’s(DOW) acquisition of Rohm and Haas in 2008, BASF’s (BASFY) $5B acquisition of Engelhard in 2006 and Swiss specialty chemical maker Ciba in 2008. Dow Chemicals paid a 74% premium to buy Rohm and Haas. Some of the foreign chemical stocks that are available on the U.S. market include Bayer (BYERF),Yara International (YARIY),L’Air Liquide (AIQUY), Braskem (BAK), Syngenta (SYT),Arkema (ARKAY),Nova Chemicals Corp.(NCX),K+S AG (KPLUY) and Linde AG (LNEGY)

Disclosure: No Positions

Knowledge is Power: China, Amsterdam, Tech Bubble Edition

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Up to our eyes

 

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The World’s Best Developed Market Banks 2011

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The Global Finance magazine has published the winners for the Best Developed Market Banks awards for this year. The winning banks were selected in 25 countries with the exclusion of Ireland and Iceland. From the news report:

The winners of this year’s awards are those banks that attended carefully to their customers’ needs in difficult markets and accomplished better results while laying the foundations for future success.

All selections were made by the editors of Global Finance, after extensive consultations with bankers, corporate financial executives and analysts throughout the world. In selecting these top banks, we considered factors that range from the quantitative objective to the informed subjective. Banks were invited to submit entries supporting their selection. Amid nominally objective criteria were growth in assets, profitability, geographic reach, strategic relationships, new business development and innovation in products. Subjective criteria included the opinions of equity analysts, credit rating analysts, banking consultants and others involved in the industry. The mix of these factors yields leading banks that may not be the largest, the oldest or the most diversified in a given country, but rather the best — the banks with which corporations around the world would most likely want to do business.

The World’s Best Developed Market Banks 2011:

[TABLE=891]

JPMorgan Chase(JPM) is the best bank in the U.S. The bank survived the financial crisis well and has announced plans to raise its dividend. Due to the current uncertainty with European banks it is a better to avoid them altogether for most investors until the dust settles. However investors willing to take a long-term view may nibble at some of the bank stocks at current levels. For Finland’s Nordea Bank (NRBAY) and Austria’s Raiffeisen Bank(RAIFY) have the potential for strong growth since they are well capitalized and have written off most of the losses from their books. Australia’s Commonwealth bank(CMWAY) and Singapore’s United Overseas Bank(UOVEY) should benefit from emerging Asia’s growth.

Disclosure: Long RY, DNSKY, STD