Forget The Correction: Here Are The Best And Worst Gold Bets For 2012

Thursday, January 26, 2012  KLSE Venture  5 comments

Despite suffering a massive December correction, the underlying fundamentals for gold point to another strong year in 2012.  Extraordinarily loose monetary policy in so-called advanced economies, the beginning of anti-cyclical easing and stimulus cycles in emerging economies, and rising central bank demand for the physical metal, particularly from China, should push gold prices higher in 2012, setting the stage for some gold equities to shine.
There is no doubt that gold has been a market protagonist in 2011.  From the beginning of the year, gold prices went on an exponential jump, hitting regular new nominal highs as it surged more than 35% to $1,920 an ounce in early September.  Just in a few weeks, though, gold plummeted more than $350, nearly 20% to lows near $1,550.  After attempting to break to the upside again, gold plummeted in December, falling to $1,574 an ounce on Wednesday, its lowest value since early July.
Even though traders like Dennis Gartman believe the yellow metal will fall even further, underlying variables that helped gold ride a decade-long bull run are in place to provide support in 2012.  If indeed gold will rise to$2,075 by the second quarter of 2012, asBarclays suggests it will, then the December correction could be a great buying opportunity.
It is hard to say precisely what variable is conditioning gold’s price behavior.  Gold, as Forbes’Robert Lenzner explains, trades inversely to the U.S. dollar 70% of the time.  Earlier this year, the yellow metal seemed to be the negative mirror image of 10-year Treasury yields, while recently it has traded more like a risk asset, moving in tandem with the Dow and the euro.  With low interest rates set to prevail across advanced economies, gold continues to benefit from a lower opportunity cost of holding an asset that doesn’t generate income.
For those who see gold as an inflation hedge, emerging economies, which will lead in terms of economic growth in 2012, are embarking on easing cycles to stimulate their slowing economies.  Brazil, China, and others are moving toward looser monetary policy, expanding their monetary base andunleashing fiscal stimulus.  These will join the central banks of the U.S., U.K., and Europe in expanding their balance sheets, which Tom Winmill of the Midas Funds estimates have already grown by about $6 trillion since the inception quantitative easing by the Fed.
The easiest, and purest, way to gain portfolio exposure to gold is through the iShares Gold Trust, the largest physically backed ETF.  GLD, which is the ETF’s ticker symbol, tracks the spot price of bullion and provides investors with a highly liquid and hassle free tool to bet on the precious metal.
Another way to play gold is via equities, but these have substantially underperformed in 2011.  TheGDX gold miners ETF is down more than 20% vis-à-vis the GLD, and has fared worse than the S&P 500 this year.  Hedgie David Einhorn said in Novemberthat the disparity between miners and metals has grown too big as he shifted some of his GLD holdings into GDX.  Jon Foster, head of Van Eck’s actively managed gold funds, adds that gold miners are pretty much all unhedged, fully exposing them to the price of gold.
Production costs per ounce stand at around $800, according to Barclays.  That means miners are set to make a 98% profit per ounce if they sold at spot prices, even despite the impressive December correction.  This will definitely benefit large-caps like Goldcorp, Barrick Gold, and Newmont, according to Winmill.
Beyond production costs, investors should look at a miner’s projects, and their relative safety, before jumping on board.  Winmill warns that several small caps, like Primero Mining, are overly exposed to bad projects.  Primero’s San Dimas mine, for example, was a castaway from Goldcorp and could pose big tax problems, Winmill noted.  Another point investors have to watch out for, Winmill explained, is companies’ overall portfolio.  Freeport McMoran, for example, isn’t among Winmill’s favorites given its large exposure to copper and therefore the Chinese economic cycle.

SEE THE BEST GOLD INVESTING IDEAS FOR 2012 HERE.
Gold has proven to be a violently volatile asset in 2011, going on skyrocketing rallies and precipitous declines over short time frames.  If indeed the yellow metal continues its decade-long rally in 2012, then this latest correction will have proven to be a very profitable entry point for bullion.  And if it’s indeed time for miners to catch up, as Einhorn and Winmill think, then 2012 will be the time to place one’s bets.
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The year when the Chinese economy will truly eclipse America’s is in sight

Wednesday, January 11, 2012  KLSE Venture  No comments


IN THE spring of 2011 the Pew Global Attitudes Survey asked thousands of people worldwide which country they thought was the leading economic power. Half of the Chinese polled reckoned that America remains number one, twice as many as said “China”. Americans are no longer sure: 43% of US respondents answered “China”; only 38% thought America was still the top dog. The answer depends on which measure you pick. An analysis of 21 different indicators chosen by The Economist (see the full set) finds that China has already overtaken America on over half of them and will be top on virtually all of them within a decade.
Economic power is best gauged by looking at absolute size rather than per-person measures. On a few indicators, such as steel consumption, ownership of mobile phones and beer-guzzling (a crucial test of economic superiority), the milestone was reached as long as a decade ago. Several more have been passed since. In 2011 China exported about 30% more than the United States and spent some 40% more on fixed capital investment. China is the world’s biggest manufacturer, and partly as a result it burns around 10% more energy and emits almost 40% more greenhouse gases than America (although its emissions per person are only one-third as big). The Chinese also buy more new cars each year than anybody else.
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The country that invented the compass, gunpowder and printing is also challenging America in the innovation stakes. We estimate that in 2011 more patents were granted to residents in China than in America. The quality of some Chinese patents may be dubious but they will surely improve. The World Economic Forum’s “World Competitiveness Report” ranks China 31st out of 142 countries on the quality of its maths and science education, well ahead of America’s 51st place. China’s external financial clout also beats America’s hands down. It has total net foreign assets of $2 trillion; America has net debts of $2.5 trillion.
The chart shows our predictions for when China will overtake America on several other measures. Official figures show that China’s consumer spending is currently only one-fifth of that in America (although that may be understated because of China’s poor statistical coverage of services). Based on relative growth rates over the past five years it will remain smaller until 2023. Retail sales are catching up much faster, and could exceed America’s by 2014. In that same year China also looks set to become the world’s biggest importer—a huge turnaround from 2000, when America’s imports were six times those of China.
Find even more indicators and adjust the figures to make your own predictions using ourinteractive chart
What about GDP, the most widely used measure of economic power? The IMF predicts that China’s GDP will surpass America’s in 2016 if measured on a purchasing-power parity (PPP) basis, which adjusts for the fact that prices are lower in poorer countries. But America will only really be eclipsed when China’s GDP outstrips it in dollar terms, converted at market-exchange rates.
In 2011 America’s GDP was roughly twice as big as China’s, down from eight times bigger in 2000. To predict how quickly that gap might be closed, The Economist has updated its interactive online chart (also here) which allows you to plug in your own assumptions about real GDP growth in China and America, inflation rates and the yuan’s exchange rate against the dollar. Our best guess is that annual real GDP growth over the next decade averages 7.75% in China (down from 10.5% over the past decade) and 2.5% in America; that inflation (as measured by the GDP deflator) averages 4% and 1.5% respectively; and that the yuan appreciates by 3% a year. If so, then China will overtake America in 2018. That is a year earlier than our prediction in December 2010 because China’s GDP in dollar terms increased by more than expected in 2011.
Second place is for winners
Even if China became the world’s biggest economy by 2018, Americans would remain much richer, with a GDP per head four times that in China. But Rupert Hoogewerf, the founder of the annual Hurun Report on China’s richest citizens, reckons that it may already have more billionaires. His latest survey identified 270 dollar billionaires but the true total, he says, is probably double that because many Chinese are secretive about their wealth. According to the Forbes rich list, America has 400 billionaires or so.
America still tops a few league tables by a wide margin. Its stockmarket capitalisation is four times bigger than China’s and it has more than twice as many firms in the Fortune global 500, which lists the world’s biggest companies by revenue. Last but not least, America spends five times as much on defence as China does, and even though China’s defence budget is expanding faster, on recent growth rates America will remain top gun until 2025.
Being the biggest economy in the world does offer advantages. It helps to ensure military superiority and gives a country more say in fixing international rules. Historically, the biggest economy has become the issuer of the main reserve currency, which is why America has also been able to borrow more cheaply than it otherwise would. But it would be a mistake for American leaders to try to block China’s rise. China’s rapid growth benefits the whole global economy. It is better to be number two in a fast-growing world than top dog in a stagnant one.
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