Buy gold - the Bank of England is printing money

There was an important development for gold pundits this week. The British Treasury on the advice of the Chancellor of the Exchequer is to engage in quantitative easing or 'printing money'. Resorting to printing money to finance government expenditure has not been used for decades because of its unsavioury association with inflation. Printing money directly links the government to inflation. The justification for this is of course the fact that the banks cannot lend funds because of their parlous condition, plus the fact that asset prices are still falling. The proceeds will be used to buy company IOUs and other assets held by banks. This will boost the reserves of the banks, and thus allow them to make new loans, which will support asset prices in the economy. But I would suggest not until asset prices find a base. The rationalisation for the move is the threat of deflation. The reality is that they will not stop deflation, but it will eventually cause inflation when asset prices bottom of their own accord. The interest rate is already 1%; but new bank lending capacity is unlikely to finance much except new gold mines given that gold prices are taking off.

The question is - when will other government treasuries show their folly by printing money as well. The reality is that the treasury of many governments has been so decimated by their prior loose monetary policy, that they can no longer debt finance, and they will be forced to print money. Asian and Middle Eastern treasuries might be questioning their prior support for the USD. No doubt they will be buying gold. I would suggest as modest wealth holders - buy gold stocks for better leverage to this emerging speculative boom.

The price of gold has been moving up $US15/oz a day of late, and is close to $US1,000/oz. We are tipping $US2,000/oz by the end of the year. Gold tends to create its own momentum in such times. Check out our gold stock selection tips here.
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Andrew Sheldon www.sheldonthinks.com

Is the US on the verge of a financial collapse?

This is critical news for us all from Brass Check TV. This video shows the Chairman of the US House Committee admitting that the global financial system came close to collapse due to the Republicans financial management. More concerning is that he suggested that they don't know what they are doing, and they could benefit from the advice of a housewife on $10/hour. I actually don't disagree, as she did display greater wisdom. But here we have displayed the humility ('read' lack of responsibility) from these politicians (and that is not a good thing), as well as one of them conceding that they don't know what they are doing, and that they are relying on the US Treasury. You might wonder whether the US Treasury knows any better. Well of course they do. These events don't occur because they don't know, they occur because they will do anything to retain power.

This thinking remains me of an incidence during the 1990s, during the meltdown of the Japanese economy. Our company was a consultant to a major Japanese trading company. The General Manager of the Coal & Iron Ore Dept asked the proprietor of our company whether they should buy a particular asset, and he responded 'You should ask your financial experts'. With typical Japanese humility, the GM said 'They said to ask you'.

The problem I see with this confession by this House Committee Chair is that he is suggesting that the US financial system was only spared from collapse because the US Treasury agreed to guarantee deposits, and that central banks around the world agreed to follow suit. The implication is that the financial system is still vulnerable. The banks are still severely indebted. Let's remember that the US financial system is in even a more precarious state because it has a 2nd wave of debt which will be liquidated. From now we can expect the ARM resets to kick in. This will likely require another injection by the US Federal Reserve. The positive side is that this will be expected...or maybe the banks have kept the government in the dark. Will depositors accept the deposit insurance or guarantee this time. In Sept 25th there was a $500 billion run on US banks. The Treasury could come up with just $150 billion before they resorted to deposit guarantees. Does this not suggest that deposit guarantees are an empty insurance? Will depositors trust it the next time around. I wolud suggest that the Treasury will throw everything at the problem because it can always print USD. The probably of course is that paper money is of dubious value.
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Andrew Sheldon www.sheldonthinks.com

Where is US property going?

The US property market is worse than many people think. Consider the following chart by Credit Suisse.

Basically it shows that we are half way through the financial foreclosure process. We have experienced the worst of the sub-prime crisis, but now we are about to be hit by ARM resets. These low-interest teaser loans will gradually reset at the variable interest rate. Over the next 2 years they will cause the same type of carnage as the sub-prime loans.
I say this not to give you any false hope, but so you might be better prepared for the future. The fact that the banking system will have worked its way through these loans is not meant to imply that we can see the light at the end of the tunnel. The market has to absorb these loans before we will see any restoration of economic activity that is not sponsored by government stimulus measures. But consider why the economy is where it is:
1. House prices are collapsing - this places a lot of people in a position of having negative equity. More than anything else this will cause consumer confidence to shrink. The most indebted will be walking away from their homes. Some people were really sucked in by the rhetoric and easy credit terms.
2. Home repayments are increasingly moving to a variable rate (i.e. ARM resets). This is hardly a problem as long as interest rates remain low (which is the case as long as the Fed keeps lowering the Fed rate) and inflation doesn't break out.
3. The unemployment rate does not plummet too much

You might wonder (given the downward spiral caused by a deterioration in unemployment) what it would take to restore confidence in the market. Clearly there is not going to be private sector lending as long as asset prices are collapsing. The government is going to some lengths to make up the difference, but government spending is no substitute for private spending and investment. How long before the US and other governments will be forced to print money to fund all sorts of stimulus measures. Does anyone believe this debt is going to be repaid? Well no doubt there will be some dilution in the value of the USD, as well as the prospect of higher interest rates when confidence is restored and asset prices stabilised. The first priority for the government is to stability or 'refloat' asset prices. When that occurs they can raise the Fed rate again to lift US savings. This might be tough medicine as its going to be accompanied by higher inflation. The message being....the pain of resets is just part of the story. In effect governments will be absorbing private sector debt with public debt. Wasteful expenditure with more wasteful expenditure. Their intent of course is to defer the problem rather than deal with it. Their solution is absorbing debt with more debt. Sounds kind of meaningless doesn't it.
So what do the ARM resets tell us about the US property market? Well we must remember that they are only a portion of the total credit outstanding. There are more secure loans with lenders who will also be struggling with unemployment and negative equity considerations. At some point however investors are going to re-enter the market. So we ought to be looking at yields on US property. If you are looking at capital growth properties, then you will need to wait longer, but for other areas there are buying opportunities now. We must remember that the US is not a single market; that property did not universally rise across the country. Some areas did not rise at all. The problem for many people is that they choose or cannot live where the reasonably priced properties are located. But I would suggest in the US there will be better buying opportunities ahead - even in rural areas. Just wait for the currency to collapse.
I am confident that equity markets have reached their bottom. I would expect them to tread sideways for the next 5 years in a series of rallies, so be prepared to trade your positions. For property, I would expect similar sideways movement with inflation undermining real property values in the city; so I don't necessarily see significant falls to come. The trends suggest capital growth properties are still falling but that rural property values have stabilised. For this reason, in countries like Australia and NZ where the currecy has already collapsed, you can start buying rural properties where value remains.
As long as they are not city lifestyle or tourist havens....since these forms of property are overvalued and going to remain a pariah for the next few years. Your best guide is yields and nominal prices. In any case. avoid the cities where there is going to be an overhang.

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Andrew Sheldon www.sheldonthinks.com

Where to put your money in uncertain times

In these uncertain times people will be wondering where to place their money. Firstly there was no question there was going to be a financial crisis - it was merely a question of when. WHEN the Dow and other markets broke historic support, it was only a question of HOW far will it for, and HOW much money will the government through at the problem to delay the inevitable.

I will suggest a strategy forward. A lot of generalisations are made, so I will offer specific investment opportunities. This is however a top-down analysis:

1. Gold mining stocks - Stimulus will eventually result in governments printing money.

2. Precious metals - Silver, platinum, palladium are all good. They are not as good as stocks because stocks have greater leverage as mining revenues rise faster than costs. Also gold stocks were over-sold in the recent stock price correction. Silver has risen 50% in just two months.

3. CFDs or derivatives in precious metals – This is another form of exposure to precious metals – whether you are talking about options, futures, or contracts for difference - mind you, you are taking a counterparty risk.

4. Foreclosed property in Japan - outlook not great now, but great yields outside the city, premature to buy in the city CBDs. Outer fringe areas make great buying, rural areas always good for lifestyle. Sooo cheap! You could buy a house for as little as $10-20,000 due to depopulation.

5. Broad Stocks: People are very negative on broad stocks: By that I mean all stocks outside the precious metals arena. I think if you cannot buy stock exposure for the long term, but there is no reason why you cannot trade rallies using chart signals. People look at the 1970s and 1930s and look at the dismal returns, but there were rallies in this period. So I suggest learning and using charts to trade medium term rallies. No long term ‘buy & hold’ investing.

6. Rural property in NZ - City property is overpriced, but if you don’t need to work in the city, or want to rent, then prices are modest, and the NZD is at a low point for foreigners earning USD,JPY,EUR. The NZD has fallen from USD0.80 to USD0.50. So great currency trade in beautiful country, no capital gains tax or transfer taxes, no GST on property. People will say the economy is in bad shape. Yeh, that's why it’s cheap. It’s a counter-cyclical investment, but when cheap, sell when currency recovers in 4-5 years. The 9% budget deficit will turn around like it did in the 1990s. Expect compulsory super to boost savings.

7. Property in the Philippines - regional property is more appealing, as it will benefit from more call centres going there. Yes, during a contraction, Western call centres are still shifting to the Philippines. More are being set up in smaller regional centres rather than Metro Manila as the infrastructure improves.
You can find more info by searching Google for foreclosed property. A lot of Westerners are doing it, and it makes sense if you are living there for a few years. Japan & the Philippines property markets are among the most under-leveraged and did not have the big gains. That will be important when the global economic activity finally picks up.

8. Foreclosed property in USA: It is still too premature to buy foreclosed property in the USA; I would suggest waiting until the bottom which will likely correspond with a peak in the Adjustable Rate Mortgage terms, so say another 8 months. Again we are looking for yields, so let that be your guide to where. Unless you are seeing rental yields over 10% then you are not getting good value.

9. Currency: Currencies are an interest asset class because they are essentially priced in relative terms as opposed to the absolute value of other asset classes. My favourites are:

a. South African Rand: South Africa is the largest producer of gold, palladium and platinum in the world, so the terms of trade for RSA are going to improve greatly as precious metal prices rise. The unfortunate aspect is that this will drive many mining companies broke as the strong Rand will undermine Rand revenues. So avoid RSA mining stocks.

b. Chinese Yuan: As long as China is the lowest cost producer and has the capacity to generate its own internal demand it will do relatively better, which is what currencies are about.

c. Swiss Francs: Governments and the elite of the world have much of their assets in Switzerland as they have done for hundreds of years. Thus Switzerland is always a safe investment.

d. Japanese Yen: I can expect the USD will fall to 87yen/$ support in future, though no further as the US economy has underlying strength.

The best investment opportunities

The best investment opportunities. There are not too many great investments in an economic contraction like this, but there are some. I would suggest the following:
1. gold stocks - Stimulus will eventually result in govts printing money.
2. Precious metals - Silver, platinum, palladium all good.
3. CFDs or derivatives in precious metals - mind you, you are taking a counterparty risk
4. Foreclosed property in Japan - outlook not great now, but great yields outside the city, premature to buy in the city CBDs. Outer fringe areas make great buying, rural areas always good for lifestyle. Sooo cheap! You could buy a house for as little as $10-20,000 due to depopulation.
6. Rural property in NZ - City property is overpriced, but if you dont need to work in the city, or want to rent, then prices are modest, and the NZD is at a low point for foreigners earning USD,JPY,EUR. The NZD has fallen from USD0.80 to USD0.50. So great currency trade in beautiful country, no capital gains tax or transfer taxes, no GST on property. People will say the economy is in bad shape. Yeh, that's why its cheap. Its a counter-cyclical investment, but when cheap, sell when currency recovers in 4-5 years. The 9% budget deficit will turn around like it did in the 1990s. Expect compulsory super to boost savings.
7. Property in the Philippines - regional property is more appealing, as it will benefit from more call centres going there. Yes, during a contraction, call centres are still shifting to the Philippines. More are being set up in smaller regional centres rather than Metro Manila as the infrastructure improves.
You can find more info by searching Google for foreclosed property. A lot of Westerners are doing it, and it makes sense if you are living there for a few years. Japan & the Philippines property markets are among the most under-leveraged and did not have the big gains. That will be important when the global economic activity finally picks up.