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Good morning,
Markets are called to open lower this morning. This is what's happening today:
The markets turned red in the US yesterday despite the good results from Cisco. We have moved back to a risk averse environment. The reason for the drop in the US markets is mainly Obama's press conference from the White House. Obama yesterday said that not only will he stop the tax cuts allowed by the Bush administration but he will also not extend tax cuts to 'people who don't need it' and that would be close to $1trn. Obviously the markets doesn't appreciate the fact that its President is going to increase taxes on the rich which after all are the people that drive the economy.
US retail sales fell 0.3% in October, close to expectations after sizeable headline increases of 1.3% and 1.0% in the previous two months. While core retail sales were weaker than expected last month, the impact from hurricane Sandy, which hit near month end, seems evident and will take time to clarify.
However despite all the negativity we are seeing in the US markets, we are seeing positive news come out of the US with stronger housing demand and a pick up in hiring. So things are not as doom and gloom as the market is picturing it out to be.
The same is happening in China. China’s factory output and retail sales exceeded forecasts in October and exports climbed the most since May. However, the market wants more stimulus from China in order for growth not to slow down.
“Across Asia, the business cycle likely reached its trough, with many economies reporting the worst growth in the third quarter,” said Glenn Levine, an economist at Moody’s Analytics in Sydney. “Stimulus measures are starting to boost Chinese demand and the recovery slowly coming into fruition in the US means 2013 will be a better year for most of the region.”
Moving on to Europe, France just published its Q312 GDP data which came in better than expected. We saw an expansion of 0.2% when the market was expecting zero growth for the quarter. However we still have to hear from Germany and the Eurozone.
My arguments why a portfolio should be exposed to GOLD
I'd like to end the blog by speaking about gold. I mentioned that Deutsche Bank yesterday said that gold will hit the $2000/oz in 2013. I'd like the go deeper into this argument. In 2012 we saw a slowdown in demand for the gold metal from both India which is the biggest consumer and China. The demand from India fell by 24% in the first 9 months of the year. In China, demand is down 1%.
Let's start off with India. The weakness we are seeing in India is due to a global slowdown in demand for jewellery. People have held back from buying jewellery because of the fact that the global economy is slowing down. Despite this slowdown we still saw the price of gold go up in 2012. Why? The reason is that despite a slowdown in consumption on jewellery, Central banks were buying gold to protect their currency from losing value after all the stimulus that was taking place. And although consumers weren't spending money on luxury, investors were buying gold ETFS. So this demand made up for the slowdown in consumer expenditure in gold. We are now starting to see a pickup in demand from India plus the market is expecting demand to turn positive in China during the last two months of the year.
Deutsche Bank expect the price to go up a further 17% till the end of the year. What you want to know is what will push the price up. The price will go up as governments around the world continue to pump money into their economy. Take the US as an example. You have the US investor who is worried about the value of the Dollar because of all the stimulus, so he hedges his portfolio by buying gold. Apart from that, more stimulus means more cash in hand which means greater demand so we should start seeing a pick up also in jewellery from India.
But there is more. Did you know that in China there are not Gold ETFs! Analysts are expecting gold ETFs to come to the market on the Chinese exchanges in 2013 and this would obviously result in an increase in demand for the gold metal.
Warren Buffett would not agree with this reasoning. He'd say that gold is overvalued on a comparative analysis. And he is right in saying so. Gold is far overvalued if you have to compare the value of all the gold reserves in the world to what you could be buying instead. But in the medium term, I tend to agree with Deutsche Bank and all the analysts that are bullish on gold.
2013 is going to be another slow year so I wouldn't expect large jumps in valuations from international companies. But whatever direction the market takes it seems like it's a win win situation with gold. More stimulus means more cash which creates demand for jewellery. On the other hand stimulus weakens the dollar so we see a demand from central banks and investors. The same applies for China. As the standard of living of the Chinese improves we will see an increased demand for gold plus more ETFs which buy physical gold on the market will increase demand.
Bottom line is that going into 2013, it makes alot of sense to be exposed to gold in your portfolio.
Stock to watch: SPDR Gold Trust (GLD US EQUITY)
SPDR Gold Trust is an investment fund incorporated in the USA. The investment objective of the Trust is for the Shares to reflect the performance of the price of gold bullion, less the Trust's expenses. The Trust holds gold and is expected from time to time to issue Baskets in exchange for deposits of gold and to distribute gold in connection with redemptions of Baskets.
For further information on SPDR Gold Trust or other stocks and bonds we follow, contact our offices on 25688688.
Good day and happy trading!
Kristian Camenzuli
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