It is worth noting that the Gold has managed a 9th year Y-O-Y high.

Happy New Year to you all!

Year End Closing Price

2000 272.25
2001 278.95 +2%
2002 348.05 +25%
2003 415.45 +19%
2004 438.45 +6%
2005 517.00 +18%
2006 636.70 +23%
2007 833.92 +31%
2008 881.45 +6%

(Source Bloomberg)

I have been exchanging emails with one of our reader about 2009 investment.

The conversation started with how the market has punished Russia. The Russia Rubble has depreciated back to its 2004 /2005 level.



We talked about how powerful the open market is in punishing Russia. I then compared the situation with China. I argued that China has a comparatively closed economy and fixed currencies since State controlled a lot of the money flow and definitely where currency is pegged.
My friend argues that both countries had export and reserve, now exports are suffering in global recession, reserves are slowing down and both equity markets are down 62-72% this year - how can China be immuned?

Then this is how the rest of email exchange went:

BigApple- It is a poker game. Russia was bluffing his bets since the flop was showing a straight draw (oil, oil, more oil). Now, some body called the bluff and went all in. Russia unfortunately was playing the game with borrowed money. The same thing goes with China. The flop was "export, FDI, Olympics", now the turn is "consumer/ domestic stimulus". No one has a better hand at the moment, so no one has called bluff. the problem is the river maybe a "doom" card. ... Put it this way, when you are called at the poker table, you will need to show your card and give up/win the money. When you lose, you will need to pay. But if you are on borrowed cash, you will need to sell something. it was a one way bet for Russia with oil. But for china, can you pin point a easy asset which they can sell. ie something that you can push down and force their hand? I cannot for now. whereas if you spike up commodity, they will be in more of a trouble.... they are importers of "needs"

Friend - We are dealing with GLOBALIZATION and now competitive FX devaluation where EVERYONE owns USD. Whether it be Russia, OPEC, US,China: everyone is in the same boat. There is no more "credit" and the consumption driven economic model is in taters. I would venture to guess that there will be deals between CHINA and OPEC and LATAM and ASIA to get things "righted". Since OIL backed OPEC FX, its easy to seehow it could come together. We are entering a reflation trade notbuilt upon growth, but built upon RE-rating of FX values. This is the real NEEDs over WANTs trade. OPEC and the rest of these regimes NEED higher CRB. China and ROW has too many USDs that need to bespent without "rocking the boat".

BigApple - ok. so you are suggesting weakening USD will hurt China... i agree

Friend - USD is going to be a 2009 story...UST is going to be a problem. CRB is going to spike. For the first time I feel like I need to invest USD outside.



We then talked about investment ideas:

1. short USD
2. long Commodity - especially Agricultural goods, oil.
3. long Gold
4. short Treasury

All pretty much in line with our earlier assessment of 2009 investment landscape.

Related Posts:

1. Deleveraging Creates bubble in Treasury - 24 Dec 2008
2. US Debt Approaches Insolvency - 25 Dec 2008
3. James Grant Questions Dollar Validity - 22 Dec 2008
4. SafeHaven - Obama's Spending Spree Won't Rescue the US Economy from Recession - 28 Dec 2008
5. Marc Faber reiterates Buying Gold and Gold Stocks - 21 Dec 2008
6. Marc Faber sees bankruptcy for US - 6 Nov 2008
   

Gerard Jackson at SafeHaven.com (Safe Haven - Obama's Spending Spree Won't Rescue the US Economy from Recession - 28 Dec 2008) wrote a detailed analysis of Obama's spending spree and explained why it is inflationary and may not boost our economy as intended. I particularly agree with him regarding the point that you cannot promote employment in an industry which is not profitable. That does not sound like good long term investment. Therefore unless the car or manufacturing industry can become competitive and profitable, the bailout money will prove to be only a temporary fix for the economy. As for Obama push for green projects, unlike the article, I believe that if directed correctly and managed tightly, R&D is America's strength and can bring long term prosperity back to US. Finally, I cannot agree more with the monetary inflation argument. Therefore, we still recommend Gold as not only a hedge to financial and economic uncertainty but also to long term inflation threat.


Here are 3 of our recent posts agruing that all these bailout and devlveraging creates a bubble in the Treasury market and questions the validity of all these money printing:

1. Deleveraging Creates bubble in Treasury - 24 Dec 2008
2. US Debt Approaches Insolvency - 25 Dec 2008
3. James Grant Questions Dollar Validity - 22 Dec 2008
   

Here are some excerpts from the article (my emphasis in Bold):

... Now that it is apparent that Obama has conceded -- at least for now -- that raising taxes could sink the US economy it seems he is really only left with the printing press, so to speak. Considering that his coterie of economic advisors are Keynesians who, in turn, consult only other Keynesians we should expect to see a huge monetary surge in the near future. Bernanke has already laid down the foundations for such a strategy. Since last January the money supply has grown by about 18 per cent. And just to prove to Obama's economic advisors how big a Keynesians he is he raised the monetary base from $980,914 billion on 8 October to $1,233,679 5 November, a 24.7 per cent increase in a matter of four weeks. These are dreadful monetary figures and one should never lose sight of that fact.

... I'm afraid Americans are stuck with what is going to be a highly inflationary policy that will have disastrous consequences if persevered with. Part of the problem is that as Keynesians Obama's team will be focused on the rate of unemployment and this will be used to justify their spending program. The target of 2.5 million so-called green jobs is evidence enough of their line of thought. This policy could generate a consumer boom that would only add to the imbalances that the economy has accumulated.

The idea that focusing on jobs through consumption will fuel a recovery in manufacturing displays an enormous ignorance of capital theory. What the US could end up with increased consumer spending while manufacturing stagnates. The same goes for his so-call alternative energy investment schemes. The more resources directed to these malinvestments the greater will be the damage to the capital structure. This is the kind of interventionist thinking that helped prolong the Great Depression.

Finally, what about interest rates stimulating manufacturing? The view that investment is a simple function of the rate of interest has led to the dangerous notion that economic growth can be promoted by forcing down interest rates. But this is precisely what causes the boom bust cycle. And as we can see, US manufacturing is still contracting even as interest rates fall to historic lows. One should have thought that this phenomenon would have given Bernanke second thoughts. Apparently not.

Lower interest rates cannot stimulate investment without the prospect of profits. No profits, no investments. Slashing corporate taxes while simultaneously abolishing the capital gains tax could help spark an investment-led recovery. By setting his face against this policy of expanding capacity and to rely entirely on monetary expansion to promote recovery while at the same time promising higher energy prices in the future and a huge tax hike in 2010 or 2011 Obama will be fuelling uncertainty as well as inflation.

Adam Hamilton wrote a fantastic article on Seeking Alpha (Seeking Alpha - Gold Poised to Move Higher - 28 Dec 2008). He argues across the following points about his Gold Bullishness (I have added some of my thoughts where appropriate in italics):

1. Supply - Mined Supply - new supplies are hard to bring onboard and will take time.
2. Supply - Central Bank Sales - even though CB owns 18% of the above ground gold, their sales are limited by the Gold Agreement and Asian CBs are interested to buy from them or the IMF to bring their Gold allocation up in their reserves.
3. Demand - Investment Demand - as we have reported, physical gold premium is at its historical high and simply very hard to find coins at the moment.
4. Demand - Monetary Inflation - Money Printing Machine is ON!
5. Demand - Negative Real Interest Rates - Central Banks need to promote credit lending and investment rather than saving. With such a large economic recession, I expect to see negative real rates to continue into 2009/2010.
6. Demand - Secular Dollar Bear - I think that technically we are close to seeing a resolution in the next leg of the Dollar. While it is still in a major bear trend, further Dollar strength can change this technical picture.
7. Demand - Secular Stock Bear - While I acknowledge the outperformance of gold and gold stocks over S&P, we prefer not to make an outright call on the stock market.
8. Demand - Secular Commodities Bull - even though we are cautiously bullish in commodities from the point of view that 1. CRB has massively under-performance Stocks and other assets, 2. during recession and depression, government spending will orients around what their citizens need - we are bullish on water, agricultural products, some metal links to infrastructure projects; we are fully aware that the overall commodity investment space is in a deep sell off driven from the deleveraging activities and government selling from certain emerging markets to raise cash.
9. Supply and Demand - Technical Proof - for an array of charts pls see Gold Boom Doom - Gold Outperformance to continue in 2009 - 26 Dec 2009

Even though we don't agree with all the points from Adam's article, it consolidates a lot of thoughts out there about gold and gold stocks. It is well worth a read in planning your 2009 investment allocations. (see Gold Boom Doom - Gold Outperformance to Continue into 2009 - 26 Dec 2008)

Our core investment theme into 2009 remains as follow:

1. long Gold versus Treasury (Treasury looks to be a potential bubble to us)
2. long Gold versus Eur/usd (Gold is technically very bullish against all currencies)
3. look for CRB bounce (emerging market will focus less on trades but more on what it needs)

Updating some of our Gold charts from an October post (Gold Boom Doom - Gold taking a breather vs SPX but still Strong vs Commodities - 29 Oct 2008).

A few points to note:

1. Gold is edging towards its downward slope resistance but has turned technically short term bullish in early November and confirmed earlier this month. We will wait to see where we market Gold on Dec 31st to see if we get another YOY gain.






2. Gold has consistently outperformed SPX (Equity) from the start of this year.
   
   




3. It is good to see that Gold Stocks have played some catch up since we last talked about their under-performance versus Gold. (see Gold Boom Doom - Gold versus Other Assets - 16 Oct 2008)
   
   


4. Gold has clearly held its ground versus CRB and Oil. This trend looks to continue.
   
   
   
   
   



5. Gold is looking to gain grounds versus Treasury and EUR/USD. This is our core theme of 2009.
   
   
   
   
   

***** Update 28 Dec 2008 - for latest news and charting for Gold and Gold stocks, please check updates from our blog: Gold Boom Doom - Gold Related Blogs

This recent analysis by Maurizio d'Orlando (AsiaNews - U.S. debt approaches insolvency; Chinese currency reserves at risk - 19 Dec 2008) suggests the debt needed to be raised by the US to pay for the bailout has severe negative long term consequence. Here is an excerpt from the article (our own emphasis in BOLD):

... In the early months of next year, when the official data are published, the United States will run a serious risk of insolvency. This would involve, in the first place, a valuation crisis for the dollar. After this, the United States could face a social crisis like that in Argentina in 2001. A crisis in U.S. public debt would likely have a severe impact on the Asian countries that are the main exporters to the United States, China first among them. Chinese monetary authorities, thanks to a steeply undervalued artificial exchange rate, by about 55%, have limited imports (including food) and have achieved an export surplus. This has allowed them to accumulate a large stockpile of dollar reserves. In a currency crisis, China risks losing much of the value of its accumulated currency reserves. At the same time, pressure on imports (wheat, other grains, and meat) have led to inflation in the prices of food, the most important expenditure for more than 900 million Chinese. This is nothing more than a small confirmation of the recent statements of the pope, in his message for the World Day for Peace, where the pontiff calls the current financial system and its methods "based upon very short-term thinking," without depth and breadth (nos. 10-12), preoccupied with creating wealth from nothing and leading the planet to its current disaster.

We all know that Oil has retreated from its summer high of 150usd to 38usd and during the same period 10y note has rallied from 4.27% to 2.08%. The initial deleveraging and the subsequent shutdown of the credit market forces unwinding of risky asset to raise capital. In many countries, the only way raise money is sell hard assets which led to the oil sell off. In addition, the Fed rate cut and massive risk aversion led to zero percentage t-bills and the bond market rally. Both assets seem to have moved in an extreme manner due to the crisis condition of the financial market. Should we see any relief of the present condition, we expect unwind of some of these moves.

Look at the chart below showing the ratio of 10y Treasury price versus WTI crude oil, are we approaching a bubble territory? While, deflation can last longer and risk aversion may continue for a while, this is one bubble we are watching.

One of the blog I follow: Mint News Blog talked about the upcoming 2009 design from US Mint (
Mint News Blog - 2009 Ultra High Relief Double Eagle Coins - 12 Dec 2008). I must say that the new design (strictly a re-design from it 1907 ultra high relief double eagle coin) is beautiful and if any of my readers are considering buying physical gold coins, as recommended by Marc Faber, one may want to add this coin to the shopping list.

According to the US Mint website (US Mint - 2009 Scheduled Products Listing) this coin will be on sale 22 Jan 2009.



27 dec 2008 - I added this link for reader's benefit (Gold Investment Blog - How to Buy American Eagle Coins - July 2008)

***** Update 28 Dec 2008 - for latest news and charting for Gold and Gold stocks, please check updates from our blog: Gold Boom Doom - Gold Related Blogs

Let me start this commentary with the final paragraph from Grant's latest article on WSJ (WSJ - Is the Medicine Worse Than the Illness? - James Grant - 20 Dec 2008 ):

After Mr. Bernanke gets a good night's sleep, he should be called to account for once again cutting interest rates at the expense of the long-suffering (and possibly hungry) savers. He should be asked to explain how the central-banking methods of the paper-dollar era represent any improvement, either in practice or theory, over the rigor, elegance, simplicity and predictability of the gold standard. He should be directed to read aloud the text of critique by Elihu Root and explain where, if at all, the old gentleman went wrong. Finally, he should be directed to put himself into the shoes of a foreign holder of U.S. dollars. "Tell us, Mr. Bernanke," a congressman might consider asking him, "if you had the choice, would you hold dollars? And may I remind you, Mr. Chairman, that you are under oath?"

James Grant wrote an excellent article. It is a must read for all our readers. It summarizes all our thoughts and worries about the coming failure of US Dollar and other fiat currencies. Although our timing may not be perfect but we still believe short US Dollar, short Treasury, Long Gold and commodity will be the best investment for the medium and long term (see Gold Boom Doom - Gold Outperformance to Continue into 2009 - 26 Dec 2008). At the moment, it is hard to imagine how FED and other CBs may soak up the excess liquidity after the "hopeful" economic recovery. We believe that Gold is the best defense and offense. (you may also be interested in: Gold Boom Doom - Marc Faber Reiterated Buying Gold and Gold Stocks - 21 Dec 2008)

Here are few posts of interest:

1. Deleveraging Creates bubble in Treasury - 24 Dec 2008
2. US Debt Approaches Insolvency - 25 Dec 2008
3. SafeHaven - Obama's Spending Spree Won't Rescue the US Economy from Recession - 28 Dec 2008

WSJ's Ahead of the Tape column asked this question today: "Many corners of the market are fearing deflation. So why is it that gold isn't selling off sharply?".

Here are some important quotes from the article (WSJ - Gold's Power Is Keeping Up Despite It All - 22 Dec 2008):

... Says Malcolm Southwood, commodities analyst at Goldman Sachs JBWere in Australia, "I'm telling clients that the environment over the next five years is extremely constructive because of the inflationary risks further out."
Near-term gold could still demonstrate some weakness as the last of the panic trade peters out. And if the European Union cuts interest rates, as some expect, that could boost the dollar's value, which could undermine gold. And U.S. and European Central banks could sell gold to raise cash to pay for bailouts, which would be bearish for gold prices. But Mr. Southwood suspects Asian central bankers looking to diversify reserves would grab that supply, seeing the sales as "an alarm signal about the dollar."
And what if deflation does hit? Even that doesn't necessarily spell doom for gold, as some think. During the deflationary Great Depression, "gold preserved its value," says Matt McLennan, a lead manager at First Eagle funds, which runs a gold fund. "It preserved its purchasing power."

***** Update 28 Dec 2008 - for latest news and charting for Gold and Gold stocks, please check updates from our blog: Gold Boom Doom - Gold Related Blogs

When you read this article today from Bloomberg (Bloomberg - China Cuts Key Rates for Fifth Time in Three Months - 22 Dec 2008 ) you will realize that either Chinese Government is desperate to boost growth or playing catch up with US Fed. The People's Bank of China announced today that the one-year benchmark lending and deposit rates would be cut by 27bp. 1 year lending rate is now 5.31% and 1 yeaer deposit rate is now 2.25%. In addition, PBoC cuts bank reserve's requirement ratio by 50bp.

We suspect that in addition to our articles regarding how China need to address the export and FDI drag on its economic growth numbers (see Search Our site for keyword China). With oil down below 40usd and most commodities weak (see chart - CRB at 2002 levels), we expect that inflation in 2009 for China will be substantially lower. Lower commodity prices will help to relief some of the earlier pressure of price increase for the national price fixed items such as energy and gas. Both expected negative PPI and CPI will give China more room to cut rates.





Overall, the debt burden countries are printing their way out of trouble and the emerging growth countries such as China seek to follow suit. We wonder how this world will absorb all these fiat money. We still argue for holding Gold as a long term investment.

Gary Shilling just gave an interview to Yahoo Finance. He is extremely bearish about the stock market and is looking for another 30% drop. He favors treasury and USD. It is good to read the opposite view to ours especially from such a reputable economist. However, our thesis is based on the 2nd phase of economic downfall where foreigners will question the integrity of USD Dollar and therefore sell their Treasury holdings. The legitimacy of fiat money will ultimately support the Gold rally.

Yahoo Finance - Get Ready to Scrimp and Save, Says Economist Shilling - Dec 19 2008

This is a recent Bloomberg interview with Marc Faber on Nov 25, 2008. He reiterated his physical gold purchase recommendation and added gold stocks to his portfolio.

So rumours are flying again in the street that China bought over 60 billion of EURO over the past 2 weeks which caused the huge USD squeeze. Yes that would do it!

But let's think about that is going on:

Here are a list of recent economic numbers from China (Source: Bloomberg)
1. Actual FDI YTD YOY 26.29% versus 35.06% prior (slowing down...)
2. PPI YoY 2.0% vs 6.6% prior
3. Trade Balance 40.09B versus 35.24B prior (but see the export numbers)
4. Imports YoY -17.9% vs 15.6% prior
5. Exports YoY -2.2% vs 19.2% prior (we are waiting for this to drop)
6. CPI YoY 2.4% versus 4.0% prior
7. Retail Sales YoY 20.8% versus 22.0% prior (still robust)
8. IP YoY 5.4% versus 8.2% prior
9. M2 YoY 13.7% versus 15.0% (still strong)

The economic releases confirm our previous analysis that Chinese cannot rely on FDI or export to support their growth engine and hence the economic stimulus is announced. If their trade balance and FX reserve is going to reverse, you can imagine that they will be less reliant on USD holdings and as suggested less buying of USD Debt. If the rumour of USD selling was true... one wonders how long can FED keeps its rate low since they have already given up on the USD.

Having been away for a few weeks in Asia. It is clear to me that there is a severe lack of trust between counterparties and growingly between countries. US Dollar, EURO ... people in China is simply asking what can "IT" gets me. Market is clearly still in risk reduction mode with low liquidity. Several players are taking bets on bailout plans, FED announcements, ECB, housing, economy... in such low liquidity holiday environment, we are not surprised to see sharp moves in the market. One interesting observation is that given the range of USD in the past 6 months and the extreme high volatility environment, most option books in the street are cleaned out for the year. That usually means that there are little price magnets to anchor the market. In other words, the market price level is anyone's game.

To a more positive news: FED went all in, China pumping a lot more stimulus. With most "stronger" countries moving towards "Quantitative easing" (aka print money) and "weaker" countries trying all their best to stem outflow of money, clearly there is no safe heaven and let alone reserve currency. It is time to accumulate what we need (ie oil, food, metals...etc) and GOLD.

We need to also acknowledge our bad calls. 1. With FED's QE, shorting treasury (because we question that long term viability of US) is too early. 2. no squeeze in Nov28 delivery of Gold.

A curve ball - if Obama manages to turn US focuses on Renewable Energy/Biotech or Stem Cell research, US can arguably create another "dot-com" like boom. Since US is strong in creativity and promoting entrepreneuralism, if we see that in within Obama's term, we may call to buy back US beacuse what the world needs next are better energy solution and better healthcare solution.

GOLD - 853
EURO - 1.4080
JPY - 88.47
CRUDE - 43.6
US10y - 2.165%

FED - 0-0.25%
BOC - 1.5%
ECB - 2.5%
BOE - 2%
SWB - 0.5%
RBA - 4.25%
CHINA - 5.58%


***** Update 28 Dec 2008 - for latest news and charting for Gold and Gold stocks, please check updates from our blog: Gold Boom Doom - Gold Related Blogs