Business Innovation and Creativity

27 January, 2012

• Three ways to cash in on the Fed-inspired ‘dash for trash’

• Recommended article: This tiny company’s ‘wonder materials’ could change our world

• Friday’s close: FTSE 100 up 1.3% to 5,795... Gold up 0.59% to $1,720.65/oz... £/$ - 1.5690

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Ben Bernanke has made it clear to the world that he will print as much money as it takes to blow up another bubble.

As one City pundit pointed out to me, adopting a 2% inflation target now means Bernanke has an excuse to ramp up the printing presses, even if there is no ‘emergency’. He just has to say that inflation looks like coming in below target.

That’s quite scary. When quantitative easing was introduced, it was an emergency policy to prevent economic Armageddon. Now it’s just another little lever on the central banking machine, to be tweaked when Ben feels the economy could do with growing just a little bit faster.

This is bad news in the long run – the current crisis was caused by overly loose monetary policy, after all.

But in the meantime, markets are back in risk-on mode. So how can you profit?

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Profiting as markets return to ‘risk-on’ mode

We’ve been keen on defensive stocks and gold and cash for quite some time now. I’m still happy to hang on to big blue chips with decent dividends. But it’s becoming a very popular trade. So I’d hold on to what you’ve got, but before you decide to add a lot more, make sure the yield is chunky enough to be worth it.

Meanwhile, with the Fed promising to print up another bubble, now could be a good time to put some of that cash you’ve been hanging onto into some of the more attractive risk assets out there.

But before you run off and tell your broker to stuff your portfolio full of RBS shares – don’t. If you want to profit from a Fed-inspired ‘dash for trash’ then the sensible way to do it is to buy risky assets that have a decent fundamental story too.

In other words, you’re not buying ‘trash’ at all. You’re buying ‘risk-on’ assets that you’d like to buy anyway, so that even if the Fed sugar rush wears off, you’re not left holding some dodgy financial stock that you wouldn’t otherwise have touched.

India is the most attractive Bric

So what looks worth buying? Looking at emerging markets first: of all the Bric (Brazil, Russia, India, China) economies, I like India best. Why?

Despite China loosening monetary policy, I think the country is heading for a harder landing than most people expect (as I wrote in last week’s issue of MoneyWeek magazine: Brace yourself: China is heading for a hard landing). The property market is in trouble, and we all know that when a property bubble bursts, it’s messy for the economy. Maybe China has discovered a way to short-circuit that process, but I wouldn’t want to bet on it.

As for Russia, forget all the arguments about corruption and the power of the Kremlin: the real problem for your average retail investor’s purposes is that it’s simply a play on the oil price. And the outlook for oil is far too vulnerable to disappointment for me to want to bet on Russia.

Brazil has a lot going for it: it’s resource-wealthy, with healthy demographics. But its consumers are over-stretched and if China does have a hard landing, Brazil’s dependence on commodities will hurt it.

What’s India got going for it that the others don’t? My colleague Cris Sholto Heaton ran through all of India’s problems in a MoneyWeek cover story a couple of weeks ago: Investors should look forward to an Indian summer. It’s corrupt. Its politicians can’t get their act together. The infrastructure is appalling.

But India does have some advantages. It’s one of the few emerging markets that would see lower commodity prices as outright good news. Its politicians may be rubbish, but there isn’t the same concern about outright revolution that might lurk at the back of your mind if you buy into Russia or China.

And sentiment towards it has been awful. While you can find plenty of people willing to state the bull case for Brazil or China, even fans of India have been lukewarm on the investment outlook. This isn’t just being contrarian for the sake of it. When risk appetite turns, it’s the investments that people have despised that benefit the most.

India’s market has already climbed 7% since we published that cover story. One way to buy in is via the Aberdeen New India investment trust (LSE: NII).

Precious metals look good

Secondly, precious metals: you no doubt own gold, and it has shot up on the back of the Fed’s announcement. But if you don’t have exposure to junior gold miners, now could well be a good time to buy. If risk appetite remains strong, then these are the kind of ‘punting’ stocks that will benefit.

The US-listed Market Vectors Junior Gold mining exchange-traded fund (NYSE: GDXJ) is probably the easiest way to get in. It’s risky and volatile, but it’s still a lot safer than sticking your money into an individual gold mining stock.

Thirdly, and also in the precious metals area, if you’re feeling bold, you might want to look at silver. Or if you’re feeling a little less bold, platinum is unusually cheap compared to gold at the moment. We look at the reasons behind this, and the best ways to get exposure in the latest issue of MoneyWeek – subscribers can read the piece here (if you would like to become a subscriber, you can claim your first three issues free here).

Got a comment on this article? Leave a comment on the MoneyWeek website, here.

Until tomorrow,

John Stepek

Editor, MoneyWeek

Our recommended article for today...

This tiny company’s ‘wonder materials’ could change our world
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And for yesterday’s market update, see below...

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Don’t buy another share until you’ve read this...

For over 70 years the Fleet Street Letter has warned its readers of major events that could affect their wealth.

They predicted the fall of the Berlin Wall... the dot-com crash... the huge rise in the price of gold over the past 10 years, to name a few.

With a weak UK economy, massive debt, and governments resorting to desperate measures, it’s vital that you protect your wealth in the months and years ahead.

Find out the Fleet Street Letter’s latest predictions for the next 12 months here.

Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Forecasts are not a reliable indicator of future results. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. 0207 633 3600.

Market update

Click here for the latest stock market news and charts.

The FTSE 100 was back in positive territory yesterday, lifted by the US Federal Reserve's commitment to supporting the American economy. The index closed up 1.3% at 5,795.

Miners were on good form as metals prices rose. Topping the index was Vedanta, which added 8.7%. Polymetal rose 7.8%, Kazakhmys gained 7.3% and Randgold Resources was 5.1% higher.

Banks were also given a boost. Lloyds led the sector up with a gain of 6.1%, while RBS added 3.4% and Standard Chartered added 3%.

In Europe, the Paris CAC 40 rose 51 points to 3,363, and the German Xetra Dax was 118 points higher at 6,539.

In the US, the Dow Jones Industrial Average fell 0.2% to 12,734, the S&P 500 lost 0.6% to 1,318, and the Nasdaq Composite was 0.5% lower at 2,828.

In Japan, the Nikkei 225 and the broader Topix index each slipped 0.5% to 8,841 and 761 respectively. China’s markets were closed for the New Year celebrations.

Brent spot was trading at $109.95 early today, and in New York, crude oil was at $99.57. Spot gold was trading at $1,719 an ounce, silver was at $33.39 and platinum was at $1,602.

In the forex markets this morning, sterling was trading against the US dollar at 1.5703 and against the euro at 1.1984. The dollar was trading at 0.7632 against the euro and 77.11 against the Japanese yen.

And in the UK, London slipped from first to tenth place in Europe's commercial property league table, according to a survey by PricewaterhouseCoopers. Investors have been put off by high prices and the threat of recession.

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25 January, 2012

• Can gold miners make a comeback in 2012?

• Recommended article: Something to look forward to: the collapse of the euro

• Yesterday’s close: FTSE 100 down 0.5% to 5,751... Gold down 0.69% to $1,665.68/oz... £/$ - 1.5626

It’s something that has wrong-footed and infuriated me in recent years. And it’s a theme that I, and many others like me, keep coming back to.

I’m talking about the relative underperformance of gold miners versus the metal.

That is, gold has risen, but the miners haven’t.

Why is this happening? And can we expect more of the same? Or will the tide finally turn in 2012?

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Dr. Tubbs’ Research Investments is a regulated product issued by Fleet Street Publications Ltd. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Forecasts are not a reliable indicator of future results. Please seek independent financial advice if necessary. 0207 633 3600.

Gold miners had a terrible 2011

The gold price started 2011 at $1,424 an ounce. It ended the year at $1,564. A typical – in the context of the last ten years – 10% annual rise.

The miners, on the other hand, haven’t followed the script at all. The index of senior gold miners (the HUI), fell by 14% in 2011. The junior gold miners, as represented by the exchange-traded fund (ETF) GDXJ, fell 38%. And the gold explorers (GLDX) fell by nearly 50%.

Why has this happened? The theory is that if gold rises by 10%, gold miners should rise by even more: 15% to 20%, say. And the juniors and the lowly exploration companies should rise by still more, surely?

Yet with a few exceptions – well run companies, or those that have made big discoveries – it hasn’t been the case in recent years. Rather, gold stocks have only risen with gold if equity markets in general are rising too, or at least flat. If equities are tanking, as they did in 2011, gold stocks will too.

So why have the miners been so disappointing in recent years? Let’s look back at previous crises and see if it casts any light on today.

Gold miners thrived in the 1930s

Two previous long-term economic contractions during which gold flourished include the 1930s and the 1970s. And in the 1930s, gold stocks did incredibly well too. Homestake, the leading US gold miner of the time, rose by some 600%. The company’s big move came between 1932 and 1935 (from $2 to $6) but the Dow, too, was rising during this period. Homestake saw gentler gains between 1930 and 1932, a period when the Dow was falling.

But then, in 1933, it became illegal for Americans to own gold. Executive Order 6102, signed into existence on 5 April, 1933, by US President Franklin D Roosevelt forbade the “Hoarding of gold coin, gold bullion, and gold certificates within the continental United States” and required that citizens hand over their gold by 1 May.

So Homestake Mining and similar companies became one of the only ways Americans could buy gold, or at least an equivalent, and the stock benefited from this. On top of that, in 1934, the Gold Reserve Act saw gold revalued upwards from $20 to $35 an ounce. As a result, Homestake’s profits ballooned.

These days, many people now blame gold ETFs for the failure of gold stocks to deliver. A majority of gold mining executives questioned for the 2012 Pricewaterhouse Coopers (PwC) Gold Price Report, said that while the high gold price was having a positive impact on their share price, it wasn’t as significant as they’d have expected. Both the executives and gold analysts cited ETFs as the “main driver behind lagging share values”.

You can see what they’re getting at. ETFs such as GLD and PHAU have made it much easier to own gold. So they have attracted capital that might otherwise have gone into gold stocks. It means that gold investors don’t have to take individual company risk or cope with the many problems that come with owning a gold stock – incompetent management, escalating costs, labour issues, geo-political issues, funding, stock dilution, geological or metallurgical difficulties. These ETFs now occupy the niche that Homestake enjoyed in the 1930s.

However, I don’t entirely buy this complaint about ETFs. There are also ETFs that track the various gold mining sectors, so you don’t ever have to take on individual company risk if you don’t want to.

How did gold stocks do in the 1970s?

Below we see gold stocks in the 1970s, during gold’s last bull market. This is the US Gold Index.



(Thanks, as always, to Nick Laird of Sharelynx.com for preparing the chart)

You can see that from 1973 to 1974, (at a time when the S&P 500 was falling), gold stocks rose. At that point, it was still illegal for Americans to own gold (that ended on 1 January, 1975).

Gold stocks then went on to fall from mid-1975 to late 1978, before setting off on the mother of all bull market runs, which ended in 1980, along with gold’s bull market. The S&P 500 was broadly flat during this period.

I certainly don’t think the current bull market in gold is over just yet. In 1980 monetary policy suddenly became a lot tighter. We had interest rates over 15%. Paul Volcker was at the head of the Federal Reserve. We have no such fiscal discipline among central bankers today. And, interestingly, gold stocks – despite gold’s fall – broke to new highs twice in the 1980s. So the gold mining sector should still have plenty of good times ahead of it.

What will it take to turn the gold miners around?

But what could get gold miners out of their current slump? The PwC report notes that the companies are trying to make themselves more attractive. Some are getting more creative with dividends – linking them to the gold price, paying out more frequently and, in some cases, actually paying in gold bullion.

That’s good news. In a world simultaneously starved of cash, but awash with it, dividends are an attractive proposition. As I’ve long said, the strategy should be find the stuff, mine the stuff, make money, give it back to the shareholders. It’s not rocket science. Companies that do that beat the market.

Plans to make acquisitions are also rising – 29% of respondents were planning to spend their cash on acquisitions this year. Perhaps we’ll start to see the long-touted-but-never-realised frenzy of takeover and merger & acquisition activity in the junior sector. Here’s hoping.

Obviously, certain strategies will suit some companies, but not others. It’s up to management to make the right call. But company practice at all levels of the gold mining sector has to improve, otherwise they’ll remain mired in ‘dogsville’.

It is no longer enough to just be a gold company in a gold bull market – there are plenty of other ways for investors to get access to gold now. The market is demanding something more. And investors should be looking to those companies where management is acknowledging this and trying to do something about it.

Got a comment on this article? Leave a comment on the MoneyWeek website, here.

Until tomorrow,

Dominic Frisby

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- The received wisdom is that a break-up of the eurozone would be terrible for Britain. But it could be a bright spot in an otherwise bleak year, says Matthew Lynn: Something to look forward to: the collapse of the euro.

And for yesterday’s market update, see below...

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Market update

Click here for the latest stock market news and charts.

The FTSE 100 slipped back yesterday, closing down 0.5% at 5,751.

Banks took some of the biggest hits. RBS fell 3.9%, Lloyds slid 2.8% and Barclays lost 1.9%.

Miners were also among the biggest losers, with ENRC, Kazakhmys and Randgold Resources down between 3% and 2.1%.

But utilities performed well. International Power was the day’s highest climber, rising 2.4%, Centrica gained 1.8% and Scottish & Southern, National Grid and United Utilities added between 1.4% and 0.8%.

In Europe, the Paris CAC 40 fell 16 points to 3,322, and the German Xetra Dax was 17 points lower at 6,419.

In the US, the Dow Jones Industrial Average fell 0.3% to 12,675, the S&P 500 lost 0.1% to 1,314, but the Nasdaq Composite rose 0.1% to 2,786.

In Japan, the Nikkei 225 rose 1.1% to 8,883, and the broader Topix index added 1.3% to 767. China’s markets were closed for the New Year celebrations.

Brent spot was trading at $109.54 early today, and in New York, crude oil was at $98.77. Spot gold was trading at $1,667 an ounce, silver was at $32.09 and platinum was at $1,550.

In the forex markets this morning, sterling was trading against the US dollar at 1.5552 and against the euro at 1.1935. The dollar was trading at 0.7675 against the euro and 78.04 against the Japanese yen.

And in the UK, retailer WH Smith reported a 5% drop in like-for-like sales in the 21 weeks to 25 January. But it said improved profit margins and reduced costs meant it was still on course to meet its profit forecasts.

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