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Ready, Set, Gold: Best Months Are Just Ahead
August 09, 2010
Global economic conditions are now favorable for gold as a safe-haven investment. The U.S., Western Europe and Japan are close to buckling under the weight of their sovereign debt loads, government budget deficits remain large and persistent and, as a result, faith in major paper currencies is low.
On top of this, China – the world’s No. 1 gold producer and No. 2 gold consumer – is encouraging gold investing by its rapidly growing middle class, and will likely have to increase imports to meet this new demand.
If history is any guide, gold is about to get even more attractive because we are heading into the fall and winter gift-giving season. This is the time of year that gold jewelers typically do their biggest business. The kickoff is the Muslim holy month of Ramadan, which starts next week and ends with generous gift-giving in early September.
After Ramadan comes India’s post-monsoon wedding season, and in November there’s Diwali, one of India’s most important festivals. During the fall, jewelry makers in the U.S. and Europe stock up in advance of the Christmas shopping season. And in China, there are two big gold opportunities: the week-long National Day celebration starting October 1, and the Chinese New Year in early 2011.
Looking at more than four decades of seasonality, September has been the best month of the year for gold and gold stocks.
The clear trend can be seen on the seasonality chart for spot gold. In a typical year, the September price rises 2.5 percent above the August price. And to make the case even more compelling, the gold price has risen in 17 of the 21 Septembers since 1989, by far the best success ratio of any month of the year.
In September 2009, the gold price jumped nearly 6 percent, well above the long-term average.
September is historically an even better month for gold stocks as measured by the NYSE Arca Gold Miners Index (GDM).
After the typically weak months of June and July, the gold miners start moving up in August and make an 8.3 percent leap in September. In September 2009, the jump was 14.5 percent. Since 1993, the GDM has been up 12 times in September and down just five times.
The strong correlation between the gold price and gold-mining stocks explains much of the average September jump for gold stocks, which have historically offered leverage to the gold price. In up markets, earnings growth has tended to exceed the increase in gold price. In down markets, the leverage works in the opposite direction — gold stocks also tend to decline more when the price of bullion is falling.
This leverage is shown on the chart of how bullion and the miners have fared in late-summer and fall rallies during the gold bull market that began in 2001. These uptrends have generally occurred between mid-July and early October, though in 2004 it extended into late November.
The gold price has climbed an average of 12.4 percent during the 2001-09 seasonal rallies even as the price steadily moved into four digits. As good as that result was, the impact on gold stocks was even stronger – their annual jump averaged more than 26 percent.
In 2010 the trend could be shaping up right on schedule. From a recent bottom of $1,157 per ounce in late July, spot gold had risen more than 4 percent through mid-afternoon on August 6 and the TSX/S&P Global Gold Index had gained more than 6 percent.
Bank of America-Merrill Lynch recently called for $1,300 gold by October-November 2010 as a result of the seasonal demand, and the gold watchers at CIBC World Markets in Toronto see $1,400 gold next year due to strong investment demand and inadequate supply response.
Given the current economic weakness, CIBC pointed out that during the Great Recession, “gold was one of the only investment classes that provided positive returns. This fact will not be forgotten if the next recession materializes.”
Its analysts also say that gold equities look relatively cheap compared to bullion, adding that, for the first time ever, some of the big producers are trading at price-earnings ratios below the S&P 500 Index average.
Going back to 1971, when President Nixon ended dollar convertibility into gold and deregulated the price of gold, gold stocks have tended to outperform the S&P 500 when the federal government runs budget deficits. Through 2019, the annual federal deficit is projected to average around $1 trillion, creating the potential for gold stocks to remain an attractive investment relative to the broader market for years to come.
Based on the long-term record, this may be a good time for investors to consider establishing or adding to a gold or gold-stock position in advance of seasonal demand growth. Historical patterns may be a useful guide and improve the chances for investment success, but of course, there are no guarantees that the fall of 2010 will follow the well-established trend.
The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver. The index benchmark value was 500 at the close of trading on December 20, 2002. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Toronto Stock Exchange Gold and Precious Minerals Index is a capitalization-weighted index designed to measure the performance of the gold and precious minerals sector of the TSX 300 Index. The S&P/TSX Global Gold Index is an international benchmark tracking the world's leading gold companies with the intent to provide an investable representative index of publicly-traded international gold companies.
The Next Big Emerging Markets?
August 02, 2010
When countries get grouped together for economic or political purposes, an acronym or other shorthand device is soon to follow. OPEC, EU and G7 are a few of the old standards, while G20, PIIGS (European nations with dangerously large sovereign debt burdens), and of course BRICs are newer examples.
Now The Economist is getting into the game with “CIVETS”: Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa – six countries that could be the next wave of emerging markets stardom.
The Economist’s basic case: these six have large and young populations, diversified economies, relative political stability and decent financial systems. In addition, they are for the most part unhampered by high inflation, trade imbalances or sovereign debt bombs.
We didn’t think up the acronym, but we have liked the long-term prospects for most of these countries for quite a while. Here are some of our thoughts and observations.
Start with Colombia, which has had a hard time getting people to forget about its narcoterrorism past and look at its promising pro-business government policies.
I met with former President Alvaro Uribe and it was fascinating to observe his policies for social stability and job creation. Five years ago, he changed the rules and began to encourage companies to come in and help develop their oil resources. He has taken those petrodollars created and reinvested them back in the country’s infrastructure and created jobs.
That is in complete contrast to what Hugo Chavez is doing in Venezuela, or even Mexico and its energy policy. Both of those countries are watching their reserves deplete, but there’s no policy to bring in intellectual capital like you’re seeing in Colombia.
| Population (m) | GDP per head (US$, PPP) |
Consumer price inflation (%, av) |
Budget balance (% of GDP) |
||
|---|---|---|---|---|---|
| Source: Economist Intelligence Unit, Country Data | |||||
| Colombia | 46.9 | 8,920 | 2.6 | -3.9 | |
| Indonesia | 243.0 | 4,230 | 5.1 | -2.2 | |
| Vietnam | 87.8 | 3,150 | 9.3 | -7.7 | |
| Egypt | 84.7 | 5,910 | 11.8 | -8.7 | |
| Turkey | 73.3 | 12,740 | 8.7 | -4.5 | |
| South Africa | 49.1 | 10,730 | 5.8 | -6.3 | |
Turkey’s economy is dynamic and currently supported by strong underlying trends that point to long-term growth ahead. Its economy is the sixth largest in Europe and in the top 20 worldwide with a 2009 GDP of $615 billion. Turkey’s per capita GDP of just over $8,700 is greater than any of the BRICs. Industrial output leaped by 21 percent in the 12 months ending March 2010, inflation fell to 6.1 percent last year from double-digit levels a year before, and public debt is less than 40 percent of GDP.
And while Europe still makes up more than half of Turkey’s exports, the current government has taken steps to increase exports to Middle East trading partners – Saudi Arabia, Iraq and Egypt – as a hedge against economic volatility in Europe.
Indonesia’s demographics, natural resources and relatively stable politics have set up the country for what could be a very strong decade of growth. Its economy doubled in the past five years and in greater Jakarta – the world’s second-largest urban area with roughly 23 million people – per-capita GDP grew by 11 percent each year from 2006 through 2009.
More importantly, this growth was driven by the private sector, not by government spending – the private sector accounts for roughly 90 percent of the country’s GDP. Over the past five years, the average income has doubled to $2,350 a year and Deutsche Bank thinks that figure can rise another 50 percent by the end of next year.
Despite this income growth, Indonesia still has the lowest unit labor costs in the Asia-Pacific region, according to JP Morgan. This has attracted manufacturing activities from China. Employment growth is key because half of Indonesia’s population is 25 years old or younger, so the workforce as a portion of total population will rise over the next 20 years. This should increase the country’s consumption levels and fuel further economic growth.
Vietnam has seen rapid economic growth in recent years. It too has picked up some manufacturing base that was formerly in China. The country’s per-capita income of $1,050 last year was nearly fivefold higher than it was in the mid 1990s, and in Hanoi, the income level is closing in on $2,000 per person, according to government figures.
That new wealth is showing up in gold purchases. Net retail gold investment in Vietnam exceeded 500,000 ounces during the first quarter of 2010, up 36 percent year-over-year, the World Gold Council says. Add to that a 20 percent increase in gold jewelry demand.
Beyond the CIVETS, we see some potential in other places. Malaysia’s economy, for instance, grew more than 10 percent in the first quarter of 2010, and the country has plans to slash its budget deficit and at the same time invest more heavily in infrastructure. And in Chile, despite February’s earthquake, public debt is just 7 percent of GDP and the economy is expected to see 5.5 percent growth this year and 6.5 percent in 2011 as resource exports to emerging markets in Asia accelerate.
We see the global growth story – led by key emerging market countries like the BRICs, the CIVETS and others – as the most powerful long-term investment opportunity.
For more on this theme, I invite you to visit our website to read through the Emerging Markets archives on the “Frank Talk” blog and to look at our interactive "What’s Driving Emerging Markets" presentation.
Advanced G-20 economies references members of the G-20 whose economies are considered by the IMF to be developed. This includes Canada, United States, Austria, Belgium, France, Greece, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom, Australia, Japan and Korea. Emerging G-20 economies references members of the G-20 whose economies are considered by the IMF to be emerging. This includes Brazil, India, Indonesia, Hungary, Russia and Saudi Arabia. BRIC refers to the emerging market countries Brazil, Russia, India and China.
The Case for Emerging Markets
July 19, 2010
One of the best selling points for investing in emerging markets is growth potential, but like any other sector, this growth must come at a reasonable price.
Emerging market stocks are cheap these days. The MSCI Emerging Markets Index has a 12-month forward price-to-earnings ratio of 10.8x, which is 15 percent below the P/E for the MSCI World Index. As you can see on the chart below, this valuation has rarely been more attractive – it is 15 percent below the long-term average.
On top of that, significant sales growth is expected in global emerging markets – 15 percent and 10 percent, respectively, for 2010 and 2011. The EMEA (Europe, Middle East and Africa) region is expected to lead the way – within EMEA, Turkey is seen as the star with nearly 30 percent sales growth this year and 17 percent in 2011.
Other emerging market standouts in expected sales growth: Taiwan (28 percent), Russia (15.8 percent) and India (15 percent). At 5.5 percent growth, the Philippines is expected to be the laggard.
Sales growth and margin expansion drive earnings growth – UBS predicts a 34 percent jump in earnings for emerging-market equities this year and another 12 percent in 2011.
Emerging market companies also have cleaner balance sheets and lower leverage compared to global peers. Debt-to-equity levels are low and heading lower – UBS sees a drop to 22 percent in 2011 from 28 percent this year. This balance sheet strength gives those companies strategic advantage in raising dividends and targeting their capital expenditure toward areas with the highest potential for return.
| % of 2010 GDP Forecast |
Percentage Point Increase 2007 - 2010 |
||
|---|---|---|---|
| Source: JP Morgan | |||
| Developed | |||
 |
United States | 92.4% | 30.6% |
 |
Japan | 197.2% | 30.1% |
 |
United Kingdom | 83.1% | 36.1% |
 |
Germany | 77.1% | 12.1% |
 |
France | 83.0% | 19.2% |
 |
Italy | 118.4% | 14.9% |
 |
Greece | 133.4% | 37.7% |
| Emerging | |||
 |
Russia | 7.9% | 0.5% |
 |
South Africa | 38.2% | 9.3% |
 |
China | 19.0% | -2.7% |
 |
India | 41.1% | 0.2% |
 |
Brazil | 61.7% | 2.9% |
 |
Turkey | 49.0% | 1.9% |
 |
Indonesia | 32.5% | -3.8% |
The table above from J.P. Morgan shows public-sector debt of selected countries in developed and emerging markets. The contrast is staggering, particularly the rate at which debt is growing in the largest economies – more than 30 percent this year in the U.S., Japan and Britain.
Among emerging markets, only Hungary and the Dominican Republic are expected to see double-digit increases in public-sector debt. China and Indonesia should see a decrease in 2010, while India and Russia are seen as pretty much flat.
This trend represents a major reversal from the past, when investors in developing economies often had to factor in large sovereign debt, high default risk and wildly fluctuating currencies. Government policy changes have contributed greatly to stronger economic fundamentals in many emerging nations, while policy moves by governments have been a source of weakness and uncertainty in the developed world.
Emerging markets have outperformed the world market by 400 basis points since April, when Europe’s sovereign debt crisis accelerated. The key factors discussed above – greater sales growth, cleaner balance sheets and cheaper valuations – make a good case for emerging-market equities to continue this outperformance over the longer term.
John Derrick, director of research, contributed to this article.
Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. MSCI World Index is a capitalization weighted index that monitors the performance of stocks from around the world.
Habits for Confident Investors
July 12, 2010
A New York Times columnist is calling for another depression, volume is rising on the “double-dip” recession debate, and a well-known technical analyst is predicting that a 90 percent plunge is coming for the Dow Jones average.
Ambitious doom-and-gloomers are racing to the bottom to conjure up the most apocalyptic market scenarios – it’s small wonder why many investors are curled up in the fetal position.
In his Forbes blog, Rich Karlgaard labeled this bunch “The Men Who Want to Be Roubini – which is to say rich and famous.” The wealthy and well-known pundit Nouriel Roubini made his name as an uber-bear, but these days he doesn’t foresee a depression, a second recession or an asteroid destroying the planet.
We also don’t share the growing despair. I’ve lived through many market cycles and have learned that there are always opportunities in global markets – we’re just working harder to find them. As active managers, we use sophisticated investment processes, and we play to win. On the macro side, we believe in cycles and seasonal patterns, and that government policies are precursors to change, both domestically and internationally.
We also believe that each asset class has its own DNA when it comes to volatility. You can see this in the chart below, which shows the rolling 12-month volatility over the past 10 years for gold and gold equities compared to key large-cap and small-cap stock indexes.
| Index | Rolling 1 Year |
|---|---|
| NYSE Arca Gold BUGS Index (HUI) | 42.3% |
| Russell 2000 Index (RTY) | 23.2% |
| S&P 500 Index (SPX) | 19.6% |
| Gold Bullion | 14.8% |
For gold, the volatility over any 12 months for the past decade is plus or minus 14.8 percent and for gold stocks (as measured by the HUI), it about three times greater – investors should look at these numbers as “normal” behavior. It may come as a surprise to some that both the S&P 500 and the Russell 2000 are both considerably more volatile than bullion.
If you don’t pay attention to volatility of gold, for instance, you'll risk being herded into buying at the top and then getting upset and selling at a loss after it corrects.
When you understand volatility, it’s easy to see how much risk you have if you’re leveraged. If you're not leveraged, you have the flexibility to be able to buy gold on down days. Volatility can help you buy gold on sale.
It's really important for people to understand that there are peaks and troughs in life and in markets, and you have to be humble when you’re at the peak and hopeful when you’re in the trough.
The image above is a familiar one to many investors – it shows the sequence of emotions during a market cycle. It’s increasingly positive on the way up to the peak, and then progressively negative on the way down to the trough before starting back up again.
The irony, of course, is that investors feel happiest when they are at the highest market peril, and they want to jump out a window when their potential upside is the greatest.
These peaks and troughs don’t correspond just to markets or to the good and bad events in your life – they’re also how you feel inside and how you respond to outside events. How you feel depends on how you see your situation. Do you have hope and confidence, or are you paralyzed by negativity and despair?
I believe the key is to separate the events in your life from how you feel about yourself as a person. If you don't, your emotions can take control and, as an investor, you end up buying at the top and selling at the bottom. When this happens, of course, problems are compounded in a downward spiral.
Actions should be shaped by beliefs and values, not emotions. When investors understand volatility, they can manage market movements better and make better decisions. They can steer their financial ship with confidence, rather than sitting powerless and being pushed around by the market’s powerful tides.
July and Emerging Markets
July 06, 2010
There's no shortage of bleak news out there that's weighing heavily on the markets, but we could be coming into a positive period for emerging markets investors.
The chart below, from Jim Lowell at Dow Jones MarketWatch, shows that July tends to be a good month for emerging market equities.
The sector's beta-weighted performance in July tops 2 percent on average, far greater than any other asset class on the chart.
Of course, emerging markets can be highly volatile and there's no assurance that this month will follow the pattern. But Lowell's observation is certainly timely and may be of value to investors looking for opportunities in the current market.
Our experience is that seasonality is one of many important variables to monitor to keep a finger on the pulse of the market.
We have found it useful over the years to watch the seasonality of gold, oil, copper and other commodities as part of our broader approach of tracking both short-term and long-term cycles.
Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
Net Asset Value
as of 09/02/2010
- Global Resources Fund
PSPFX $8.72 +0.08 - Gold and Precious Metals Fund
USERX $17.25 +0.18 - World Precious Minerals Fund
UNWPX $19.21 +0.13 - China Region Fund
USCOX $8.50 No Change - Eastern European Fund
EUROX $9.05 +0.03 - Global Emerging Markets Fund
GEMFX $8.15 +0.01 - Global MegaTrends Fund
MEGAX $7.67 +0.03 - All American Equity Fund
GBTFX $19.86 +0.15 - Holmes Growth Fund
ACBGX $15.79 +0.19 - Tax Free Fund
USUTX $12.61 No Change - Near-Term Tax Free Fund
NEARX $2.27 No Change - U.S. Government Securities Savings Fund
UGSXX $1.00 No Change - U.S. Treasury Securities Cash Fund
USTXX $1.00 No Change