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Who’s Afraid of the Big Bad Sovereign Debt Wolf?

Last Friday, the sovereign debt of nine European nations—including France and Italy—was downgraded by S&P.  Now, there are only four European nations whose sovereign bonds carry the . . .
Continue Reading: Who’s Afraid of the Big Bad Sovereign Debt Wolf?]]> This week Gold Subscribers received two recommendations and a special alert.  Since Gold Subscriptions began, there are five new recommendations available to Gold Subscribers.

For a limited time, sign up to become a Gold Subscriber and receive the first month of Guild’s Premium Global Market Commentary complimentary.  Become a Gold Subscriber today.  Click here.

Who’s Afraid of the Big Bad Sovereign Debt Wolf?

Last Friday, the sovereign debt of nine European nations—including France and Italy—was downgraded by S&P.  Now, there are only four European nations whose sovereign bonds carry the highest AAA rating: Finland, Germany, Luxemburg and the Netherlands.  Since the sovereign debt refinancing and potential default problem still goes unsolved, we foresee the markets having to keep digesting more waves of bad news.

Yet the fear created by such news is diminishing—not because of a shortage of negative news headlines—but because European banks are more protected by the many lifelines that central banks keep throwing them.

Many Lifelines Bolster the European Banking System

 We see the protection of the banking system as more important than certain governments’ ability to borrow.  Stock markets seem to agree.  They appear to have discounted much of this week’s sovereign debt news.  A few months ago, headlines highlighting rating agency downgrades—like last Friday’s—would have caused violent drops in the U.S. and European markets.  Yet when Friday the 13^th’s news of the downgrades was announced, the same markets declined less than 1 percent…and in the following trading sessions, the markets rallied, some even rising more than 1 percent.

Good and bad news go hand in hand in this business, especially in a situation like this…and good and bad news can come simultaneously.  Sovereign debts get devalued, and new countries offer more liquidity or support for the European Central Bank (ECB).  It all boils down to the problem continuing, while resources to repair it are being accumulated.

Available to Gold Subscribers

Good for Gold

Why would gold rise if inflation is falling?  Because the Euro and the U.S. dollar are being debased as more liquidity injections, aka Quantitative Easing (QE) programs, are instituted.  As this additional liquidity is being offered to the banking system by many governments, it increases the supply of currencies and thus decreases their values.

Here’s what we think: the long-term trend of rising inflation will not end until the poorly managed nations begin to make rational fiscal decisions. They should move toward balanced budgets, and they should create an environment where new businesses can start and flourish. This is what is needed to increase employment and tax revenues. When poorly managed nations achieve these milestones, they will cease to be poorly managed.

Investors continue to wonder how to protect buying power when their national currency is being debased.  A solution chosen by many investors is to buy insurance in the form of gold as a hedge against the declining buying power of their money.  We agree—gold can be an excellent insurance policy against unwise behaviors by government officials.  Countries do this too; gold continues to be demanded by many nations.  Last year many countries, including South Korea, Thailand, Turkey, and Russia, all added to their national gold reserves.  Recently, some well-respected technical analysts have written that the correction in gold has ended and a new uptrend will begin soon.  We are not technical analysts—but our fundamental research continues to make us bullish on gold.

What does this mean for me?

There is an investment opportunity. To know which investments we recommend, click here to become a Gold Subscriber and receive our recommendations.

A Note About Hoarding

Governments over the last few years have raised interest rates, in part to stop speculation in commodities which were being hoarded.  The price rises and subsequent hoarding contributed to the inflation problem that gripped many countries in late 2010 and early 2011.  Now, lower prices are a sign of little hoarding and thus a more effective system of resource allocation.

Inflation Rates – Shorter Term: Lower…Longer Term: Higher

Inflation Rates – Shorter Term: Lower…Longer Term: Higher

Grocery baskets may have been fuller in 2011 than in 2010, but how long will that last?  Food inflation is moderating slightly in China, India, and most other Asian nations, in part due to larger food crops in Asia—but this moderation is nothing huge, and we do not expect it is permanent.

It can be misleading to only look at year-over-year inflation statistics, since they don’t always capture the larger trends.  For an example, we will use a fictitious country.  Let’s call it Chindia. In Chindia, the inflation rates went up 10 percent in 2010 and 5 percent in 2011.  Government officials in Chindia will measure this as a moderating rate of inflation.  This decline in the inflation rate will allow for a decline in interest rates.  However, the reality is that despite the fall in the rate of inflation, the goods being sold on January 1, 2012 are still 15.5 percent higher than they were on January 1, 2010.  Chindians may feel a little relief, but they will know that prices are still rising.

Reasons for the Slowdown

The slowing growth in the developed world and the tighter monetary policies in the emerging world were two reasons why 2011 saw a slowdown in inflation rates.  Another reason was general fear about Europe, which slowed bank lending and corporate expansion.

Brazil started cutting rates in late 201…reducing their SELIC rate

Courtesy of Bloomberg

China also began loosening…reducing their high banking Required Reserve Ratio(RRR)…we expect more of this in coming weeks and months

Courtesy of Bloomberg

Causes of the Inflation

If you have read our past commentaries, you’ll remember us saying previously that the food inflation was caused by the expansion of wealth among citizens in many countries—China, Brazil, Thailand, Indonesia, Philippines, Malaysia, Chile and India to name a few—over the last few decades.  As the poor of these countries have grown wealthier, they have desired food in larger quantity and variety.  The first wave of demand was for more grains, and secondly, more meat protein—which, in turn, increased demand for feed grain—because animal protein has higher grain and water requirements than other sources of protein.  The general rule states that every pound of chicken requires four pounds of grain; a pound of pork, six pounds of grain; and beef, eight pounds of grain.  Therefore, countries shifting from a vegetarian-based diet to an animal-protein-based diet must feed animals between four and eight pounds of feed grain to produce every pound of animal protein.  Clearly, as more animal protein is demanded, more consumption of grains is necessary.

Now that food inflation is moderating, has the food inflation problem been solved?  The answer: partially.  The problem has been addressed in part by: 1) Increasing the acreage of land under cultivation. Many countries are preparing for their citizens’ demand for a diet higher in animal protein. They are planning to grow more food and raise more animals.  2) When a country allows its currency to rise the higher currency acts to lower the cost of imported grains and meat.  For example, the Chinese currency, the Yuan, has risen by 8 percent against the U.S. dollar and 22 percent against the Euro since the January 1, 2010.  The rise in the value of the Yuan reduces the cost of imported food in Yuan terms.  3) Countries have started to address their water needs and are investing in and developing more water resources.

How Long Will Inflation Continue To Moderate?

That is a very good question, and we do not know the answer.  We will discover the answer by monitoring world political, social, and economic events.  We expect to identify signs as they appear…before the return of rising inflation.  Inflation in Asia is moderating now, and it is not vigorous as it was in other parts of the world.

History tells us that all of the ‘money printing’ that has been going on in many countries will cause the buying power of currencies to decline.  Decline in buying power of money is inflation. The shopping cart of food costs more dollars as the buying power of the dollar falls.  It is not hard to hide, but we will have our antenna out and we are monitoring inflation events carefully. You can count on us to report to you.

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Declining Food Inflation Shows Up In The Guild Basic Needs Index^TM …But As We Said Above, It Is Not Permanent

Available only in the Guild Global Market Commentary, the Guild Basic Needs Index (GBNI) tracks the changes in price of the essential needs for living; food, clothing, shelter, and energy. 

2011 saw prices of certain basic needs pull back.  Correspondingly we saw a reduction in the rapid rate at which the GBNI had been outpacing the U.S. inflation measure, the Consumer Price Index (CPI).  Longer term inflationary pressures are building, especially in food and energy, and we expect a re-acceleration of inflation will resume in years ahead.  The GBNI gives our readers insight into the subsurface inflationary trends that cannot easily be gleaned from the data offered by government statisticians.

In the twelve years since the new millennium started, the prices of the ingredients for life measured in the GBNI are up almost 70 percent, versus about 35 percent for the CPI.  To measure a decline in the standard of living, you can take either inflation measure, and compare it to the fact that over the same twelve years, wages in the U.S. have gone nowhere.

Our goal is to help readers and investors preserve the purchasing power of savings, and thus their standard of living.

Seeking Higher Yields As Part of The Investment Strategy Is Our Tradition

There has been a lot of hype and press about how high dividend paying stocks have outperformed.  Equity income investing is the new marketing buzz among many money managers.  As our investment management clients know, seeking higher yielding stocks has been one of our major strategies for decades, and we continue to use high yielding stocks in our aggressive growth, growth, and our income strategies. All of our strategies enjoy the benefits of owning companies with good yields and strong cash flow growth.  We monitor these companies carefully.  Guild’s principals and analysts speak with the managements of these companies regularly to understand their growth prospects, the visibility of their yields, and their potential for continued growth or shrinkage of the dividends.  We have followed many of these companies for years and we continue to keep a close eye on them and their competitors. This vigilance allows us to find new vehicles for investment.
The U.S. Dollar Continues Its Slow Loss of Influence in Global Trade

New Alliances China and Japan - In recent weeks, China and Japan began to trade without using the dollar as an intermediate currency.  A similar announcement came from Russia and Iran.  In the first case, it is for economic reasons of trade and practicality. In the second case, it is as much for political reasons; primarily to show scorn for the U.S. and its world influence.

China and Japan expect to be each other’s major trading partners for the next 100 years. They are located near each other, are the 2nd and 3rd largest economies in the world, are natural trading partners, and direct trade between their two currencies is a rational and practical idea.  It will save money, allow simpler trade and cause the overvaluation of the Japanese Yen to moderate.  The two nations benefit from each other and need to encourage more trade between themselves.  A side effect is that because the Yen is overvalued against the Yuan, Japan will buy more Yuan bonds and diversify its investment portfolio away from U.S. dollars.

Russia and Iran have entered into a similar arrangement which provides for them to trade with one another using their home currencies rather than the U.S. dollar as an intermediary currency.  This agreement was devised as the two countries’ response to new sanctions against Iran’s central bank.  The purpose is to cause Iran to suffer a loss of oil revenues. Oil transactions with Iran by western countries have to be processed through the Iranian central bank.  Loss of oil revenue further worsens Iran’s dismal internal economic situation.

We wish everyone a happy upcoming Lunar New Year (Chinese New Year)
Gong Hey Fat Choy

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Healthy Banking System Trumps Government Solvency

In our opinion, the health of the world banking system is a transcendent issue, the magnitude of which is poorly understood by 99 percent of the people living on the planet. In many ways, banking . . .
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We expect some countries will opt out of the Eurozone because the pain of compliance with European Community edicts will lead to depression-like economic contractions.

Healthy Banking System Trumps Government Solvency

In our opinion, the health of the world banking system is a transcendent issue, the magnitude of which is poorly understood by 99 percent of the people living on the planet. In many ways, banking systems are more important to societal standard of living than are the headline-making fiscal woes of nations.

BSE-500 Index (5 Year)

            Courtesy of Bloomberg

Corruption-India’s Self-Destructive Addiction A prerequisite for consideration of the Indian economy is to understand the corruption culture that pervades most aspects of national life. India is a highly-bureaucratized country. Anytime you need approval to do something you have to run a gauntlet of  bureaucrats. Unless they receive some favor, they will slow down your approval process or stop the process entirely. As examples, that means handouts to get government approval to buy a house, invest in land, or any activity that requires permits, or to register a business, start a new line of business, or expand a business operation. Corruption even extends to getting government officials to show up at their offices to manage the affairs for which they are paid and to get teachers to show up at school.  Sometimes even to mail a letter.The people of India are tired of having to pay somebody, or several somebodies, to get things done. This ruinous behavior affects everyone in the smallest villages or the biggest cities. The practice is unsustainable.  Although corruption has a long tradition, the suffering public which has tolerated this gross inefficiency for years has been rising up to complain and demand that politicians do something. Religious and business leaders, social activists, foreign investors and others are also raising their voices. Several high-profile figures have gone on hunger strikes. Hopefully, the corrupt political and bureaucratic classes will get the message and realize that reform is necessary if the country is to ever to fulfill its great economic potential. Strong anti-corruption legislation is critically needed to stop the corruption and its drag on everyday activities. When that happens, India can count on a huge surge in foreign investments. But so far, the ruling Congress party has been unable to pass strong anti-corruption legislation.At the very least, politicians need to remove some of the ponderous burden caused by administrative hurdles and make the environment more friendly to business.  Even if they just dismantle some of the decades-old socialist economic practices, such as subsidizing prices for certain commodities, or subsidizing bank loans to those who cannot repay, then the vast but stifled industrious energies of India could be unleashed, and the Indian economy, standard of living, and stock market could move forward dynamically.
Now that we see efforts by China to expand its economic activity and stimulate borrowing for business expansion, we expect more of the same going forward. China continues to be a VIP in the world economy. We expect slightly slower economic growth rate in China for a few months followed by a robust expansion in the second half of 2012 as the money flow starts to have an effect. Covering the Oil Front: North American Oil Taking Center StageWe aren’t meteorologists here at Guild Investment, but we have learned to expect political heat and unrest to rise in the Middle East with cooler seasonal weather. That’s what’s happening now. Social turmoil continues to simmer in Bahrain and boil in Syria. There’s escalating bickering between Shiites, Sunnis, and Kurds in Iraq.  And, of course, there’s the endless threats and counter-threats between nuclear-bound Iran and the West.The Middle East is all about politics and oil revenue. Looking ahead, we anticipate more political instability. The more intense the level of instability the higher goes the price of oil. So, any declines in price levels along the way should serve as buy signals for investors.

As far as oil production is concerned, regional turmoil has had a negative impact in several areas. Examples: Production has not returned to normal in Libya, Syria, and Iraq. Predictions of increased production in 2012 appear unrealistically optimistic to us. Both history and current events in the Middle East make it clear why major foreign oil investors are increasingly flocking to energy opportunities in the shale and oil sands of politically-stable North America.

For instance, France, China, and Spain have enlarged their North American oil assets. In just one day last week, Sinopec, China’s second largest oil company, committed $2.5 billion to partner with Devon Energy of Tulsa in five shale properties, and Total, the large French oil company, invested $2.3 billion in an Ohio oil and gas shale project with two American producers, Chesapeake and EnerVest. Not long before that, PetroChina, China’s largest oil and gas producer and distributor, spent $680 million Canadian to purchase the remaining 40 percent that it did not own of the Athabasca Oil Sands property in Northern Alberta.They now own 100 percent of the project. These are just two of numerous investments by Chinese companies in Canadian oil and gas enterprises over the last few years. Even Spain has gotten into the action. Just before Christmas, the Spanish oil giant Repsol invested $1 billion in a joint venture with Sandridge Energy’s oil acreage in Oklahoma and Kansas.
Where’s the U.S. Government in All This? We would not be far off the mark to say, with disappointment, that Washington has its head in the sand. Politicians are under pressure from environmental groups to deny laying pipelines through the U.S. carrying southbound oil from Canada. Some groups are also against hydraulic fracturing (fracking) for oil and gas wells (fracking involves applying pressurize fluid to fracture rock layers in order to release oil and natural gas for extraction).While we support some of the environmentalists concerns, we remain confident that a factual debate will show that fracturing and pipelines are not sufficiently risky to the environment to warrant stopping them. It is high time for a serious and factual debate about the risks and rewards.  The benefits include, hundreds of thousands of new jobs, energy self-sufficiency, lower energy prices, and military energy security. Shouldn’t those benefits be priority items on Washington’s checklist?It is obvious to us that nations put themselves in a stronger geopolitical position when they have access to large energy supplies. For example, Saudi Arabia wields significant influence in spite of its small population of only 18 million citizens (and 9 million guest workers). The Saudis have global muscle because of their energy reserves. Any country with energy self-sufficiency is much stronger than an otherwise comparable country without such self-sufficiency. That’s the geopolitical reality in today’s world. The U.S. should encourage the development of its oil and gas resources and those of its close ally Canada.  If we ignore energy security now, we can count on future generations cursing our stupidity.

Among readers who may be members of Congress, the executive branch of the U.S. Administration, or in government positions at state and local levels, we sincerely appeal for reality ahead of politics. The oil and gas reserves in the U.S. and Canada should be valued at premium prices. Please wake up and approve the Keystone pipeline. The U.S. needs the secure and available Canadian oil. Do not encourage Canada to send its energy reserves to Kittimat in British Columbia for shipment to China. Oil InvestmentsWe like U.S. oil producers with strong current dividend yields and the probability of increasing yields in coming years as the price of oil rises. We additionally anticipate for capital gains as investors gravitate to more high-yielding and energy-related securities. We may recommend some of them in coming letters.
Covering the Gold Front: Diagnosing Gold Mine AnemiaGold mining company stocks performed poorly in 2011 while gold bullion rose in price.

The price of gold bullion has climbed  for 11 years in a row and will, in our opinion, continue to rise for some time.  Why the disconnect between the price of bullion and mining shares?

We see two primary reasons:

1. The emergence of gold ETFs as an investment vehicle. The ETFs have attracted investors who might otherwise have bought gold mining shares instead of futures.
2. The underperformance of the mining industry, a result of the difficulty finding new gold properties along with the rising costs of mining. Large companies have not had big success in finding new properties.

We’d like to expand on the second point, and specifically the need of big companies to make acquisitions of gold mining properties or related enterprises in order to grow. Often, it is less expensive to acquire smaller miners with attractive, underdeveloped properties than it is to find new reserves.  Some smaller gold miners sell below their asset value and should rise as investors realize that the value of their reserves exceeds their market value.

In our experience, there are three key differentiators among small gold miners that explain why some stay small and others grow or become acquired. To be attractive, they must first and foremost be located in a politically-stable country. The government needs to allow the companies to keep a fair and reasonable share of profits for stockholders, while at the same time receiving satisfactory income from royalties, co-ownership, or taxes. From our perspective, we see strong, reasonable, and well-managed governments…as well as bad ones…on every continent.  For example, we view Canada, Mexico, Australia, Chile, Colombia, Tanzania, Ghana, and Philippines as reasonable.  On the other side of the gold coin, we see Venezuela, Bolivia, Argentina, South Africa, Zimbabwe, among others, as unreasonable.
Going further in our analysis, let’s discuss three types of small gold mining companies that may be available for investment.

• Type 1
  Run by promoters on sites with no proven or probable gold reserves. They have possibilities, hope, and some land, and may possibly produce gold. The challenges for these companies are finding gold, raising capital, and financing the company during the time it takes to bring any gold to market.
• Type 2  
  Run by geologists who know mining but are ignorant of financing gold ventures. They often fall into traps such as selling their future production in the forward market. They end up with greatly-diluted equity, a result of inability to keep income above costs and having locked in their income when they sold forward their future production.  These operators may be honest and have solid gold reserves, but lack a coherent plan for exploiting their reserves.
• Type 3
  Run by managements with identifiable reserves, mining and engineering expertise, and solid financial planning. These are the operations best equipped to bring mines to fruition and to become recognized by value investors.

Overall, if you are interested in high risk, high upside potential stocks that have been beaten down to historically-low valuation levels, gold mining stocks may be an attractive choice.
SummaryAvailable to our Gold Subscribers
]]> http://www.guildinvestment.com/2012/01/12/become-a-gold-subscriber-today/feed/ 0 http://www.guildinvestment.com/2012/01/06/guilds-premium-global-market-commentary-become-a-gold-subscriber-today/ http://www.guildinvestment.com/2012/01/06/guilds-premium-global-market-commentary-become-a-gold-subscriber-today/#comments Fri, 06 Jan 2012 18:51:52 +0000 Monty Guild & Tony Danaher http://www.guildinvestment.com/?p=2555 For this week only, we are making the premium content available for all of our subscribers.  Please see the areas in blue for a sample of the premium content.  Next week, subscribers must become a Gold Subscriber in order to receive access to Guild’s Premium Global Market Commentary.  To learn more about Gold Subscription, click here.  For a limited time, we are offer a complimentary one month free trial to our Guild’s Gold Subscription.  Gold Subscribers will be issued a user name and temporary password via email notification and will be directed to a secure login page.  . . .
Continue Reading: Guild’s Premium Global Market Commentary: Become a Gold Subscriber Today]]> For this week only, we are making the premium content available for all of our subscribers.  Please see the areas in blue for a sample of the premium content.  Next week, subscribers must become a Gold Subscriber in order to receive access to Guild’s Premium Global Market Commentary.  To learn more about Gold Subscription, click here.  For a limited time, we are offer a complimentary one month free trial to our Guild’s Gold Subscription.  Gold Subscribers will be issued a user name and temporary password via email notification and will be directed to a secure login page.  If you have any questions about Gold Subscription and Guild’s Premium Global Market Commentary, please contact Tim Shirata at (310) 826-8600 or email guild@guildinvestment.com.

What Will 2012 Bring?

Looking at the year ahead, our research team has analyzed global developments and plumbed a variety of key markets. You’ll find a broad selection of our conclusions later in this newsletter issue and hope they will be useful in guiding your investment strategies. We will be following up in coming weeks with more details about specific recommendations.

In 2011, financial news was dominated by the festering turmoil in Europe.  Looking ahead, we believe the ongoing crisis will be addressed by a global money printing “jamboree” and coordinated funding from central banks in the developed world, including the U.S. Federal Reserve. When the money starts rolling off the presses, the liquidity infusion will create some genuine buying opportunities for American, European, and Asian stocks, as well as selected commodities. Why, because liquidity infusions are like a rising tide of money available to buy assets. Wise investors seeing the rising tide, buy stocks, commodities, and primarily gold to protect the buying power of their assets.

The Swap Line/Life Line:

The Fed Gives and Europe Takes…but Quietly

We have mentioned many times that the U.S. Federal Reserve will help bail out Europe.  The rescue operation is underway…but oh so quietly. The talking heads on television, perhaps mostly on holiday hibernation, have missed the development thus far, and you may have as well unless you read a December 28 editorial in the Wall Street Journal.  It was written by Gerald P. O’Driscoll, Jr., a former senior economist and vice-president of the Federal Reserve Bank of Dallas, who is eminently equipped by education, experience, and connections to know the mechanics of the Fed.

The Fed action is surreptitious. That’s because the European Central Bank (ECB) wants to provide needed liquidity to Europe’s anemic banks without printing a lot of Euros. If the ECB blatantly cranks out Euros it would undermine its status as an inflation-fighting stalwart and incur the wrath of Germany. At the same time, many European heads of state want the ECB to purchase more sovereign debt, so what you have is an obvious conflict.

The U.S. Fed to the rescue.  But shhhhhhh….

Here’s what’s going on.  The Fed is engaging in a temporary U.S. dollar liquidity swap arrangement with the ECB. In common English, that means the Fed swaps dollars with the ECB for Euros. The ECB pays a small interest rate and guarantees to return a fixed number of dollars at a future date at a fixed exchange rate. Then, the ECB lends the money to the European banks that need it most.  In 2008, the Fed caught flak for loaning money to U.S. branches of the foreign banks, so this time they are attempting to maneuver by tip-toeing around the eggshells.

The artful maneuvering provides cover for both the Fed and the ECB because it allows for helping European banks without printing a lot of Euros or dollars in an obvious manner.

A most important part of the story now follows: In late 2008, the Fed had $600 billion of swaps on its balance sheet. By early 2010 they were mostly paid down as the panic of 2008 subsided and banks were able to raise capital from traditional sources, primarily by selling stock. By the end of last summer, the Fed’s swap renewal agreement had a balance of only $2.4 billion.  In recent weeks, the balance has grown to $64 billion.  We fully expect to see much higher numbers in the coming weeks as more dollars are channeled to Europe.

What’s happening is an obscure form of quantitative easing, aka money printing; but it is a type of money printing nonetheless. Central bank balance sheets…and future generations’ debt burdens continue to grow.

In addition to the dollar funding, there are other plans afoot to further liquefy European banks and strengthen the financial backstops. It was announced, for instance, this past week that Germany has agreed to enlarge the size of the European Financial Stability Fund (EFSF), the special funding pool financed by members of the Eurozone to combat the continent’s sovereign debt crisis.

U.S. Gallup Poll: Near-Record Fear of Big Government

In mid-December, the nonpartisan Gallup polling organization announced the results of its latest triennial survey about the biggest domestic threat to America. The specific question asked to a broad spectrum of American adults was this: “In your opinion, which of the following will be the biggest threat to the country in the future – big business, big labor, or big government.”

The results: 64 percent believe big government is biggest problem.  Seen by political preference, it comes out to 48 percent of Democrats, 64 percent of Independents, and 82 percent of Republicans who share this view.  A quarter of all those polled pointed to big business as the greater villain, and 9 percent cited big labor. See the tables from Gallup Poll below:

Source: Gallup

Outlook 2012: A Guild Global Projection

U.S. and Canada Overview: Mixed bag with high-yielding stocks topping the most attractive list, followed by some exporters with strong Asian business

The positives

• S&P 500 earnings estimates of $100 in 2012 put the U.S. market at lower than normal P/E ratio.  Stocks priced below average. Small cap U.S. stocks cheapest in 30 years.
• Election years have positive history. Meaning: both parties work to help the economy and stock market before elections.
• Investors attracted to many high-yield investment opportunities in energy, transportation, chemicals, real estate, and specialty business lending.
• Excellent conditions for exports, such as coal, timber, food, and technology, aided by  continued growth in Asia and Latin America,
• Continued Middle East difficulties with Iran and others indicate strong oil price for 2012.

The negatives

• General pessimism among investing public about stocks and bonds. Shaky confidence generated by fast trading and short-seller smears of companies.
• Dysfunctional Congress cannot agree on a realistic plan for cutting, spending, and moving toward a balanced budget.

We are recommending investors buy the U.S. S&P 500 (SPX) for a rally.

Europe Overview: Generally not attractive, with the exception of some exporters

The positives

• Some progress by miscreant nations toward rational financial behavior.
• European banks being totally backstopped from failure by the U.S., Japan, Switzerland, U.K., and Canada.
• Stocks are cheap

The negatives

• Many politicians out of touch with economic reality
• Many countries still unwilling to take the necessary medicine.  The exception is Ireland, which has done an admirable job addressing its deficit. However, the Irish austerity measures have exacted a heavy toll on the middle class and poor.
• European banks need to sell stock to raise more capital.
• Countries need more financing.

Asian and Australian Markets Overview: Bullish on some countries, neutral on others

The positives

• Some markets have gotten cheap.
• Profits will grow in 2012 due to increased regional consumer spending.
• Inflation will decline, and stay down.
• Some high-yield stocks available for income investors.

The negatives

• Exports to the developed world will decline overall, and emphatically so to Europe.  However, increases in inter-Asian trade and stable trade to North and South America should help blunt the European losses.

Latin America Overview: Neutral, but may become attractive soon

The positives

• The Brazilian market is getting cheaper.  This week President Rousseff announces a push for 5% growth in 2012. This means lower interest rates ahead.
• Continued strong demand from Asia and North America for Latin American commodities.
• Oil discoveries in Argentina, Columbia, and Peru.
• President Hugo Chavez of Venezuela losing influence at home and in the region.  Good news for free markets.
• Some regional currencies are undervalued.

The negatives

• Since her election in 2007, Argentine President Cristina Fernandez de Kirchner has done much damage to her country’s economic future.
• In her first year in office, Brazilian President Dilma Rousseff has reversed some of previous President Luiz Lula da Silva’s popular programs and damaged investor confidence.

Base Metals Overview: Currently unattractive

Volatility in 2012; wait for dips to buy.  For first six months of the year, China’s growth rate will slow a bit, as we have been reporting, and result in less interest in base metals. As holders get discouraged by slowing Chinese growth, and prices dip, the metals may become more attractive. We may buy later before prices resurge later in the year.  Which base metals we buy will be a function of worldwide economic activity as it unfolds.

Gold Overview:  Attractive

We recommend buying on dips and with a long-term attitude.  Clearly, the continued improvident behavior by politicians in the U.S., Europe, and other parts of the world will lead to inflation, fears of deflation, and slowing economic growth. Simultaneously, the need by Europe, U.S. and Japan to repair their banking systems will lead these countries to debase their currencies. Gold is the beneficiary in all of this.

The smartest move is to buy dips. We see gold as the big winner during the first twenty years of this century. Gold has been going up for about eleven years. Why would we panic if it goes sideways to lower for a few months at a time?  One can use those occasions to buy and expand your ride on the biggest winner or you can jump ship every time a period of inactivity and decline occurs?  Buying dips seems wiser.

1 Year Chart of Gold

Source: Bloomberg

Energy Overview: Attractive to Neutral

• Oil

Oil-related shares should do well, but we recommend focusing energy investments on high-yielding income producers, MLPs, and royalty trusts. Look for 10 percent yields and keep down the beta of your portfolio and your capital relatively safe. We will recommend some of these in coming letters when prices dip.

• Natural gas

Prices are falling. In North America, prices have been weak for the past few years as major discoveries and technologies have opened up multiple tight shale deposits, thus increasing the gas supply. Using the same successful shale technologies developed in North America, natural gas deposits are being found in many parts of the world, including Europe, Australia, and China. Such discoveries are creating a rapidly growing appetite for this low-cost and abundant resource. East Asia (Korea, Japan, and China) is one prominent region of growing demand.  We expect more substitution of coal by natural gas in many parts of the world. We will not buy natural gas producers until we believe gas prices will stabilize.

• LNG (liquefied natural gas)

LNG global traffic is on the rise, a result of more discoveries of a relatively cheap energy commodity. Thus, we expect demand to thus increase  for equipment that processes gas and turns it into LNG, which is easier to transport, and for equipment that re-gassifies LNG when it reaches its destination.

Our research indicates that the international demand for LNG carrier ships far exceeds the size of the current fleet. Ship capacity is growing, but not nearly fast enough. LNG vessels are not cheap. They cost about $200 million each, and take years to construct. We expect shippers to take advantage of the situation and inflate their charges accordingly. As a result of the shipping pinch, we’ve seen day rates for LNG shippers soar to $150,000 per day, which is over 300 percent higher than 2010 levels.  One destination country that will obviously pay more for shipping is Japan. Last March’s destruction at the Fukushima Daichi nuclear power plant has created a greater need for natural gas. The only way to bring Qatari, Indonesian, and Australian gas to Japan is by sea.

LNG seaborne routes are expanding.  Soon, large amounts of U.S. and Canadian natural gas will also be cruising the oceans.

Source: www.whatlng.com

Golar LNG (NASDAQ: GLNG), a Norwegian company, is the world’s second largest fleet of LNG carriers, and has been our favorite way to play this theme for some time. We recommend GLNG. Another way to play the trend here is Chart Industries (NASDAQ: GTLS), a company supplying equipment to transform gas into liquids and back to gas form, as well as equipment for the purification, liquefaction, distribution, and storage of natural and industrial gases. We believe that GTLS has gotten too expensive, but we are adding Golar LNG to our recommendation list this week.

Agriculture Overview: Rising grain prices… attractive for some, negative for others

We see a continuation of big opportunities in agriculture plays in 2012.  More wealth in the developing world is leading to more food consumption, thus creating even more demand for grains, meats, and dairy products. For several years, we have been heralding this trend and others more recently have been jumping on the bandwagon. We still see strong demand and growth trends because of the simple dynamics involved. There are opportunities in food and food-related investments cropping up ahead.

• Meat and dairy production – Mixed results

In general, price increases in grains do not bode well for livestock and dairy. Grains represent a large input cost. Some producers and retailers are hurt more than others. Ranchers, for instance, are pinched by rising grain prices, causing them to cull herds. The timing here is critical. If you have to sell your livestock when herds are being culled, you get low prices, but if you sell after other herds have been culled, you could benefit and enjoy fatter profits. Producers of processed meat and dairy products hedge their cost inputs, but they can still be hurt if unable to pass their cost increases to retail customers in a timely manner.

Feeding time is getting expensive

• Grains – Bullish on wheat

Producers in this sector are pleased with the rising price trend. The fundamentals are excellent.

 The only negatives we see – and they are slight – for the U.S. grain scenario is the removal of U.S. corn-into-ethanol subsidies and tariffs on Brazilian sugar imports.

 In 2011, wheat prices fell as Russia increased its wheat acreage by more than 30 percent. North American and Latin American farmers are storing more on the farm, and awaiting higher prices. In spite of the extra wheat from Russia we are bullish on wheat. Hot, dry weather has negatively affected the Brazilian and Argentine soybean crops, adding to demand for U.S. soybeans as a substitute and causing livestock producers to buy corn or wheat for animal feed.

1 Year Chart of Wheat

Source: Bloomberg

1 Year Chart of Corn

Source: Bloomberg

1 Year Chart of Soybeans

Source: Bloomberg

Several weeks ago we recommended a buy on wheat. The traditional mechanisms to buy wheat are via wheat futures or a wheat exchange traded fund that trades in the U.S and London under the symbol WEAT. A word of caution about investing in agriculture futures-related ETFs like WEAT, DBA, and JJG. They typically use U.S. listed commodity futures to mimic the price action of the world commodity markets.  If the agriculture commodities get too strong, we expect there could be regulatory efforts to control price rises through position limits or rule changes for non-commercial hedgers. Food price run-ups tend to grab the attention of government officials. Investing in a good theme may not be enough here.  It’s important that investors fully understand the instruments – and the risks thereof – that they own.

• Fertilizers – Benefitting from strong grain prices

Potash refers to various mined and manufactured salts that contain potassium. More than 30 million tons are produced annually, mostly for use in fertilizers, and constitute the single largest global industrial use of the element potassium.

Mining for potash in Saskatchewan, Source: Potash Corp. of Saskatchewan

In recent weeks, we have seen a pullback in most fertilizer prices, causing us to become more bullish. Longer term, we expect higher potash prices from producers.  Our favorite investment is the biggest and most liquid of the publicly-traded companies, Canada’s Potash Corp of Saskatchewan, (NYSE: POT). Other companies that produce potash are Intrepid Potash (NYSE: IPI) in the U.S, Brazil’s Vale International is more known for its iron ore, but also produces potash (NYSE:VALE, Brazil: VALE3), K+S Potash (DAX: SDF) in Europe, and Uralkali (LSE: URKA) in Asia.

• Brazil Sugar – Attractive

The recent removal of U.S. import tariffs on Brazilian cane sugar for ethanol creation and stoppage of subsidies for American corn-ethanol producers are smart moves. These actions increase the amount of U.S. produced corn and will have a modest price-suppressing influence on corn prices. The removal of the tariff is a plus for Brazil which will now be able to sell sugar for export.  It may also be positive for U.S. ethanol prices as it is more efficient and less expensive to create ethanol from imported sugar than from corn. We are not making a formal recommendation of Brazilian sugar.

• Agricultural equipment makers and retailers – Attractive

We expect farm profits in the U.S., Canada, and Latin America to rise in 2012. This should lead to further demand for farm equipment and products sold by farm-oriented retailers. The obvious plays are John Deere (NYSE: DE) and Tractor Supply Company (NASDAQ: TSCO).  Others that benefit from rising farm profits include: Agco (NYSE: AGCO), CNH Global (NYSE: CNH), Agrale (Brazil: AGRA3), Agrenco (Brazil: AGEN11), Agrium (TSX: AGU, NYSE: AGU), Ag Growth (TSX: AFN), and Viterra (TSX: VT). We may recommend these stocks in the future, but currently we are waiting for a more opportune time.

Summary

We remain bullish on gold, wheat, Singapore and Canadian dollars. We are adding buy recommendations on Potash Corp of Saskatchewan (NYSE and TSX: POT), Golar LNG (NASDAQ: GLNG, and Oslo: GOL) and the U.S. S&P 500 (SPX).

 Watch for us again next week, and in the subsequent weeks, with more insights to share for the new year.

Recommendation Tracker

For many people, the word Brazil conjures contrasting images of endless Amazonian jungles, jumbo snakes, man-eating piranhas, the dazzling beaches of Rio, and of Carnival, the world’s biggest party.

Olympic and World Cup fans are looking forward to visiting Rio de Janeiro

Photo Source: American Travel Club

Today, you have to add the word ‘boom” to the Brazilian national resume.  It’s ten years old and going strong, driven by rising production of everything from autos and computers to farm products and . . .
Continue Reading: Guild Global Market Commentary Premium]]> Beyond Beasts and Bossa Nova: The Brazilian Boom

For many people, the word Brazil conjures contrasting images of endless Amazonian jungles, jumbo snakes, man-eating piranhas, the dazzling beaches of Rio, and of Carnival, the world’s biggest party.

Olympic and World Cup fans are looking forward to visiting Rio de Janeiro

Photo Source: American Travel Club

Today, you have to add the word ‘boom” to the Brazilian national resume.  It’s ten years old and going strong, driven by rising production of everything from autos and computers to farm products and minerals. The country’s growth has, in turn, been pushed by huge waves of exports to Asia, Europe, and North America, along with big-time domestic consumption of housing and consumer goods.

The boom has created a much larger middle class than existed ten years ago and transformed Brazil into more than just a fast-growth economic player on the global stage.  It has also turned many Brazilians into a jet set army of shoppers who flock to Fifth Avenue and Florida for big savings. Believe it or not, Brazilians, as a national group, are the leading foreign shoppers in New York City.  In 2010, they spent more money in the Big Apple than natives of any other country, ahead of Canada, the U.K., and Italy.  In the state of Florida, Brazilians are second only to snowbirding Canadians.

There are a couple of good reasons why Brazilians like to shop in the U.S.:  1) Avoid paying a high value-added consumption tax, and 2) the Brazilian currency has risen by 25 percent versus the U.S. dollar since 2009.  Together, these factors make Brazilian products very expensive at home and make shopping in the U.S. well worth the airline ticket and hotel bill. An Apple iPad, for instance, will cost half the price in New York as in Brazil. Some specialty products may be only a quarter the cost in the U.S. that they sell for back home.

The Guild Guide to Brazilian Investments

What does all this mean for those who wish to invest in Brazil? It means that when it is time to buy Brazil – and the time isn’t here yet – you will want to consider banks and credit card companies as a way to capture the wave of consumer cash since many consumers go abroad to buy personal and pricey consumer goods. To take advantage of rising internal Brazilian spending you will probably want to consider autos, housing, and big ticket durables that will not fit into the luggage of shoppers returning from spending trips abroad.

That’s the general picture.  However, investing in any market sector in Brazil, or for that matter in any country, requires a great deal more than just top-down thematic insight. We like the prospects of Brazilian banks and credit card issuers, homebuilders, auto and appliance manufacturers, and the makers of steel from which many of these products are constructed.  They are all beneficiaries of Brazil’s growing and spending middle class.  Sugar producers in Brazil may also be beneficiaries of another trend which we will discuss in next week’s Premium Global Market Commentary. However, a top-down approach can only point out potential countries and industries as investment targets. To go further, and fully analyze companies, there are many other variables to consider – and such consideration and study in Brazil and elsewhere is a primary preoccupation at Guild Investment Management.

As an example of what’s needed to make an informed investment in a particular sector, we chose homebuilding.  With homebuilding one needs to understand many factors. They include tax policy, interest rates (present and expected) as compared to the inflation rate (present and expected), the operating skill of management, the price points of homes to be built, financing availability, affordability, and a knowledge of the markets that builders are addressing. In addition, there is the issue of relative P/E ratios versus growth rates; the economic, political, and investment backdrop of emerging markets in general; and Brazil in particular.

Brazil’s Bovespa Index- Last 10 years

Source: Bloomberg

The following lineup represents sectors we are keeping our eyes on for the time when Brazil does become attractive.

Homebuilding – Brazilian homebuilder stocks experienced a rough 2011 due to rising interest rates in the first half of the year. They sell at trough valuations. The largest publicly- traded residential constructions companies are MRV Engenharia (Bovespa: MRVE3); Gafisa (NYSE: GFA, Bovespa: GFSA3); PDG (Bovespa: PDGR3); and Cyrela Brazil Realty (Bovespa: CYRE3).

Banking – The six largest Brazilian banks account for more than 75 percent of bank lending and credit issuance in Brazil. Only four are publicly traded. They are Banco Bradesco (NYSE: BBD, Sao Paolo: BBDC4); Itau Unibanco (NYSE: ITUB, Sao Paolo: ITUB4), Banco Santander (NYSE: BSBR); and Banco do Brasil (Sao Paolo: BBAS3). The country’s smaller banks have much higher funding costs because they do not have access to international markets.  They require government assistance to compete. They are less attractive in our opinion.

Automobiles and Motorcycles – Brazil ranks fifth in automobile production worldwide (about 3.5 million units made in 2010). The country cranks out cars – and motorcycles as well – for large global multinationals like Ford, General Motors, Toyota, Fiat, Honda, and Yamaha.  Although auto sales are robust, there are few pure plays in this sector.  We are investigating ways to take advantage of this opportunity when the Brazilian market gets attractive.

Steel – Autos are made partly of steel and are just one factor in the growing attraction of Brazilian steelmakers. We will discuss this sector in detail in a coming issue and make a specific recommendation as soon as the opportunity ripens.

Brazil – In Summary

Many Brazilian stocks suffered major declines in 2011 and the time for investing has not arrived yet.  Our review is a heads-up.  From our standpoint, even when markets are not attractive, working on a potential buy list can be a valuable exercise.  As we recognize openings ahead, we will recommend specific groups to you and give more in-depth reasons why we like them. We continue to monitor the scene and do our homework so that we will have a good selection of recommendations to make at the right time. For now, you may want to add these ideas to your watch list for the buying opportunity to come.

China 2012: Looking Good

China, according to a December 14 report from Reuters news agency, has pledged a growth guarantee for 2012 despite a poor outlook for global economics. Here are the key snippets from the report:

• China is “laying out a blueprint for the world’s second largest economy in the year ahead.”
• Beijing promised to keep monetary policy “prudent,” fiscal policy “proactive,” and consumer prices “stable.”

The language is broadly in line with previous commitments. To us, this means that China’s GDP will grow at a rate below 9 percent for three to six months in early 2012 and then accelerate.  The speed-up will occur because of the continued cuts in the reserve requirements by banks that will allow capital to flow more freely into the economy.

The Chinese Copper Caper: A Lesson in Market Manipulation

You probably haven’t noticed but Chinese refined copper imports have hit a 2 1/3-year high as copper prices have fallen to lower levels. Give credit where credit is due.  The Chinese have artfully played the system. They made huge purchases without driving prices up.  Just the opposite, in fact! China clearly plans to use plenty of copper over the next year or two and will have a large stockpile, smartly bought, with which to do so.

A closer look at this development further reveals China as a master market manipulator. You may remember that we have pointed out many times in past years that the Chinese may often say, “oh, we will not need any nickel (or any industrial metal) this next year, and we will be selling to diminish our stockpiles.”

Due to non-Chinese speculators, excessive leverage of their portfolios and the fear factor, world prices then subsequently drop. The Chinese then move from small seller to big buyer; going into the market to scoop up future supplies at low prices. In the instability that ensues, the wily Chinese may then sell off a tad to keep the markets guessing.  They will also go out and buy discreetly through intermediaries, buying more than they are selling publicly, thus locking in their stockpiles at lower prices.

The Chinese are smart. They view things with a long-term perspective.

The lesson for you is to be cautious when the Chinese say they are selling an industrial metal or energy material.  They may just be taking advantage of the system.

China’s Baubles

A final Chinese observation to share – Retail sales have boomed in 2011 because many more Chinese are rushing to purchase consumer goods. Now that home prices have begun to fall or stabilize, the public is spending more instead of saving for an immediate down payment on a home. The strongest retail segment has been gold, silver, and jewelry, a result of expanding retail store infrastructure throughout the country, especially in the smaller cities where wealth is growing rapidly and, secondly, where an attitude of consumerism is eclipsing saving. Consumers who want to show off are doing so with gold, silver, and jewelry.

The Canadian Wheat Scramble

On December 16, the Canadian government ended its 70-year monopoly of the domestic wheat trade. Previously, farmers could only sell to the Canadian Wheat Board. Now, they can sell on the market as do U.S. farmers. Many farmers have already hailed the action. It gives them a better chance to profit from the rising price of wheat that will occur as the U.S. dollar declines. As readers know, wheat is priced in U.S. dollars on a global scale.

Here are some background wheat facts that you should know:

• Wheat contains more protein per bushel than corn (maize).
• Wheat is the number one source of vegetable protein for humans.
• Corn is the most widely-grown grain and much of it goes for animal feed.

Harvesting profit on the prairie

Wheat has fallen in price versus corn to the point where wheat now provides a better value for animal feed. We expect this to create new markets for wheat. Wheat growers and grain handlers will want to hedge their crops and more farmers will want to grow the grain. We foresee more profits for grain handlers, less government bureaucracy involved, and more demand for futures exchanges to hedge crops. We think that many farmers in Canada who had given up wheat (not liking the politicized government system) will now return to the fold. Over the long run we expect a greater Canadian supply, a bigger demand, and bigger profits for wheat farmers. We also expect a much bigger hedging program by Canadian wheat producers. Commodity exchanges are already competing for this business.

In the U.S., we expect some substitution of wheat for corn because of the politicized and inefficient system where the latter is used for ethanol, artificially increasing its price and decreasing the supply available for feed. The artificial corn shortage created by ethanol demand will create demand for the higher-protein wheat.  Combine this situation with the recent news from Canada and you have further reason for liking wheat.

Wheat Price (CBOT) since 1990

Source: Bloomberg

Here’s yet another reason: current poor growing conditions in South America have damaged the corn crop.  Rains have been less than expected and forecasts for dry weather ahead have caused grain futures in the U.S. and Europe to rise. The magnitude of wheat price rises in the near term will be affected also by South American corn production shortfalls as corn users may substitute wheat.

How To Play Wheat?

Investors can buy wheat futures in the U.S. and several other countries or wheat exchange traded funds that trade in the U.S. and the U.K.

In our Global Market Commentary, Guild Investment Management, Inc. currently has a long-term buy recommendation on wheat which was placed on October 24^th, and it has risen by 3% since our recommendation.  We first recommended buying wheat on December 31, 2008, and then recommended taking profits in March of this year after it had risen about 35 percent.  We track our recommendation based on the price of cash wheat as designated by the Chicago Board of Trade’s rolling futures contract.

Meanwhile, Europe is Still Sick and Not Out of the Woods Yet

The vital signs of Europe’s chronically ill financial house are better, but is the big bad wolf still lurking in the bushes?

Last week, some 500 banks borrowed about 490 billion Euros (some $637 billion U.S. dollars) in the form of three-year loans from the European Central Bank (ECB).  The stronger-than-expected demand for ECB cash came shortly before several months of very large refunding activity will take place in many Eurozone countries.

The question at hand is whether banks will use their money to continue buying the toxic debt at high yields of the weak European peripheral countries, like Spain and Greece, or have they learned their lesson?  In June 2009, European banks received over a half-trillion dollars in government loans. About half of the money was spent on peripheral nation sovereign debt, which has been the source of much of Europe’s ongoing financial woes. Hopefully, they use the cash this time to shore up their balance sheets and avoid buying bad bonds.

The Next Big QE  or other bailout for Europe = Opportunity

Currently, we are working on a buy list and preparing to take advantage of global market opportunities. We expect multiple opportunities ahead when a concerted quantitative easing “jamboree” or a more subtle type of bailout of European banks occurs with the U.S., Europe, Britain, Switzerland, Canada, and Japan taking part.  Quantitative easing, or QE for short, means extraordinary money creation. We may see QE or we may see a more creative type of bailout using other tools from the central banker’s tool box.  For example, today we are aware of swap lines from the U.S. to Europe and Japan which are being used to provide liquidity to financial institutions in Europe and possibly Japan. The purpose of these swap lines is provide liquidity when normal liquidity sources dry up.  Until recently European banks were funding their activities using money from U.S. money market funds and through bank loans from US banks. When the funds and banks became afraid of the risk in European banks they withdrew their loans and now the U.S. Fed has stepped into provide the liquidity that has been removed.  The use of swap lines to accomplish this is not a typical approach and as such has escaped notice until now. Hints of this type of program have begun with the U.S. Federal Reserve surreptitiously engaging in swap transactions with the European Central Bank (ECB).  Stay tuned.  We will write much more on this next week.

Here’s a preliminary look at how we see the opportunities shaping up.  We will recommend taking action when the major QE program or another type of bailout is implemented. In the meantime, here are some general parameters.

• Continue avoiding European banks and most European stocks that are not more than 50 percent export-oriented to non-European destinations. Asia would be the preferred export customer.
• Own gold as an insurance policy. We are not concerned if it rises in the short term. Gold can help hedge European meltdown risk and benefits from continued currency debasement.
• Be prepared to buy growth stocks in Europe, the U.S., and in Asia only when the investing public becomes aware that QE or other bailout program has been activated. It has already been activated in our opinion, but investors who are mostly traders and not economists have not yet realized what is going on. When they do come to that realization we expect a big rally that will be must like the rally that occurred in 2009 and early 2010 after the bailout of U.S. banks and insurance companies.  Stay tuned…
• Consider becoming a Gold Subscriber to receive the Guild Global Market Commentary Premium so that you will be able to track our new recommendations.  Current subscribers to the free Guild Global Market Commentary will be notified if any changes take place in the 4 outstanding recommendations that we have on gold, wheat, and the Singapore and Canadian dollars.
• You will be receiving an email at the beginning of the New Year with instructions on how to become a Gold Subscriber to the Guild Global Market Commentary Premium Edition.

We would not buy Europe yet; we own gold, and recommended taking profits on U.S. stocks this week.

Why are we not currently in the buying mood? Unfolding events could drive stocks further down before they go much higher after the big quantitative easing ahead.  We will continue to hold gold while we wait.

Recommendations Summary

Beginning in 2012 our new recommendations will be included in the Premium edition of the Guild Global Market Commentary, which will be made available to our investment management clients for no charge and to our paying Gold Subscribers.

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The plans were announced by Chancellor of the Exchequer George Osborne earlier this week and, when put into law, has the potential to significantly strengthen banking in . . .
Continue Reading: Banking Reform: Hopefully Britannia Creates A Wave]]> The British government has set in motion this week a future overhaul in the way that individual banks do business.  British banks will be required to separate their basic lending and deposit operations from investment activities involving trading and speculation on behalf of clients and the banks themselves.  This should mean that the deposits of retail customers will be shielded and protected from bank investment and trading ventures.

The plans were announced by Chancellor of the Exchequer George Osborne earlier this week and, when put into law, has the potential to significantly strengthen banking in England.

We support this British step forward and hope for similar action globally, including in the United States, to cleanse and detoxify what has become a destabilizing and dangerous banking practice.

It is just the kind of sorely-needed reform that has been long championed by former U.S. Federal Reserve Chairman Paul Volcker and which is being challenged in the U.S. by the banking industry.

China Watch: Diversifying Reserves From Bonds Into Hard Assets

Over the years, China has invested about $3.2 trillion of its excess reserves into U.S. and European government bonds.  The returns, however, have been paltry and painful.  Initially, the Chinese bought many U.S. bonds only to see the dollar fall into a prolonged slide versus the Chinese Yuan.  In a decade, it has dropped by about a third.  In an attempt to diversify, the Chinese then started moving some reserves into European bonds.  Now, low and behold, Euro bonds make up about $800 billion of their foreign exchange reserves fund.  But, like the U.S. dollar, the Euro has fallen versus the Yuan – by nearly 14 percent in the last three years.

Recent investment activity indicates that Beijing has decided that real assets make better investment sense than the bonds of their trading partners.  The central government has clearly taken notice of how major state-owned enterprises have successfully bought into energy and mineral properties throughout the world and how the value of oil and minerals has risen sharply during this time. The government is now following the lead of these companies, adding gold, copper, energy, and other important commodity holdings to its reserve portfolio.  To accomplish this, it is creating a sovereign wealth fund with initial capital of $300 billion.  This latest shift is a blow to a Europe that desperately needs buyers for its ailing bonds.  For the Chinese, however, this is smart business that best serves the national interest.

China’s shift should serve as a warning to Washington, which has not gotten its financial house in order.  The U.S. has not cut spending or raised taxes. The deficit continues to grow and remains a huge problem.  Currently, the attention is on Europe, but crisis time is coming next to the U.S. It has become obvious that Congress will not do anything to anger its favorite special interest groups. So, we expect nothing more than meaningless baby cuts and lots of rhetoric, campaigning, other-party blaming, and prolonged foot-dragging.  It’s very sad to see such dysfunction and self-destructive behavior.  For America, this is dumb business that does not serve the national interest at all.

China Report

As we have been reporting lately, China continues to import and consume more.  At the same time, speculation-driven real estate prices have stalled and food inflation has eased.

In effect, the economic news from China is good.  China is continuing to steadily diversify its industrial base.  The economy is no longer so export driven and is more driven by domestic consumption.

How can we monitor this?  One way to monitor import and export trends is to monitor the shipping rates from various locations to and from China. Many of China’s imports come from Canada and South America. Now more are coming from the U.S.  In the last year, shipping rates from Shanghai to the Los Angeles/Long Beach ports are down 26.8 percent—meanwhile shipping rates from Los Angeles/ Long Beach to Shanghai have risen by about 30 percent.  Container shipping rates are now higher going from the U.S. to China than going in the reverse direction.  These revealing shipping numbers reflect the rising value of the Yuan as well as a rising standard of living in China, two developments that create a high demand for many raw materials including among other things hardwood, minerals, and food.

Guild Investment Management’s contacts and correspondents in China represent a wide range of observers, including business people, company employees, independent consultants, employees of real estate developers, professionals, professors, doctors, lawyers, and investment managers.  From them, we hear that the demand for housing continues strong, particularly from the middle class, and from families that want to own a home.  This point may seem obvious to you, but it represents an important victory for Chinese housing policy. The fact is that in recent years, speculation by small and mid-sized companies stoked a housing bubble.  Many of these Chinese companies were motivated by the prospect of greater profits from housing speculation than from their regular business activities. Thus, many of these companies cut back on their business and pursued real estate speculation. Even local governments got into the act; some local governments built vanity projects, or big, showy real estate projects to make themselves look more important.  In order to combat the speculation, the central government raised interest rates and down payment requirements. The strategy has worked and the market has returned to the legitimate buyers, people who want homes for the long term. The prevalence of speculation is abating.

Very recently, Chinese interest rates have begun to decline. We believe the lower rates will generate increased domestic economic activity by mid-2012.  Domestic consumption is already expanding rapidly. The middle class is scooping up technology products and brand names familiar to Westerners.  Look around and you see iPhones and iPads all over, and these aren’t cheap in China.  Men and women alike are buying consumer electronics, sporting goods, clothes, jewelry, fancy food, and eating expensive meals away from home.  Hotels and high-end restaurants are bustling with business.

Elsewhere In Asia: The Declining Interest Rate Trend Continues

In the last two years, India, like many fast-growing Asian nations, has been frightened by rising food inflation.  To combat inflationary pressures, the Indian government has raised interest rates many times. However, concern has emerged recently that GDP growth would suffer because of the higher rates. Fortunately, food inflation has begun to ease, allowing the government to put its foot on the brakes and halt the interest hikes.

In India and other developing Asian nations, inflation levels are dropping as exports drop. Expect to see interest rates soon come down, a long-term positive influence for Asian stocks.  Historically, falling interest rates have heralded stock market surges.

Asian stocks have been held down by fear of declining exports.  Such a fear is somewhat well-placed and we expect a slowdown in emerging world exports to the developed world.  When the positive influence of lower interest rates overcomes the negative influence of lower exports in these markets, look for a big rally in the Asian growth market.

The U.S. Bailout Saga – How Much Did It Cost?

Washington has declared that U.S. taxpayers have not lost a penny.  This is technically true.  The Treasury got most of its money back from the banks; that which has not been repaid may be repaid, and the trillions in deposit guarantees for money market funds were not triggered. However, the operation cost plenty when you consider that the dollar has depreciated in value because of the bailout and the Quantitative Easing that was implemented to create demand for bonds.

Yes, the symptom was relieved, but the disease is still there, and it is a Made-in-the-USA disease.  The cause is the spendthrift ways of current and previous U.S. Administrations and Congress – and that means both political parties.  Since the bailouts began in 2008, it seems that trillion dollar-plus-sized deficits have now become “acceptable.”

Gold Watch: What’s Ahead

Gold has been snared in a corrective phase since peaking last September.  Recently, a major long-term historian of gold predicted a correction through January 2012 to be followed by a rally, from a much lower level, beginning in February.  Some technical analysts, meanwhile, look for support at $1,560 and $1,450 per ounce.

We aren’t sure what scenario will play out, but we are sure that gold will go much higher over the long term.  What will be the catalysts for the coming advance?

Here are two of them:

• Money printing on a grand scale as the most probable solution to the European banking crisis

•  Continued head-in-the-sand reluctance of many countries, the U.S. at the top of the list, to cut operating deficits

In our opinion, the continuing instability in Europe, combined with banking problems in Japan and the U.S., will keep the pressure on world central banks to create liquidity and this will be accomplished by quantitative easing (QE, aka money printing).  QE leads to inflationary pressures. Such pressures may occur within an economic expansion, and create inflation, or they may occur within an economic contraction, creating an inflationary recession. In either case, gold benefits.

If you review history, you find many examples where nations opted to solve similar problems we face today in the world via the creation of liquidity by the means of QE.  During the great bull market of the 1970s, for instance, gold went from $35 to over $850 per ounce. In that spectacular rise there were several 50 percent corrections in gold’s price.  We don’t see anything of such magnitude on the horizon, but we do think that using periods of pessimism and panic as a buying opportunity has been, and will continue to be, a good yardstick for action.  If you are frightened, you may want to scale your purchases; perhaps adding to your holdings with every $50 decline, or some other equally mechanical approach.

The Guild Basic Needs Index^TM And CPI Decline In November

Inflation is percolating on the back burner.  While it may not be boiling over or whistling in alarm, the temperature builds nonetheless.  Many prices of commodities and assets have been in decline recently, but in our opinion, the basic necessities of life will soon resume their long trend upward, at a rate exceeding the traditional inflation measures.

In the U.S., the population spends a large portion of its income on many superfluous, non-essential goods and services.  Because of this, the rising costs of basic needs like food, clothing, shelter, and energy can be masked by the falling prices of technology goods and consumer services.  At some point however, these basic needs impact of the ‘cost of living’ will be felt, especially in an environment with falling wages…as the U.S. has been experiencing for almost a decade.

When the realization hits that monetary debasement will be employed over and over in the coming years to spur growth and paper over debt crises, we expect countries, companies, and people will rush to hoard real assets, especially those that are basic to survival.  That behavior will have a profound upward effect on the Guild Basic Needs Index^TM.

An Exciting And Important Offer To Our Readers

For some time you have received our weekly analysis of the global events and markets that can impact your investment portfolio. As a reader of this commentary, you will have noticed that over the past year we have expanded the content of the letter. It now includes periodic buy and sell recommendations on countries, commodities, and currencies as well as new discussion topics like the Guild Basic Needs Index and how traditional inflation data should not be taken at face value.

We continue to get a lot of feedback and requests from our readers as to how we may constantly improve the quality of the letter.  Beginning in 2012, we plan to offer more of what our readers have been asking for.  We plan to include more in depth research on countries, industries, and companies, and offer more specific timely investment ideas.  Providing these expanded features involves a good deal of more work on our part, so as we revamp the Guild Global Market Commentary in January 2012, the additional content will now be available as part of a new paid Premium Guild Global Market Commentary Subscription Service.

At the same time, we will still offer the current free weekly letter which will continue to discuss many global macro events and global market developments and trends; but the more in-depth research, analysis, and investment recommendations will only be available to our paid subscribers and investment management clients.

This expanded Premium newsletter, with its in-depth research, analysis, and investment opportunities, will be available for only $295.00 per year. This works out to less than $6.00 per weekly issue; and for that, you will get greater access to the information and research tools used to make sound investments. You will get to look deeper into the thinking process that generates investment opportunities — and you will also receive specific investment ideas and action items that you can turn into gains for your own portfolio.

We are excited when we get feedback from our readers, such as what led to this Premium Service, and we look forward to seeing you become a subscriber of the new Premium Guild Global Market Commentary.

You will receive an email notifying you when the “Premium” commentary is available and how to subscribe to this service.  Please email us at guild@guildinvestment.com, with any questions and comments, and we look forward serving you in 2012.

Summary

We remain bullish on gold, U.S. stocks, wheat, and Canadian, and Singapore dollars. The logic behind these picks is simple.

Wheat and other grains will rise in price long term due to 1) wealth creation in the emerging world increasing the demand for more protein and a more substantial diet, and 2) historically low carried forward storage [inventories] of grains worldwide.

The Singapore and Canadian economies are more rationally managed than the U.S. dollar.  Their currency values should reflect their better management by appreciating against the U.S. dollar.  The U.S. dollar temporarily rises during coming periods of fear as some see it as a relative safe haven.  Eventually, investors will realize that the U.S. Government is doing nothing to address the deficit spending and taxation issues plaguing the country.  As attention increasingly focuses on this fundamental failure, we believe that the US dollar will decline against these two currencies.

Gold should rise as investors come to the realization that gold is a valuable asset to store and protect wealth during periods of inflation or recession.  Whichever economic environment persists, the value of gold will be driven by the efforts of central banks to create liquidity and debase fiat currencies.

Presently, the developed world has a deleveraging banking system. The deleveraging is very painful. So, in order to impress voters and stimulate economic activity, politicians and central bankers are under heavy pressure to create liquidity via various mechanisms.  Most of these mechanisms create money and thus create excess currency. Excess currency creation drives gold higher.  As we learn in basic economics, an increase in supply while demand stays constant will lead to a lower value for whatever has increased in supply.  To say it another way is that as the supply of world currencies increases, their values fall…and gold rises.

Today, some investors believe that the U.S. dollar is rising in price.  This is not correct; the U.S. dollar is rising in price only versus even weaker currencies.  The dollar’s buying power is falling, and has been falling for decades.  In this situation, demand for gold is buoyed as gold is used as a mechanism to maintain the buying power of one’s assets.

We want to take this opportunity to thank all of you, our readers for your attention and valuable input in 2011.  We wish each of you a wonderful holiday season and a happy, prosperous new year, and we look forward hearing from you in 2012.

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