ArabianMoney.Net

First with Financial Comment from Arabia

Exit equities for cash, bonds or gold?

with 2 comments

The UAE Central Bank is making fresh liquidity available to its banking system today to meet an expected rush to the door by holders of local equities, bonds and cash by investors worried about Dubai World’s debt moratorium.

Investors do not usually wait to hear the details and just react on the bad news. This will be their first opportunity to sell their stocks and bonds since the long Eid holiday began last week.

Cashing out

Those exiting equities and bonds will receive UAE dirhams in exchange. This currency is dollar pegged but already pays 3.5-4 per cent on deposit accounts, way above anything available on US dollars.

Indeed, if last autumn’s financial crisis is a guide then the UAE banks may well raise rates higher. Depositors got six per cent then to encourage them not to cash out into US dollars. Backed by 10 per cent of the world’s oil reserves the UAE is arguably the richest nation on earth. Its black gold ought to make the dirham a super safe bet.

Investors who want to stay in liquid assets have the choice of US bonds, or they could be really brave and buy Dubai government related debt which is bound to be squeezed just as hard as local equities today in an across the board sell-off.

Bond options

The question then is whether you want to hold either US or local government bonds. Is the problem with the Dubai World debt not showing the danger of government debt in general? There is a limit to how much that can be created, and bond markets are like any other capital market and can fall as well as rise.

It is more complex than that for UAE investors. If the global financial markets also decide to correct then the position is far more difficult to judge than if the problem remains isolated in the UAE.

As this website has discussed since mid-August the global rally from the lows of March has been very strong and unprecedented, particularly in the circumstances of a very weak recovery and the permanent loss of output sustained by the global economy.

Big sell-off

A strong correction in financial markets would therefore seem unavoidable as the liquidity shock of the stimulus shots wears off. Last Friday the global markets showed a microcosm of what to expect in a big sell-off.

The dollar rallied, bonds rose sharply and oil and gold sold off. But it took only a matter of a couple of hours for a sharp fall in the gold price to attract new buyers and almost restore the price. It seems equity sellers took their dollars and immediately bought gold.

In that case investors cashing out of equities might be well advised to follow this new trend. For in a world where the ability of governments to repay debt starts to be called into question, or actually stalls in the case of Dubai World, then holding wealth in any currency is an issue, and the ultimate safe haven is gold.

As the illustration below from gold bug Jim Sinclair’s website shows the pull towards higher gold prices looks irresistible as the global economic crisis unravels.

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Written by Peter Cooper

November 30, 2009 at 8:24 am

2 Responses

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  1. Could be of your interest:

    Some months ago a chap described changes in the comex rules for futures contract deliveries. Therein it was described that the EFP, exchange for physical, rules were amended to allow for delivery of GLD shares in lieu of bullion.

    Well take a look at something new, at least for me, in Monday’s comex preliminary volume and open interest report. On page 3 of the attachment, notice that in addition to futures contracts listed under the EFP category, a new category is listed: “Delivery Cash Settled” = 2866 december gold contracts. Just so happens 2866 was exactly the number of delivery notices issued on FND as reported in the Nov 27 vol and op int report.

    Conclusion: guess you can no longer get bullion via using comex contracts. This apparently is the next step in the evolution of gold trading.

    Jeroen

    December 1, 2009 at 10:36 pm

  2. @ Peter:

    Well, that should be a “no-brainer”, as they say.

    Gold is, and will remain, in a long term bull market, even with the US FED desperately trying to hold it down by issuing massive “paper shorts” via JPM.

    Last Friday (27 Nov), JPM issued an obscene number of short positions on the Hong Kong exchange at approx. 1:30PM HK time; this drove gold down by over $30. But as you said, it simply bounced up again within a few hours.

    It’s comforting to know that the US FED is losing its grip on gold price suppression, via paper gold derivatives. One of these days, the gold derivatives market is gonna implode!

    obewon

    December 1, 2009 at 1:33 am


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