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Gold buying from Arabia will likely outpace China

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The latest report from the World Gold Council, ‘Gold in the Year of the Tiger’, concludes that Chinese gold consumption could double in the next decade if its economy continues to grow at a rapid pace.

China is presently the world’s second largest gold consumer after India with 11 per cent of global demand. Last year China consumed more gold than it produced: 423 tonnes versus 314 tonnes with investment and jewelry the main sources of demand for the yellow metal.

1970s gold boom

But in the 1970s gold boom the Middle East was the market that drove gold prices higher and higher. The region is still a huge gold market and consumed 250 tonnes last year, admittedly down 28 per cent on the year before due to the economic recession that hit Gulf expatriates especially hard.

However, it is one thing to read the official statistics about gold. The real market for physical gold is quite different both globally, and locally in the Middle East.

In November 2008 ArabianMoney reported on a record $3.5 billion purchase of gold by Saudi Arabian investors (click here). Many of these gold deals go unreported and are metal deals between individuals, often of very substantial size.

Rumors of gold hoards buried in the Arabian desert may not be so wide of the mark. But the scope for con-men to hone such stories into believable investment opportunities is legendary and due diligence is called for in any such transaction.

What certainly seems to have happened among the super-rich of Arabia is that gold has become very popular as a safe haven asset without third party risk. In the wake of global banking and investment crises and scandals the absence of a third party is particularly desirable.

Gold as money

In short, there is nobody between you and your money. Gold is money. The recent rally in global stock markets has also been treated with much skepticism in Arabia. It would be surprising if investors here emerged as net buyers of global equities rather than sellers into this rally.

It would also not be surprising if Arabian investors were secretly amassing gold hoards, and just doing it on the quiet to avoid sending the price up when news of their massive transactions emerged.

Could it be that gold buying from Arabia will outpace China in the future, if it is not already actually doing so behind closed doors? It is perfectly possible, especially if the Chinese economic miracle proves to be yet another bubble waiting to burst.

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Written by Peter Cooper

March 30, 2010 at 8:39 am

Posted in Banking, Gold & Silver

Public debt fears overshadow worst-ever US housing data

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The poorest figures for new home sales in US history were largely ignored by financial commentators yesterday as the markets focused on global debt problems that threaten a rise in interest rates before the fragile global economic recovery can handle it.

Portugal saw its sovereign rating cut by Fitch. US treasuries were hit by poor demand in an auction of five-year notes. Japan approved a new budget with a record $49 billion in new bond issuance. And a pre-election budget in Britain offered no relief for its huge debts.

US dollar surge

The main beneficiary was the US dollar with the euro down to $1.33. US financial markets also took a breather from their endless rally as risk aversion crept back into the market. The S&P is now valued at 22 times earnings, 32 per cent above its 30 year average, and clearly overvalued for this stage in the economic cycle. Gold fell to $1,085.

Meanwhile, the market largely ignored data showing that US new home sales fell to the lowest level on record in February. Sales of new homes dropped unexpectedly, falling 2.2 per cent during the month to 308,000. That was the lowest sales rate on record and much worse than expected.

US new home sales are down 23 per cent since last October. New home sales are off 13 per cent from February 2009. With sales falling for four months running, the inventory of new homes has increased, reaching a supply of 9.2 months.

Housing crisis

The construction of new homes in the United States is a critical source of demand for commodities used in building houses. Only a surge in demand from China has prevented a meltdown in building material prices and related commodities from steel to aluminum and timber.

The now frosty relationship between China and the US is symbolized by the Google condemnation of Chinese censorship and its self-imposed exit. The call for tariffs on Chinese goods to protect US industry is growing. At the same time China is tightening up on credit and could start buying less US treasuries.

Far from being in a fragile recovery the world is set for a round of further instability in global financial markets. In the initial stages the chief beneficiary will be the US dollar but the problems in the treasuries’ market is a reminder that dollar strength could be transitory.

Written by Peter Cooper

March 25, 2010 at 8:36 am

Damas bosses fined heavily with two tonnes of gold still missing

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The Dubai Financial Services Authority has issued a landmark ruling that fined the three brothers who ran the Nasdaq-listed Damas jewelry company more than $3 million and requires them to repay $99 million in cash and almost two tonnes of gold ‘borrowed’ from the group.

They will also be banned from directorship of any company in Dubai for up to 10 years. The case is now past over to the Dubai Police and Dubai Public Prosecution to consider possible criminal charges that could carry a custodial sentence.

Swift action

The DFSA is the regulatory authority within the Dubai International Financial Centre where Damas had listed its stock on the Nasdaq Dubai exchange. Its justice has been commendably swift in this case, the sort of legal case that might have dragged on for many years in more developed countries.

For their part the Damas bosses – Tawfique, Tawhid and Tamjid Abdullah – have previously promised to pay back all the monies taken from Damas and are now under court order to fulfill this promise.

The regulator discovered some 2,200 debit transactions between July 2008 and October 2009 ranging from petrol bills to 50 property deals, including twin 49-storey towers on the Sheikh Zayed Road. The two tonnes of gold, which has not yet been paid back was used to make ‘certain personal investments’ reported the DFSA.

DIFC chief economist Nasser Al Saidi told The National: ‘The Damas case is a very important reminder to the boards of regional companies of the directors’ duties and liabilities. This action will remind directors of public companies that they owe a duty to the company and to all their shareholders, which supersedes any duty they have to their own private interests’.

Outstanding litigation

Dubai is now moving as fast as it can to clear up the mountain of legal cases that remain outstanding in the aftermath of the real estate slump that began 18 months ago with the global financial crisis.

News on the rescheduling of $26 billion of debt owed by Dubai World real estate subsidiaries is keenly awaited this week. This is not yet the subject of litigation although the DIFC courts have been given special competence in the event of a liquidation.

The jury is still out on whether Dubai can emerge from its real estate crash with an enhanced reputation for corporate justice. But such landmark decisions as the Damas ruling do at the very least show that issues of corporate governance are now being taken very seriously.

Written by Peter Cooper

March 22, 2010 at 8:39 am

Gold’s next move is down says $5,000-an-ounce author

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While firmly sticking to his forecast of $5,000 gold within the next few years, ArabianMoney editor and publisher Peter Cooper can see a three-month price correction as the next move for the yellow metal and its best friend silver.

Of course books are frequently published just as major changes of direction occur, and markets do not always move on cue as authors would like. That does not necessarily invalidate a price theory but it certainly does test it.

Stock market crash

The devil in the brew for gold right now is an imminent correction in global financial markets. For the latest predictions there are several articles on this website ( click here and then here).

Late in 2008 gold bugs saw their precious metal dragged down with other global financial markets in a big sell-off. Basically good assets were sold down with the bad to meet margin calls by investors.

It will most likely happen again. And if this sell-off proves to be as strong as ArabianMoney suspects then gold will also be a big loser. It is even possible that we might test the lows of last April, and fall below $700, although $950 is a more reasonable downside target.

But that really will be the ideal moment to stack up your vault with gold. For the $5,000 target is still there and the bounce back will be very strong with money rotating out of bonds and back into precious metals and particularly associated equities.

Ultimate bubble

Presumably general equities will also offer some rebound potential from these summer lows. But if George Soros and other hedge fund investors in precious metals are right then this is the next and ‘ultimate bubble’.

That leaves investors with little alternative but to park their money in US dollars and bonds before investing in precious metals this summer. Even the normal seasonal upturn in precious metals in the autumn would make this an excellent trade but as readers of ‘Dubai Sabbatical, The Road to $5,000 Gold’ will know there is far more money to be made.

However, whether holders of gold and silver should now sell up and try to buy back at a lower level is always a difficult question. Getting market timing wrong is always a consideration, and with some of the world’s great hedge fund managers presently big hoarders of gold you have to wonder if they know something that is not yet apparent.

Written by Peter Cooper

March 21, 2010 at 1:44 pm

Market futures indicate a trend reversal for stocks, dollar rally

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A surge in put or sell options in New York, and a decline in call or buy options is a classic signal of a stock market trend reversal, and is now in place. On Friday the S&P 500 also registered its biggest percentage fall in almost a month.

Then again on Friday 89 per cent of stocks in the S&P 500 traded above their 50-day moving average, and by definition a trend line above an average is not sustainable.

Indian rate hike

On Monday Indian stocks will lead the downturn after a surprise interest hike after hours on Friday. Meanwhile, renewed fears over the Greek debt crisis have floored the euro again.

In the US housing dominates the statistical show next week. Housing has been the component of the US recovery that has failed to come right so far. Existing home sales are out on Tuesday and new home sales on Wednesday.

It is also uncertain how the now expected passing of President Obama’s controversial healthcare bill will be received by financial markets. This removes uncertainty but the cost of the measures may be judged anti-business. Then again Google pulling out of China is hardly a positive.

On Friday the dollar gained against all major 16 currencies. This is an indicator of what to expect in a big market sell-off. Bond yields will take a dip and prices jump. All commodity prices, including precious metals will fall.

The flight to the dollar and bonds as a safe haven has started. Partly this is an automatic response to the liquidation of assets like stocks that are denominated in dollars. Partly it is a shift from risky assets to a perceived safe haven.

How long will this dollar rally and stock market correction take? Stock markets generally correct much faster than they rally. So a 12-month rally might be followed by a three-month fall, or it could be an even quicker correction.

Size matters

However, the higher and longer a market rally then logic suggests the harder and longer the fall. In previous bear market rallies after major financial crises the correction has generally been to a new low and over a matter of several months.

Institutional investors have also been replicating hedge fund strategies so that they can liquidate faster than possible with hedge fund withdrawals. That could add significantly to the velocity of the next downturn.

So successful has the Fed been in sustaining this rally that most investors have forgotten that this now leaves the emperor with no clothes, as the liquidity is spent and it is impossible to lower interest rates meaningfully – and that is how 20 per cent corrections are usually capped.

Is it too late to short the S&P 500 at this point?

Written by Peter Cooper

March 21, 2010 at 8:12 am

‘Road to $5,000 Gold’ published on Kindle

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ArabianMoney editor and publisher Peter Cooper announces that his latest book ‘Dubai Sabbatical: The Road to $5,000 Gold’ is now available as an e-book from the Kindle Store (click here).

Written by Peter Cooper

March 19, 2010 at 8:13 am

Marc Faber on the sovereign debt crisis and buying gold

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Written by Peter Cooper

March 18, 2010 at 1:16 pm