Agora Financial’s Rude Awakening

Jump to Comments

Dubai, UAE

• Gold: it’s no salami…or equity…or bond…or realestate…
• An $800 buying opportunity? A wander through Dubai’s gold souk,
• No cheeky photos of lingerie models and plenty more…

Joel Bowman, reporting from Dubai, the City of Gold…

In addition to the usual dosage of market insight, yesterday’s Rude readers
were treated to a picture of Brazilian supermodel, Giselle Bundchen, in full,
runway flight.

The model has, by now famously, demanded payment for her catwalk struts in
anything other than U.S. dollars.

Editors of dusty, institutional publications around the world got themselves
in a tizzy earlier this week when they found legitimate reason to segue
effortlessly from purchasing power parity to leggy South American lingerie
models.

Alas, we have no such picture for you in today’s edition. But fear not, Rude
reader! This morning we have another alluring graphic for you to salivate
over. Behold…gold!

The above picture was taken on your editor’s recent visit to the famous gold
souk here in Dubai, the “City of Gold.”

The souk (Arabic for “market”) is renowed as the world’s premier retail
market for everyone’s favorite shiny yellow metal. The streets are lined with
shoppers of every ilk, from hopeful Indian grooms-to-be to deep-pocketed
Arabian oil tycoons. Every window literally glistens with elaborate,
handcrafted jewelry from Calcutta, Bombay, Dehli and local craftsmen here in
the Emirates.

As you might imagine, these markets are extremely sensitive to the price of
their predominate asset on the open markets. In fact, if you duck behind the
front room of any of these shops and you’re likely to see the television
switched to Bloomberg, or a couple of kids on laptops keenly eying gold’s
charts for their dad.

Twice per day, the market records the spot price of gold, altering the price
of their entire inventory accordingly. A bracelet bought before lunch is
almost certain to carry a different price when the second shift comes on
after 4pm, hence the lack of price tags on any of the pieces.

Each purchase is weighed on a scale, the way a drug dealer might weigh out
his cocaine, or a butcher his salami. The price is calculated by multiplying
out the spot price of gold plus the workmanship, by the weight of the metal.
For example, last Friday afternoon’s price was 89 dirhams (about US$25) per
gram for 24-carat gold. A necklace weighing 20 grams and carrying a 10-
dirham workmanship cost per gram would be:

(89 + 10) x 20 = 1,980 dirhams - about US$530.

Usually you get a bit of leeway with the workmanship - a chance to practice
your bartering skills, but the spot price of gold is strictly non-negotiable.

Predicatably, the high prices of gold tends to hit the retailers pretty hard
as those hopeful grooms watch the size of the engagement rings they can
afford get smaller and smaller.

According to Tawhid Abdullah, managing director of Dubai Gold and Jewellery
Group, sales contracted from 26% to 13% from August to September of this
year. Some retailers fear sales for the remainder of the year could shrink by
up to 10%, despite the upcoming Indian festivals of Dhanteras and Diwali,
their busiest season.

Still, idle shopkeepers needn’t be too worried. A retailer with gold on his
shelves would have done a lot better over the past year than if he had U.S.
dollars in his register. The dollar, as any Brazilian supermodel will happily
to tell you, has shed about 9% of its trade weighted value so far this year.
Gold, conversely, is up well over $200 over the same period.

As a store of value, gold is unquestionably far more resilient than our
butcher’s salami…and probably has a more favorable shelf life than cocaine.
All in all, things look pretty good for the leisured storeowner. Our
suggestion to him? Buy a “gone fishing” sign and take the next few years off.

But what exactly IS gold? Read on below as Adrian Ash of BullionVault takes
an interesting look at the ultimate “anti-investment.”

—– Gold Backed Wealth Insurance Report ——

Introducing a revolutionary investment…

A “WEALTH INSURANCE” POLICY with a potential 201% upside in two years… and
zero downside

With the stock market gyrating wildly in recent days, wouldn’t you like the
security of an investment guaranteed to never lose money… while giving you
the ability to cash in on a gold price that could reach $2000?

I’m so confident about gold tripling in price and protecting your hard-earned
wealth, I’ll even make a triple-your-money guarantee…

(But you have only until November 13th, 2007 to act… or this “wealth
insurance” may never be offered again.) Read On Here For Details.

————————————————-

Gold: The Anti-Investment
by Adrian Ash

Gold is not an investment, which may be the very best reason to own it. Gold
is the anti-investment.

Dubbed the No.1 “diversifier” by serious analysts and clued-up wealth
managers alike, gold clearly stands outside the three asset classes held by
most private investors.

• Bonds: Gold pays no interest, not unless you lend it in return for a
  yield. Nor does gold promise to repay your original capital at some point in
  time. There is no maturity date. But then, since gold is no one’s debt to
  repay, the threat of default is zero.
• Stocks: Gold has nothing in common with equities either. It employs no
  staff, no board of directors, and gives no quarterly earnings report. It
  doesn’t make anything or provide a service beyond being yellow, shiny and
  rare.
• Real Estate: Nor is gold anything like commercial or residential
  property. Even if you did rent it out, you still couldn’t extend it or add a
  marble-topped kitchen counter. Gold requires no upkeep (it’s virtually
  indestructible), and there’s no property tax to pay for merely holding it.

Not a bond, stock or real estate play, gold bullion doesn’t pay you any
interest, yield or dividend. No wonder it fell out of favor during the
property, bond and securities boom that got started as the runaway inflation
of the 1970s started to fade!

A sucker’s trade for nearly 20 years, gold sank as everything else shot
higher.

Now that gold has turned higher, however, you might want to know just what
kind of an asset class you’re getting into if you buy it today.

Cut free from the world’s monetary system, gold is not listed as a currency
by Bloomberg or Reuters. Instead, it has come to be classified as a commodity
– “an article of commerce or a product that can be used for commerce,”
according to the National Futures Association.

Does it make sense to lump gold along with cocoa, orange juice, lean hogs and
zinc?  “The simplest definition of commodities is that they are raw
materials,” notes Katharine Pulvermacher in a 2005 paper for the World Gold
Council – and raw materials, by definition, are used to make other products:
Wheat into bread; copper into electrical wiring; crude oil into gasoline;
hogs into bacon…gold into…?

Well, gold into what? The quick answer is jewelry. But gold is much more than
simply the main ingredient in a wedding ring. It is much more than a mere
commodity. In fact, as an investment, gold is very un-commodity-like.

In the twenty years to 2006, weekly price movements in gold showed a
correlation of only 0.1 with the weekly move in commodity prices according to
data from the Swiss National Bank (SNB). It would be nearer 1.0 if gold and
commodities moved together.

What’s more, the correlation has “varied heavily within the period,” notes
the SNB, “and despite similarities in [broad] price movements, the gold
market has a number of distinct features.”

Not least amongst gold’s distinct features is the fact that it’s (virtually)
indestructible. That means that the supply of gold above ground continually
increase – a trait which makes gold very unlike crude oil, for example.

Gold does not get burnt up once it’s been mined and refined. Instead, it just
sits there – not doing anything, but not vanishing either. In fact, “not
vanishing” may be gold’s most important attribute. Gold’s durability is one
reason why the precious metal’s value has been so enduring. Investors know
they can count on gold to be there for them when they need it – i.e, to “not
vanish.”

All told, says the educated guess-work by GFMS Ltd., the widely-respected
London consultancy, there were some 158,000 tonnes of gold sitting above-
ground by the end of 2006.

Only 12% was being used in industry. Meaning that just one ounce in eight had
found its way into people’s teeth, home-pregnancy testing kits, and mobile
cell phones.

Yes, the proportion of new gold going into electronics and other industrial
end-uses is rising; it will account for 19% of all the extra gold mined and
supplied to the world market in 2007 say the analysts at Virtual Metals in
London. That figure has risen from 14.5% in 2002.

But the vast bulk of the world’s gold is still not “consumed” by industry.
This trait sets gold apart from both silver and the platinum-group metals,
all of which are as heavily used by industry – if not more so – than they are
by jewelry and investment buyers.

Gold’s relative lack of industrial value also separates demand for the metal
almost entirely from the flux of economic growth. Price patterns come and go,
but a 27-year study in 2003 – covering both the bull market of the 1970s and
the long slump that followed – found that:

• Gold showed “no statistically significant correlation” with changes in big-
  picture economic trends such as Gross Domestic Product (GDP), inflation or
  interest rates;
• US stocks and bonds, in contrast, were linked to changes in the economy;
• Other commodities – “such as aluminum, oil and zinc” – also showed a much
  stronger correlation with economic changes than did gold;

“These results support the notion that gold may be an effective portfolio
diversifier,” concluded the study’s author, Colin Lawrence, visiting
professor at Cass Business School in London.

Yet Lawrence still called gold a “commodity”, a word that most people take to
mean – in its everyday sense – something consumed as an industrial input or
used as a raw product in our homes. The vast bulk of the world’s gold, in
contrast, does not have this kind of economic purpose. It now exists in gold
jewelry, central-bank vaults, and private investment portfolios instead.

Add them together, and these physical gold hoarders – central banks, private
investors and jewelry owners – hold 86% of all the gold ever mined between
them. In other words, gold’s primary “use” is no use at all – its job is
simply to “not vanish.”

This rare and precious form of money is very much in demand right now, and
for good reason.

“There is so much uncertainty around and if you’re looking for a basic store
of value what else do you choose?” asks Peter Hambro, head of the eponymous
gold-mining company listed on the London Stock Exchange but hard-at-work in
Russia. “All currencies seem to be in a degree of flux.”

Hambro’s reference to currencies is telling. RBC Capital Markets trade the
metal on their currency, rather than commodity desks. “The right way to trade
gold is as a foreign currency, not as a commodity,” agreed Steven Mathews,
commodities strategist at Tudor Investment Corp. in a 2003 study for the
London Bullion Market Association’s Alchemist magazine.

If gold does belong to the currency asset class, then the “stateless
currency” is clearly beating all the rest in the first decade of the 21st
century – outpacing Euros, Rupees, Chinese Yuan and Sterling. Just this week,
gold touched new all-time highs against both the euro and the British pound.
Gold has also outperformed the three key asset classes in most people’s
portfolios since the start of 2000: stocks, bonds and real estate.

“The investment motive is a much more important driver in the gold market
than in the market for other commodities,” as Philipp Hildebrand, vice-
chairman of the Swiss National Bank pointed out in a 2006 speech.

Given that gold doesn’t pay you anything in yield, interest or dividends –
and that it does not have any real industrial value – the “investment motive”
for gold can only be explained as desire to quit other assets. Or at least,
to hold an asset entirely free from what drives other asset markets up and
down.

That’s what happened during the 1970s.

During the last great bull market in gold, between 1970 and 1980, a portfolio
spread evenly across US stocks and bonds would have lost 1.6% per year on
average. Gold’s annual gains, meantime, averaged 19.9%.

Gold is once again on the move, both in absolute terms and relative to
competing assets and currencies. It is on the move because of what it is NOT,
rather than what it is. Gold is not a stock or bond or piece of real estate.
It is not a liability of someone else…and it is certainly NOT a currency
issued by an indebted government.

Gold is the anti-investment, which may be the very best kind of investment to
own in today’s uncertain financial markets.
 
[Joel's Note: Formerly City correspondent for The Daily Reckoning in London
and head of editorial at the UK’s leading financial advisory for private
investors, Adrian Ash is the editor of Gold News and head of research at
BullionVault – where you can Buy Gold Today vaulted in Zurich on $3 spreads
and 0.8% dealing fees.

—- Ride the Falling Dollar: Invest in Gold —-

From Hulbert’s #1 Ranked Advisory Letter of the Last 5 Years,
Our Most Shocking Forecast Yet…

GOLD $2,000

“I’m so sure gold will soar higher, I’ll even make you a guarantee …plus
I’ll give you 5 entirely new ways to play the trend…”

“Including one way to own gold that comes with ‘ zero-downside’ risk…”

(But you have to jump on this before November 13th, 2007…or the doors on
this could slam shut to you forever…) Get Your Gold Here.

—————————————————

Rude Endnote: Two apologies are due today for,

1) A lengthier than usual Rude and,
2) No supermodel pictures.

While we wait for Adriana Lima to redraw the specifics of her contract, we’ll
hand you over to the fellas at the 5. 

Cheers,

Joel Bowman
Rude Awakening