Stephen’s Posterous

Deborah Fuhr is the managing director and global head of ETF research at Barclays Global Investors, one of the world's leading ETF organizations. Ms. Fuhr is considered one of the top analysts in her field. Ms. Fuhr recently shared a Q&A with Barrons.com.

When asked about how ETF's compare with managed funds, Ms. Fuhr responded that according to a new five-year Standard & Poor's study in the U.S., 71% of active managers benchmarked to the S&P didn't beat the benchmark again. She also says that with mutual funds, you are not able to get a price until the end of the day when the NAV is calculated.

ETF's are still growing at a rapid pace according to Ms. Fuhr. Ine the U.S. retail investors account for 40% of ETFs with the rest being institutional investors. Outside the U.S., the customers tend to be mostly institutional. When asked what ETFs would offer the most opportunity in terms of profiting when the global economy improves, Ms. Fuhr said that fixed-icome ETF's may be a good place to look.

Ms. Fuhr says:

As an example, people are looking at government bonds because last year, if you think about what segments of the market actually did well, it was government bonds from developed countries and gold. So you see people looking at government index exposure. You see some people looking at credit. Some people are looking at infrastructure. Some are looking at clean tech and alternative energy.

With the rally the other day in India, you saw many people looking at products that allow them to implement exposure to India. We've also seen the interest in Taiwan. You've seen interest in emerging Asia because many of the strategists on the Street have said that emerging Asia should recover faster than other segments of the markets. So I think the benefit of an ETF is that it is an easy way to express whatever [your] view is.

Picking the right stock is a challenge when trying to choose the right investment. And selecting a fund, according to Ms. Fuhr, may also be a challenge when 71% of active funds missed the benchmark. The solution, according to Ms. Fuhr, an ETF that tracks a benckmark.

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China reveals big rise in gold reserves
By Jamil Anderlini in Beijing and Javier Blas in London, FT.com

China has quietly almost doubled its gold reserves to become the world’s fifth-biggest holder of the precious metal, it emerged on April 24, 2009, in a move that signals the revival of bullion after years of fading importance.

Gold rose to a three-week high of more than $910 an ounce after Hu Xiaolian, head of the secretive State Administration of Foreign Exchange, which manages the country’s $1,954bn in foreign exchange reserves, revealed China had 1,054 tonnes of gold, up from 600 tonnes in 2003.

The news could spark interest in gold among other central banks. “When the largest holder of foreign exchange reserves discloses an increase in gold holdings, other countries may decide to think more carefully about underweight gold positions,” said John Reade, a precious metals strategist at UBS.

The increase in China’s gold reserves has come primarily from domestic production and refining. However, the news raises questions about the future of Beijing’s foreign reserves policy. Ahead of the G20 summit in London this month, China suggested global reliance on the US dollar as a reserve currency should be reduced.

China has been diversifying away from the dollar since 2005, when it broke the renminbi’s peg to the US currency and officially marked it to a basket of currencies, but it still holds more than two-thirds in US dollar-denominated assets by most estimates.

As its trade surplus and forex reserves ballooned in recent years, Beijing continued to buy huge amounts of US Treasury bonds while raising the proportion of purchases it allotted to other currencies and to gold.

China’s accumulation of gold has taken place as European central banks have gradually cut back back gold sales following a 1999 agreement to prevent the market from being flooded after prices were dragged sharply lower after the UK decided to sell part of its reserves.

“China’s announcement signals a broader shift in central banks’ attitude towards gold,” said Philip Klapwijk, chairman of GFMS, the precious metal consultancy.  Suki Cooper, a gold analyst at Barclays Capital, said China’s move was “reigniting gold’s relevance as a monetary asset”.

European central banks agreed to limit gold sales to 500 tons a year in 1999, under the Central Bank Gold Agreement after a UK decision to sell part of its gold reserves dragged prices sharply lower. 

Since 1999, central banks in Europe have sold large amounts of gold, investing the proceeds into bonds. But in the past two years they have curtailed their sales significantly while central banks outside Europe became net buyers of bullion.

China’s forex reserves grew from $623bn at the start of 2005 to $1,906bn at the end of September last year but in the last six months the spectacular growth has slowed to a virtual stop, with reserves rising by just $7.7bn (€5.8bn, £5.2bn) in the first quarter.

That means smaller new purchases of everything from US Treasuries to gold. Paul Atherley, Beijing-based managing director of Leyshon Resources, said that even after the latest purchases China had a very small percentage of its reserves in gold, far below the US or other developed countries.

“Those [gold] holdings are still too low in terms of the size of its economy and the growing significance of its currency,” he said. The announcement boosted gold prices to a three week high above $910 an ounce as investors bet other countries could follow.

Russia has being an active buyer, following Beijing’s similar pattern of purchases from local miners. China became last year the world’s largest producer of gold, outranking South Africa.

Since the financial crisis started, investors have piled record amounts of money into gold, boosting prices to above $1,000 an ounce. Gold hit a low of $250 an ounce a decade ago, when central banks started selling the metal.

Additional reporting by Chris Flood

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With the US and other countries monetizing budget deficits, the chance of rapid inflation has surged. The annual production of gold, the traditional hedge, is far below the world’s rate of monetary growth. An inflationary panic could thus bring an explosive gold price rise.

Gold has little intrinsic value; if it had never been coined its price would probably rest around the $250 per ounce of the late 1990s. However because of its history it is regarded as an inflation hedge and store of value, and that psychological association becomes tighter as inflation worsens and the gold price rises. Hence arguments about the irrationality of gold investment are wrong: in an inflation-prone environment belief in gold becomes self-reinforcing.

Alternative safe-haven stores of value, such as foreign currencies and US Treasuries, are falling away as the Swiss and Japanese authorities seek to weaken their exchange rates and the US runs ever-greater deficits.

In the stagflationary conditions of 1980, the gold price peaked at $875, the equivalent of $2,300 today. However the rise to 1980’s inflation levels was gradual; monetary policy in the 1970s was only moderately over-expansive and the US fiscal deficit was modest by current standards.

Including the Fed’s March 18 announcement of further monetary stimulus, monetary and fiscal policies in the US and globally are far more inflationary than in the 1970s. Consequently, there’s a real threat that if inflation returns, it will do so violently.

Smart investors are hedging against this possibility through gold. Hedge fund tycoon John Paulson paid $1.28bn for 11.3% of AngloGold Ashanti. That company is unprofitable at present gold price levels, but would hugely benefit from a price rise.

Should other hedge funds turn to gold, its price could soar. At current prices, annual gold output is worth only $104bn and the global gold stock only $5.12 trillion. Central bank gold reserves total $895bn, a fifth of currency in circulation. Even a quintupling in the gold price, to $5,000 per ounce, would raise the value of annual gold production only to $500bn and the global gold stock to $25tn, just 20% above the world’s M1 money supply.

Recent bubbles in stocks, housing and commodities have been driven by easy credit. The ongoing US Treasury bond bubble is driven by desire for a safe haven. When it collapses, a gold bubble driven by inflationary concerns may be inevitable.

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The top 10 stocks of the Yacktman Focused Fund (YAFFX) comprise nearly 70% of total assets. "We feel like we ought to focus our money on our best ideas," Yacktman says, rather than take "a Noah's Ark approach with two of every kind."

That approach has helped consistently put the fund at the top of its category. Based on annual returns, the fund ranks among the top five large value funds for the most recent one, three and 10-year periods, according to Morningstar.

Over the last 10 years, Yacktman's fund has produced an annualized total return of 2.5%, six points better than the Standard & Poor's 500.

The current climate now has Yacktman putting any leftover cash to work in names you might not consider. The fund's top holding is AmeriCredit (ACF), an auto-financing company that now trades at a 64% discount to its book value. The fund manager has also made a big bet in media stocks, such as Viacom (VIAB) and Liberty Media (LINTA).

We recently asked Yacktman about his investing strategies:

Barrons.com: As a value investor, has your investment criteria changed in the current climate?

A: No. We've done the same thing for years. There may be slight nuances hopefully improving the process, but it's the same basic process. When the market is up we tend to start having a harder time finding things to buy. We end up owning fewer stocks, and you'll find there is a component of cash in there. Going into last year, I think we had close to 30% in cash.

Now my feeling is if you are a value investor and you're not fully invested, then there is a disconnect because there are plenty of things out there to justify buying in this environment at low prices.

Q: So is this something of a dream market for value investors?

A: Sure. These are the kind of times where you may say, I wish I waited a little longer. We tend to be early on average. But you feel very comfortable on a long-term basis. And we have a 10-year horizon time. So we just don't think in terms of 10 days or 10 weeks or 10 months. An investor who thinks in those terms is going to be frustrated and whipsawed potentially. But somebody who can have that long horizon time will have a high-comfort index in this market.

Q: How do you pick stocks in this environment?

A: You stick to objectivity, and you should look at the long term. When I hear somebody talk about 15% growth rates indefinitely, I think that's just not realistic. So you come up with some realistic normalized numbers. Most of the companies we have tend not to be wildly cyclical. Their earnings aren't as gyrating as say an auto company or an airline.

In the fourth quarter and the last few months we have honed in on sectors like media, health care and insurance. So that has some cyclicality but they're low capital requirements.

Q: What are some of your favorite stocks right now?

A: You look at the largest holdings in our top 10 and the top three would be Coca-Cola (KO), AmeriCredit and Viacom. But if you look at the top 10 you will notice there is Viacom, eBay (EBAY), News Corp. (NWSA) and Liberty Media (LINTA), [which includes the QVC retail channel. News Corp, (parent of Dow Jones, the publisher of Barrons.com) cracks the top 10 of Yacktman's flagship fund (YACKX) but wasn't a top holding in the focused fund, as of Dec. 31, 2008.]

So there's a lot of media in there and the theme is very similar in a lot of ways in that they tend to use TV or media; they're heavily TV oriented. What has killed them is the advertising has just dried up dramatically in this environment. Yet they are very good businesses, and, long term, I think they will make very nice returns.

Q: So on the media side, are you particularly interested in the TV business?

A: I just think they are good businesses, and they are cheap. If you look at the list of properties that Viacom has, it's things like MTV, Nickelodeon and Comedy Central, but the stock has been under pressure.

Q: Do you think the advertising on television will come back?

A: To some degree. One of the problems is virtually every consumer company is trying to find where they can get eyeballs. It's tougher and tougher. The media world is more diversified, and it is much more difficult to hit [consumers] than it was 10 or 20 years ago when you had just a few networks.

Q: That said, with 20% of your fund currently invested in media do you think these companies are the ones that will or can figure it out?

A: I think they are some of the best ones. Part of the problem with Viacom was they were under tremendous pressure because National Amusements owns a lot of their stock and had some leverage, and I think people were nervous about it.

Q: Are those the kind of events that scare a lot of investors that you are willing to look past in finding value?

A: We view the market as kind of a manic depressant. We are constantly looking at news events, and when companies hit the headlines with negative news, that is usually the time to start sifting through and looking at the numbers. We do our own research. We aren't relying on somebody else for making decisions. But what happens is a lot of the other research may accelerate our learning curve, so that's why we have it available to us. But I think that's what separates the men from the boys.

Q: What else is on your mind in picking stocks right now?

A: I really don't like to spend a lot of time on macro issues, because the reality is that it is the specific investment choices that really make the money. Fortunately there are plenty of good opportunities out there. But I would be very concerned about holding a lot of cash, and that's where people are moving toward. I think that's just the wrong place because when the economy does turn and things improve, it looks like there is going to be an awful lot of inflationary pressure.

Q: So do you guys have a position in gold?

A: No gold. I would rather have Coca-Cola than gold any day of the week. The ability [for them] to raise prices is like a machine that prints money.

Q: Thanks for your time.

Source. Subscribe to Barron's. Cabot Money Management.

Gold could surge to $2,500 a troy ounce in the next five years because the prospects of either deflation or inflation were “becoming more extreme”, UBS said on Tuesday, March 10, 2009. The Swiss bank told investors to overweight gold in their portfolios.

The Swiss bank’s warning is the most radical among mainstream institutions and comes as some hedge fund investors who made money last year by betting against investment banks are now buying gold as a way of betting against central banks.

“The current environment is one which can best be characterised as having a ‘low margin of error’ for central bankers, with the prospects for deflation or inflation becoming more ex­treme,” said Daniel Brebner, analyst at UBS in London.  A bet on gold is considered by some as essentially a bet against all paper currencies.

“Given the broad uncertainties in the current macro climate we believe investors should look to gold, given its historic tendency to act as a hedge,” the bank said. The bullish forecast failed to lift gold prices, depressed on Tuesday by lacklustre jewellery demand, traditionally the backbone of gold consumption, some profit-taking and an early rebound in financial stocks.

Spot gold in London was $896.5 a troy ounce in late afternoon trading on March 10, down from the previous days’ closing quote in New York of $920.95 an ounce. Gold prices hit a high of $1,030.8 last March and last month traded briefly above $1,000.

UBS, one of the biggest bullion dealers in London and Zurich, said the downside risks to gold prices were limited to about $500 an ounce, or less than 50 per cent below the current price, while the potential upside was $2,500.

Hedge funds that bet last year against investment banks are now betting against their ability to wea­ther the crisis without triggering a jump of inflation or letting the economy fall into deflation. Gold bulls include David Einhorn, founder of the hedge fund Greenlight Capital, who last year came under the spotlight for short selling shares in Lehman Brothers. Others looking at gold include Eton Park and TPG-Axon, investors said.

Source.

Hedge fund investors who made money last year by betting against investment banks are now buying gold as a way of betting against central banks.

The gold bulls include David Einhorn, founder of hedge fund Greenlight Capital, who last year came under the spotlight for his short selling of shares in Lehman Brothers, after arguing that the bank did not have enough capital to offset its exposure to falling property prices. Other funds looking at gold include Eton Park and TPG-Axon, investors said.

Their belief in bullion is being expressed even as gold prices have retreated from last month’s break above the $1,000 an ounce level. Spot gold in London closed last Friday at $939.10, after falling last week to $900.95 an ounce. Investors such as Mr Einhorn are turning to gold because they are worried about the response of the US Federal Reserve and other central banks to the global economic crisis. A bet on gold is essentially a bet against all paper currencies.

“The size of the Fed’s balance sheet is exploding and the currency is being debased. Our guess is that if the chairman of the Fed is determined to debase the currency, he will succeed,” Mr Einhorn wrote in a recent letter to his investors. “Our instinct is that gold will do well either way: deflation will lead to further steps to debase the currency, while inflation speaks for itself.”

Mr Einhorn’s comments, and the revelation he is buying gold itself, are in line with the views held by other large institutional investors in Europe, according to bankers in London. The head of commodity sales at one major bullion bank told the Financial Times that he had never been so busy dealing in gold for large investors in his life.

Goldman Sachs, Morgan Stanley and UBS all forecast the gold price will surge above $1,000 this year. Peter Munk, chairman of Barrick Gold, the world’s largest miner of bullion, told investors last week that all countries have embarked on policies that will favour gold.“The only option to governments is to print and print more money,” he said. “That will end in tears.”

In the past, hedge funds, which depend on absolute returns to earn high fees, had avoided gold because it does not produce any yield and costs money to store and insure. But those issues have become less important as central banks have pushed interest rates to nearly zero, reducing the yields on currencies.

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Gold reached a high of $1,005.40 a troy ounce on Friday, February 20, 2009, before easing back to $1,003.65, up 3.1 per cent on the day and gaining 6.6 per cent over the week. Holdings in the SPDR Gold Trust, the largest physically backed ETF, surpassed 1,000 tonnes on Tuesday, February 17, 2009,  and rose further on Thursday, Ferbuary 19, 2009, up 5 tonnes to 1,029 tonnes.

An assault on gold’s nominal record of $1,030.80 an ounce reached last March, is viewed as increasingly probable, but analysts warned that jewellery demand had dried up and that higher price volatility was likely. Michael Lewis, a commodity strategist at Deutsche Bank, said: “The surge in investment flows into gold ETFs exposes gold [prices] to the ebb and flow of investor sentiment and consequently introduces an additional level of volatility risk into the market.”

Mr. Lewis warned that the threat of deflation in the US was bearish for the gold price as it would imply a significant rise in real interest rates around the world, an environment that has historically proved problematic for gold returns. Source.

John Roque, a technical analyst at Natixis Bleichroder, has lately been focusing on an interesting phenomenon that has proven in the past to be very profitable: The price of gold has surpassed the S&P 500. In three previous cycles, when that situation obtained, gold outperformed the large-cap index by a ratio of 2.5-to-1 to as much as 6-to-1.

With gold at $1,000 an ounce and the S&P around 770 points, the ratio is now only about 1.25 times. At the end of January, Roque identified $1,000 as just a "first" target for the yellow metal, based on his charts, and wrote that "ultimately, we are looking for a new high in gold."

More recently, Roque averred that "if you own gold here [above $960] it is likely you aren't looking for $980 or $1032.70, [the March 2008 high] as your targets. You are looking for something much bigger. So are we."

Just as significant is the implication for the multiple on the S&P 500 in the three previous cycles of gold outperformance, from September 1932 to April 1942, June 1973 to December 1974, and August 1976 to January 1980. In each, the multiple collapsed to single digits.

Applying that scenario to the current situation, with estimated 2009 earnings on the S&P 500 of about $50 a share, would indicate a rather nasty drop. Says Roque: "We know which direction the car is going. We just don't know how fast it's going to get there."

Gold surged above the key $1,000 a troy ounce mark on Friday, helped by record investor inflows into exchange traded funds. For other commodities, elevated levels of risk aversion and concerns about the outlook for the global economy ensured downward pressure. 

Gold prices pushed past $1,000 a troy ounce, the highest point in nearly a year, as continued weakness in stocks and broader economic concerns sent investors in search of a haven.

The price of the thinly traded nearby February gold futures contract rose $25.70, or 2.6%, to settle at $1,001.80 an ounce on the Comex division of the New York Mercantile Exchange. The contract reached as high as $1,004.90, the loftiest front-month price since March 2008. The price of the most-active April gold contract rose $25.70 to $1,002.20.

"We're seeing investors rush into gold as a crisis of confidence continues to emerge," said Ralph Preston, senior market analyst with Heritage West Financial.

On technical charts, gold is a momentum play, he said. "Once these things start running, it's the herd mentality," Mr. Preston said. Shortly after gold trading closed, the Dow Jones Industrial Average was down 191.95 points at 7274, after dipping as low as 7249.47, the softest point since October 2002.

"Global investors appear to have just opened the doors to a den full of hungry, cranky, and no longer hibernating bears," wrote Kitco Bullion Dealers analyst Jon Nadler in a research note.

"How scary is that?" he said. "Scary enough to send anyone with whatever cash they had left into the one part of the global cave that feels relatively safe from a mauling at the moment: gold and the dollar."

Whether stocks continue to decline will likely determine how high gold goes in the near term. A stabilization in stocks would likely lead to profit-taking in the metal. Because gold is considered a safe asset to hold, investors have been flocking to the metal in hopes it will hold its value more strongly than stocks.

"Gold is a function of the fear trade right now," said Zachary Oxman, senior trader with Wisdom Financial.

The surge Friday brought gold close to the front-month record of $1,014.60 hit in March 2008. Gold still is well behind the inflation-adjusted 1980 record of more than $2,200. Gold inched above $1,000 in early trading but pulled back as that level proved to be a point of psychological resistance, sparking profit-taking, said Charles Nedoss, senior account manager and metals analyst with Peak Trading Group.

It turned higher again near the close of the pit-traded session. "There really is no other place to go," said Leonard Kaplan, president of Prospector Asset Management. "People are scared."

Source.

As investors in recent months have been pouring into exchange-traded funds that hold physical gold, much of the inflow has come from individual investors and asset managers. The largest such fund, SPDR Gold Shares, had a net inflow of $1.76 billion in January; its assets now total more than $31 billion.

Some said the new money can go out as fast as it came in, making the traditional haven bet risky. "Just as quickly as gold-ETF depository holdings have grown, so might they shrink when sentiment changes," Jeffrey Nichols, managing director of American Precious Metals Advisors, wrote in a recent newsletter.

Hedge funds have become among the biggest gold bugs. Greenlight Capital Inc., a New York fund, added about 3.7 million shares of SPDR Gold during the fourth quarter, according to filings with the Securities and Exchange Commission, bringing its holdings to $342 million, or 6.8%, of Greenlight's $5 billion in assets under management. Greenlight declined to comment.

Pequot Capital Management Inc., a $4 billion Westport, Conn., hedge fund, had about 10% of its assets invested in SPDR Gold as of the end of September. The fund declined to disclose its latest holdings. Even some endowments and pension funds are getting into the act. The University of Notre Dame, with the nation's 13th-largest educational endowment, has more than $90 million in SPDR Gold, amassed during last year's fourth quarter.

Natalie Dempster, head of investment, North America, at World Gold Council, an industry group, said pension funds and endowments globally typically have less than 1% of their assets in gold. Notre Dame's endowment had assets of $7 billion as of June, its most recent regulatory filing. Scott Malpass, its chief investment officer, declined to comment about its position in gold or provide current assets.

Teacher Retirement System of Texas, an $81 billion pension fund, had $30 million in shares of SPDR Gold as of year end, according to regulatory filings, almost doubling its gold holdings three months earlier. The pension fund declined to comment on its position. Windward Investment Management, which manages more than $2 billion for endowments, pensions and high-net-worth individuals, had about $232.9 million in SPDR Gold as of year end. Windward declined to comment on its gold buying.

If investors redeem their shares, funds would have to sell the metal into the market, pushing prices down. Source.

The rising gold price says investors are starting to freak out over governments' response to the credit crunch. Sooner or later, central bankers will have to make a convincing case why all the worry is unwarranted.

Gold is up more than 25% since mid-September 2008. Since then, G7 governments have unleashed an array of policies, using trillions of dollars, to rescue financial sectors and shore up their economies. For instance, the Federal Reserve's balance sheet has doubled to $1.84 trillion as it has ramped up lending to banks and bought debt. The justification for this unprecedented expansion: It is necessary to avoid protracted deflation and help the economy absorb the shock of global deleveraging.

Goldbugs aren't convinced central banks' flood-the-zone approach will work. They have a point, calibrating the response looks tough. If the massive monetary response overshoots, it leads to high inflation, benefiting gold. And if it undershoots, deflation remains. While falling prices don't directly help gold, the instability they create potentially does.

While it may seem too early, central bankers could map out how they plan to decrease their balance sheets and normalize interest rates if inflation resurfaces. But this could expose some of the dilemmas stemming from balance-sheet expansion. For instance, asking banks to pay back the large amount of central bank loans could require them to refinance in private markets. But what happens if private investors don't have sufficient appetite at that time?

The Fed and others need to start walking investors through such scenarios. This is one area where silence isn't golden, except for investors in the metal itself. Source.