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Sep 2006Volume 3 Issue 7
Dubai Invests in Vancouver IMF Warns that Risk of Global Crash Increasing Commodities Update
Dubai Invests in Vancouver
Dubai Ports World recently made a global acquisition worth $ 6.8 billion from a British company and, as part of the deal, acquired Vancouver's Centerm Container Terminal, valued at US$ 200 million, as reported by Vancouver's Province newspaper on Sept 7, 2006.
During a visit to Vancouver in Sept, Sultan Ahmed Bin Sulayem, chairman of Dubai World, was very impressed by what he saw.
"This place is very beautiful, its water, its mountains," said Bin Sulayem, 51. "Things that we have done in Dubai could be done here.
"We are both on the sea. Commerce is very important to us, as it is here. You have a very large Asian community here, same as Dubai.
"We have confidence in Vancouver and its investment climate. I believe Vancouver is a good place in which to invest."
He has committed to investing "hundreds of millions" of dollars in Vancouver, in port facilities, tourism and real estate.
British Columbia's Transportation Minister Kevin Falcon, on hand for the Centerm opening yesterday, said Dubai World has operated around the globe for many years with "a record of confidence and professionalism and, thankfully, hands-off oversight of their operations."
Bin Sulayem is held in high regard worldwide as a financier, he said.
"I'm very, very comfortable with his investment in this country. We're very excited about the investment, and we're very excited about the confidence that Sultan Bin Sulayem is showing in Canada, and in British Columbia in particular."
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IMF Warns that Risk of Global Crash Increasing
In its latest keynote world economic outlook, the International Monetary Fund has warned that financial markets have not priced in the risk of a host of possible shocks to the global economy, reports the Independent UK (IMF: risk of global crash is increasing, Sept 13, 2006)
It warns that those risks have increased recently.
This report coincides with a report by HSBC that puts the US on recession risk alert. It warned that such a recession would trigger a sharp decline in the US dollar and pound.
The IMF expressed concern that the five major risks were:
A slowdown in the US economy, triggered by a slump in housing prices
A surge in inflation that would force central banks, particularly the US Fed, to impose sharp rate rises that would ripple through emerging markets
A rebound in oil prices on the back of mounting speculation of geopolitical tensions - a reference to a showdown between Iran and the US over nuclear technology
A sudden unravelling of the record imbalances between surpluses in Asia and deficits in the US
A mutation in the avian flu virus that would lead to a "sharp decline in economic activity".
To forestall these possibilities, the IMF has been stating that the US must cut its deficits, China must liberalise its financial system and allow its currency to appreciate, the oil-rich countries should invest their windfall for growth while Europe should do more to boost its sluggish growth rates.
Concerned about the risks to the US dollar, the IMF published last month a research report by a leading economist that found, with a 10 per cent fall in the dollar, US stocks and bonds would wipe out $1.2 trillion of wealth held for foreigners.
It cited the facts that corporate fundamentals were still solid, equity valuations were not stretched in most markets and major financial institutions were profitable and well capitalised. But there was the risk that adverse events might lead financial markets to amplify rather than dampen emerging risks.
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Commodities Update
Most commodity prices have been correctly since reaching their peaks in May or thereafter. The fall in prices has been significant, and the trend has accelerated in the last week, creating fear among some investors and analysts that the bull market in resources may be over.
The catalyst for the reversal of trend was the growing realisation that the US economy may be headed for a recession in early 2007. The housing market has been a fundamental supporter of economic growth and job creation in the US. The rate of price increase in housing has slowed, foreclosures are rising dramatically (Las Vegas, one of the hottest real estate markets in recent years has seen foreclosures in Aug 2006 rise by 255% over Aug 2005) and unsold houses are piling up.
In previous housing market busts, research shows that housing prices have fallen by about 30% from their peaks.
A recession in the US may lead to a global recession as the US consumer has been the main factor behind sustained growth in global demand. Whether Asia and Europe also tip into recession as a result is difficult to predict and opinions are mixed among analysts. If they do, then the demand for base metals and energy will fall, and a rebound in prices of these commodities to the highs seen recently is unlikely, barring any geopolitical shocks.
Gold and silver are different. Apart from demand for jewelry and industrial uses respectively, there is an important component of investment related demand that sees these precious metals as a safe haven in times of political and economic uncertainty and as a store of value.
A day of reckoning is likely to come for the US dollar within the next few years and Central Banks are hoarding gold (and purchasing more) as a hedge against that eventuality.
One analytical tool that Adam Hamilton at Zeal uses is viewing gold in relative terms. He divides the price of gold by its 200 Moving Average, a ratio he calls Relative Gold (rGold). The chart below shows how gold (the blue line) and rGold (the red line) have performed since 2002. The black line is the 200 Moving Average for gold.
The left axis is for the red line while the right axis shows the price of gold for the blue line.
At 1.0, the price of gold touches its 200 MA. As you can see, gold has surged back each time rGold falls under the horizontal green line set at 0.99, with its worst decline down to 0.95 (i.e gold prices down 5% below its 200 MA).
Today, 0.95rGold would imply a gold price of about $ 561. Gold should find support and reverse its decline between $575 and $ 561, though it may take several weeks for the process to play out. Gold stocks historically follow the price of gold upwards from such reversals.
Adam describes investing in volatile markets such as commodities in this way:
"Great bull markets oscillate between greed in the uplegs followed by fear in the corrections. The periodic fear is necessary to keep a bull healthy in the long term by maintaining sentiment balance"
"Major uplegs can only launch under conditions of fear, despair, and apathy."
A lot of traders think ... that uplegs need no foundations and that a bull can exist in a perpetual state of greed without corrections. Even if I'd like to believe it though, I simply can't due to my many studies of market history. Bulls flow and ebb, greed turns to fear and back again. Major uplegs are always born out of a host of negative emotions when few expect an upleg, not in a positive environment bathed in warm and fuzzy sentiment."
The plunge in prices has certainly created the conditions he says are required for the price to move back up. The charts indicate that this is the time to buy (or hold) gold stocks rather than sell.
If investors can sell when markets have run up significantly and buy when no-one else wants to, then volatility can be their best friend by providing multiple investment timing opportunities within the same bull market.
