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Across the Spectrum - 17/03/2009

Finance ministers from the G20 group of nations have pledged to make a "sustained effort" to pull the world economy out of recession. "We are committed to deliver the scale of sustained effort necessary to restore growth," they said in a joint statement after their talks in the United Kingdom. UK Chancellor Alistair Darling said they agreed the International Monetary Fund (IMF) should be given more money and guard against protectionism. The finance ministers have also pledged to continue economic stimulus packages and low interest rates. While the US and UK finance ministers have led the call for further spending on stimulus packages, some of their European counterparts, most notably France and Germany, have urged caution. Led by Germany's Peer Steinbruck, they are concerned about the increase to governments' debt, and have said it would be best to see if the current stimulus schemes start to work before more money is dedicated.

For the first time since 2001, foreign governments and private investors are both pouring money into dollars, a sign to Barclays Capital's chief currency strategist Steven Englander that the US currency is peaking. He estimates foreign purchases of American assets have reached record levels, with individuals buying USD 133 billion a month on average since November, based on government statistics. Central banks were net buyers of Treasuries for 29 of the past 30 weeks, a streak unmatched since at least January 1983. While the dollar strengthened 24% against the euro since falling to a record low on 15 July as investors sought the safety of US assets, zero per cent interest rates and the signs the financial crisis is abating will help lead to a 13% drop in the next year, Englander said.

OPEC agreed to maintain current production quotas, concerned that a fourth cut since September risked increasing energy costs at Sunday's meeting in Vienna. OPEC will aim to complete existing production cutbacks agreed last year and will meet again on 28 May to review policy. Higher prices could further erode global oil demand, already forecast to fall by 1 million barrels a day in 2009. Today, oil fell from a two-month high in New York on speculation US stockpiles increased last week because of lower demand. "We have very high crude oil inventories in the US." Said Sintje Diek, an HSH Nordbank analyst in Hamburg. "We still have very weak oil demand. We will remain in this trading range of USD 45 to USD 50 a barrel for the coming weeks." Crude oil for April delivery fell 1.7% to USD 46.53 a barrel on the New York Mercantile Exchange today. It was USD 47.10 a barrel in London.

Exxon Mobil Corp's oil discovery off the coast of Brazil may hold enough crude to rival the nearby Tupi prospect as the Western Hemisphere's largest find in three decades. Exxon's Azulao-1 well tapped a reservoir that could contain 8 billion barrels of recoverable oil. The size of the discovery will intensify interest in Brazil's offshore region among US, European and Chinese producers amid a downturn in supply of untapped oil basins outside the Persian Gulf and Russia.

The yen fell for a third day yesterday against the dollar and the euro on speculation a Bank of Japan plan to buy government debt will spur investors to seek higher yielding assets overseas. The yen weakened to 98.11 versus the dollar today from 97.95 in New York last week. It reached 99.68 on 5 March, the lowest level since 5 November. Japan's currency declined to 127.02 per euro from 126.65. The euro traded at USD 1.2946 from USD 1.2928. The British pound climbed to USD 1.4078 from USD 1.4002 late last week.

Gold, little changed in London, may rise as falling equity markets boost demand for the precious metal as an alternative investment. Bullion is "looking back toward equity markets," for direction, said Emanuel Georgouras, a precious metals trader at Marex Financial Limited in London. "We've gone back to negative correlation with equity markets." Gold for immediate delivery lost USD 1.01 to USD 922.15 an ounce in London today. April futures fell 80 cents to USD 921.20 an ounce in New York.

Spotlight on Gold

According to the year-end edition of the World Gold Council's Gold Demands Trends report identifiable investment demand for gold, which incorporates exchange traded funds and bars and coins, was 64% higher last year than in 2007, equivalent to an additional inflow of USD 15 billion. Demand for bars and coins rose 87% over the year with shortages reported across many parts of the world. Retail investment in gold rose 396% from 61 tonnes in the fourth quarter of 2007 to 304 tons in the fourth quarter of 2008. However, it is worth remembering that, while the recent surge in demand is quite remarkable, the gold price has been rising for several years, buoyed by a greater understanding in the investment community of its unique qualities as an asset.

A study undertaken by the World Gold Council, which examines the performance of gold during recessionary periods in the US, suggests that there is no clear relationship between the changes in US gross domestic product growth and changes in the gold price. Hence, a US recession would not have negative implications on the gold price. This reflects the unique market fundamentals and sources of demand which drive the price of gold and explain gold's role as a diversifying asset.

Second, like all physical commodities, gold is an asset that bears no default risk. Holding assets in gold involves no counterparty risk and is no one's liability. Third, there is a substantial body of research to bolster gold's reputation as a protector of wealth against inflation and currency fluctuations. Gold is the asset that investors turn to when currencies fall or inflation rises threatening to devour wealth. In fact, gold offers better protection against dollar weakness than any of the other main commodities, having the strongest negative correlation. This has intuitive appeal for any investor with significant holdings of dollar biased or dependent assets.

With gold's role as a portfolio diversifier and a hedge against inflation and currency weakness, combined with its liquidity and lack of counterparty risk, there are several compelling arguments for investing a portion of a portfolio into gold. The events of the last year have shown that you must always be prepared for the unexpected, and this is where gold shines; gold plays a role of an insurance policy within a portfolio. As with all insurance policies, a safety net which should be maintained in good times as well as bad.

The real value of gold is its capacity to provide a trusted means of protecting wealth and to enhance consistency of returns, thus providing an effective risk management tool.The information set out herein has been obtained from various public sources and is published by way of information only. The Spectrum IFA Group can accept no liability of any sort in relation there to and readers should obtain their own verification of any statement before making any decision which may have any financial or other impact.

 

Neither the information nor the opinions herein constitute, or are they to be construed as, an offer or a solicitation of an offer to buy or sell investments.

 

This information is only provided as a guide and, if you need assistance in this area you are strongly advised to seek the help of a specialist in this field as each individual case is different.

 


If you have a question, want to arrange for a free financial review or just want further information I can be contacted on +33 (0)325461631, via my website
www.financialexpat.com or via e-mail steven.grover@spectrum-ifa.com  
Spectrum IFA Group company TSG Insurance Services Sarl is registered and licensed in France."

 


TSG Insurance Services S.A.R.L.
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