|»5 Minute Wrap Up by Equitymaster|
On This Day - 15 MARCH 2011
A heap of money that can push gold to new highs!
In this issue:
Trading on the exchange has been suspended.
Television anchors -- the cheerleaders for the rally thus far -- are looking as though they have seen a ghost.
But here's what matters the most- "How have YOU been impacted by the crash?"
If you want to be one among the very few who are geared up for any adversity, then, you need to see this right away!
Hurry... This opportunity will soon disappear forever!
However, a gentleman named Shayne McGuire has taken the discussion about how high gold prices can go to an altogether different level. McGuire, it should be noted, is a fund manager who manages a US$ 330 m gold portfolio at a US based pension fund. In his recent book, McGuire has argued that US$ 10,000 per ounce gold, a jump of more than 7-fold from the current levels, is well within reach!
Indeed, one is bound to dismiss Mr McGuire's bold prediction as pretty outlandish. But we believe he has a pretty strong reason to support the claim. Do you know who manages the world's largest amount of wealth? Well, it is the world's pension funds. As per estimates, global pension assets were believed to be in the ballpark of US$ 31 trillion. To put things in perspective, it is more than twice the GDP that the US, the world's largest economy by far, recorded in recent memory.
Now, here comes the real surprise. As of now, a mere 0.3% of pension assets are invested in gold and gold stocks. Even if this allocation doubles to 0.6%, still a small number by any yardstick, this will represent close to US$ 100 bn of new money to be poured into gold related assets. It would be worth adding for a perspective that that size of the world's largest gold ETF is US$ 55.2 bn. Hence, the push that this new US$ 100 bn can give to gold prices cannot be emphasised enough.
We are not sure whether this will result in gold witnessing a more than 7-fold rise. But the increase nevertheless is certainly going to be extremely meaningful. Do bear in mind that we have not even considered the scenario where the allocation by pension funds towards gold goes up to even higher levels. Imagine what will happen if pension funds view gold as strategically important as other financial assets like real estate and commodities. In such a case, all bets would be off. Thus, have you considered investment in gold yet? If not, do it before it is too late.
Japan may be known for its seismic activity. But, in this age of increased globalization, no country is safe. In 1995, a big earthquake in Kobe, Japan sent worldwide stocks hurtling downward. The Nikkei is down over 10% today, fearing a nuclear crisis. And the rest of Asia is also in deep red waters today. It is events like these that cause investors to run for cover, especially away from risky assets like stocks. Seems like Shiller's prediction has come true. But the question remains, what should investors run towards?
Speaking of government debt, by 2012, Japan will see the same swell to 210% of its GDP. It will stand at a colossal 997.7 trillion yen (US$ 12 trillion). That will be double of even the US' government debt of 101% of US GDP. These are certainly dire economic circumstances staring at the Japanese economy.
However, if his latest stock investment indicates anything, Buffett seems to be also veering towards emerging markets. His company Berkshire Hathaway has acquired the lubricant maker Lubrizol in a US$ 9 bn deal. About 65% of the company's sales come from outside North America, and suggests that Buffett is now eyeing growth in emerging markets as a target to deploy the huge cash Berkshire has built up.
Interestingly, Lubrizol, which had US$ 5.4 bn in sales in 2010, is a classic Buffett-style company. It's a global leader in several market applications of lubricants and, as Buffett suggests, is run by a talented CEO (James Hambrick). And as Buffett has stated, "Our only instruction to James - just keep doing for us what you have done so successfully for your shareholders."
This shows the increased competitiveness of the dragon nation and the reduced competitiveness of the world's largest economy. We see this as a fundamental shift in the global manufacturing setup, which is unlikely to be reversed in the future.
Anyways, while the US has lost out on size to China, it stands miles ahead when it comes to productivity. China's manufacturing is supported by 100 m employees. The US does it with 89% less number of employees. Now that's a huge gap that China can only dream to cover, also given its ever expanding labour force!
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