Peter J. Cooper’s Weblog

July 29, 2008

No need for capital gains tax in Dubai property market

Filed under: Dubai Property, UAE Stocks — peterjcooper @ 12:34 pm

What are the free market economists of Standard Chartered Bank thinking of in suggesting a capital gains tax on the re-sale of Dubai properties within a year? This is exactly the sort of taxation Dubai has become famous for avoiding as a tax haven, quite apart from being the very worst sort of arbitrary intervention in a market that any government could make.

Surely the Dubai Government already has a strong enough control over the local market with its ownership and share holdings in the key development companies. There is no need to revert to capital gains taxation to bring the market under control. If oversupply threatened, the breaks could be applied to projects.

The normally wise members of the Standard Chartered economics team appear to have been worried by a 42 per cent surge in Dubai house prices over three months. This price hike is strong indeed but explicable in terms of low US interest rates, very high oil prices and the poor performance of local stock markets as an alternative investment.

Rather in the same way that speculation has become a feature of the oil market, and could create a sudden correction, Standard Chartered is concerned that speculation in local property is getting out of hand. Low deposit levels, in particular, encourage short-term price flipping on off-plan sales, although this has been more of a feature of the Abu Dhabi market than Dubai in recent months.

But to introduce capital gains tax for the first time ever in the history of the UAE would seem an over-reaction to some modest speculative activity in an economy that has never seen better times. What the government might consider, if it feels it necessary is forcing developers to take bigger deposits to discourage speculation.

However, any notion that the Dubai property market is in some kind of imminent danger of collapse is patently ridiculous. The very surge in recent prices is indicative of a healthy market with very high levels of demand, inadequate supply and a price risk biased to the upside.

Dubai real estate price levels are now much higher than a few years ago but still lag behind prices in cities of comparable per capita GDP, and rental yields are still high, suggesting that capital values have room for further appreciation.

Of course, the market is maturing and the recent sudden price hike could be followed by a flatter autumn. But I very much doubt it. More likely the quieter months of summer will be followed by another upward spike in prices, unless oil prices suffer a very serious retreat.

The supply of property, both residential and especially commercial, remains inadequate to meet the demands of the hub city of the booming Middle East. Moreover, the average project delay is two years, putting back the estimated arrival time for oversupply until 2010 or later.

Construction costs are another factor driving up prices, and may well be running ahead at an even higher rate. This is a fundamental and not a speculative reason for higher real estate prices. Developers have to pass these prices on or they will have to stop building.

Even the possibility of a global stock market crash which hangs over the UAE bourse like a storm waiting to break is not likely to cause any problem for local real estate. For one thing that would mean a cut in interest rates, and positive for real estate. And if local stocks fell then investors would go for property as a more solid alternative, as happened after the 2006 crash in the UAE.

Of course no boom continues forever. The 14-year UK housing boom finally went bust a year ago. But economists had been calling an end to this boom for almost a decade and it went on and on. Why should the experience of the UAE be any different?

In particular, I would argue that the Abu Dhabi construction boom is going to send Dubai real estate prices higher. It will not be until late next year that any new property is completed in the UAE capital and that means that all the staff involved in this massive development has to be either accommodated in Abu Dhabi or in neighbouring Dubai.

The vast majority of the $1.3 trillion of infrastructure spending in progress in the Gulf States is happening in the Emirates and while this immense investment is in progress it is hard, if not impossible to see any weakness in local real estate market. Economists ought to know better than to sound alarm far too early in this economic development cycle.

The real warning will come later down the road when the economists have fallen silent, having said too much too early and lost credibility, then a correction will occur as they always do in market economies. But we are probably five years away from a real downturn, and have yet to see the market flatten.

July 27, 2008

UAE boom to continue as global economy crashes

Filed under: Dubai Property, Oil Prices, UAE Stocks, US Stocks — peterjcooper @ 11:58 am

To my mind the stage is being set for an October crash on Wall Street despite the proximity of the US presidential election. The ongoing financial crisis with the likelihood of a series of US bank failures, the collapsing US housing market and the knock on effect on consumer spending will result in a climatic capitulation.

It is remarkable, not to say unbelievable how well the Dow Jones and FTSE indices have kept up over the past year. The rumour in London last week was that George Soros is shorting the FTSE. It might be his best trade since pushing the pound out of the ERM in late 1992.

That a serious downturn is coming in the world economy can hardly be doubted. High energy prices have turned a real estate crunch into a global slowdown, and with the banks already in trouble this could get a lot worse. Shipping reports point to a severe economic contraction in 12-18 months time and are usually an accurate leading indicator.

Dr Marc Faber, who was interviewed on Bloomberg TV last week, says he has noted a downturn in economic activity in every country during his worldwide travels over the past two months. China in particular looks vulnerable to an economic collapse after the Olympics and credit ratings have turned sharply negative.

But I wonder if Dr Faber has visited Russia or the Gulf States recently. Sat in England this week the economic slowdown, especially in housing is obvious. However, a couple of weeks ago in Russia I was amazed by the prosperity and obvious progress. You get exactly the same buzz when stepping off a plane in Dubai or Abu Dhabi.

In his Bloomberg interview Dr Faber alluded to his view that a global economic downturn will hit commodity prices and bring the boom cities of the Gulf hurtling down to earth. But in the same interview he also managed to propound the argument that makes this most unlikely: namely that the world is suffering a real shortage of oil and that will keep prices stubbornly high in a recession.

You really can not have it both ways. If a global recession dashes oil prices below $10 as we saw in 1999 during the Asian Financial Crisis then the Middle East boom will be short indeed. But if oil prices stay in a high range there is little reason for immediate concern.

Surely we ought to remember that not much more than a year ago oil prices of $50 a barrel seemed excessive and ample to sustain the boom in the oil producing countries. Should we be worried if prices that topped $147 a few weeks ago moderate to $120 or even as low as $90 as Lehman Brothers suggested in a note last week?

I think it is far too early to talk of gloom and doom scenarios for the Middle East. The boom is funding a programme of $1.3 trillion in infrastructure investment, and governments are highly unlikely to cut back greatly on this transformation of local economies. Indeed, with every passing day domestic spending looks a wise investment while pouring money into global financial institutions, for example, has so far been a big loser.

Aside from oil money the other major driver in the Gulf States is the loose monetary policy of the Fed and its low interest rates which are turbo-charging local growth rates. There is no sign of the US putting interest rates up. In fact, any reasonable analysis suggests a long period of low interest rates. Again this just has to be brilliant for the Gulf economies in the short-term, if risky over a long period.

Moreover, if as I expect the US capital markets do have a meltdown this autumn then interest rates will be cut once more. The Fed funds rate could fall by 50 per cent from two to one per cent, giving a further stimulus to the dollar-pegged economies of the Gulf.

Now there is always a point at which economic booms go too far. The US and UK housing markets, the Internet bubble, history is full of examples. In the 1970s Gulf States enjoyed a seven year boom from the oil price hike of 1973 up to the Iranian revolution and just beyond.

Undoubtedly the present boom in the Middle East will undergo a correction but that does not mean forecasters should be jumping the gun. If you predict anything long enough it will eventually happen. So don’t be too alarmed by doom and gloom predictions for the Gulf. Other countries have far more immediate problems with their stock markets still far too highly valued for this stage of the economic cycle, and a worsening of their economies in prospect not a magic recovery.

July 24, 2008

Gold, silver will rebound again on further financial troubles

Filed under: Uncategorized — peterjcooper @ 11:23 am

A sharp fall in the oil price and a consequent recovery in the US dollar brought a sharp retrenchment in precious metal prices this week as gold approached the $1,000 barrier for a second time and silver closed on $20.

This is an excellent buying opportunity for anybody who missed out on earlier buying opportunities in this bull market. It can only be a matter of weeks or at most a couple of months before gold breaches $1,000 decisively and then heads to $1,200 before the end of the year.

Why can I be so confident? As Bill Clinton once argued ‘It’s the economy stupid!’ You would have to be a real fool to think the financial sector is out of the woods now and that all will be well.

The US government may agree a rapid bail out for Freddie Mac and Fannie Mae, the two mortgage underwriting agencies, but what comes next? If these agencies have gotten themselves into a mess what other disasters have yet to emerge? How much will it cost next time?

This autumn we are far more likely to see a series of banking failures in the US than a meaningful recovery. How can the banks recover while house prices are still falling and not showing any sign of bottoming out! In this climate a full scale Wall Street Crash is in prospect.

In a frenzied effort to support the economy the Fed will have to cut interest rates from two to one per cent, just as it did in the dot-com crash. That will send the dollar lower and gold and silver much higher.

Anybody who believes the current rally on Wall Street is anything except a brief trading window is stupid. Even a big downswing in oil prices will not be sufficient to prevent the financial crisis that is ongoing and barely one year into a three year cycle.

In that cycle gold and silver will be the winners – and virtually all other asset classes the losers. This last happened in the 1970s and we are seeing history repeat itself all over again.

July 22, 2008

How did global real estate become so expensive?

Filed under: Dubai Property, UK House Prices — peterjcooper @ 10:03 am

The same question can be asked about real estate in many parts of the world: why has it come to be valued at such a high level by comparison to yardsticks like local average income and rental yield? But let me focus on the UK as an example.

This week I am staying in a holiday rental apartment in Bath in Southern England and it was relatively easy to check on the Internet what the owner paid for this property recently. It cost a little over $400,000 in 2006 and is said to be worth $450,000 now, although I think with prices falling like a stone that estimate would have to be treated with some scepticism.

On my estimation, after all charges and deductions the owner would be lucky to clear $40,000 in rental income per annum, despite the inconvenience of tenants like my wife and I to check in each week and help connect to the Internet, etcetera. That is a 10 per cent return before tax, and after tax perhaps seven per cent. Not a great return and the landlady appears to have over-spent on the two-year old fit-out which benefits us but not her bottom line.

She doubtless bought on the understanding that capital appreciation would be forthcoming. But even the most generous estimate is that prices are falling by 10 per cent, so after tax I am afraid my landlady is losing money and working for a negative return.

Then consider the relationship of property prices to average income. This depends on whose figures you take. But let us say $50,000 a year is the average income in the UK. Then the relatively small property I have rented in Bath would cost nine times the average UK salary. How ridiculous when building societies offer three times salary, plus a hefty deposit is required these days.

House price inflation in the UK has been enormous if you look back over the past three decades. In my home town of Salisbury a week ago I went to look at three houses that I worked on as a building site labourer before going to university thirty years ago. These homes were sold by my father’s company for $36,000 each. Right now they would cost twenty times that amount.

I checked with my mother what our family home was worth at that time and also came up with a factor of twenty as being the change in price since then. Now inflation has been substantial over the past three decades but nothing like 2,000 per cent. My standard measure is the price of a British Rail cup of tea which is up six-fold or 600 per cent.

Why should housing cost so much more? I can accept that the cost of mortgage finance used to be higher. But that can not explain more than half the relative increase. Houses just became far too expensive. Bid up perhaps by a national mania for property ownership. When ‘location, location, location’ became the name of a popular TV series, and not just a piece of sensible advice for buying property, perhaps we should have all been more leery.

However, I did manage to find one thing during my stay in Salisbury that had not change in price in thirty years. I went to visit my local coin and collectibles shop, Castle Galleries, still owned by John C. Lodge a pillar of the community as a youth club organiser when I was a small boy. He sold me two silver bullion coins for $40, exactly what they would have cost thirty years ago.

Mr. Lodge recalled the late 1970s and how people used to queue down the road to buy and sell silver and gold coins in his shop. This summer his stock is running short, and I actually bought his last two silver bullion coins. Retail investors are again buying gold and silver coins as a hedge against inflation which is running rampant in the UK, especially for energy and food.

There is some irony that consumer price inflation is roaring ahead while the country is suffering from housing asset deflation. Until house prices have bottomed out there is little sense in British expatriates buying homes or for any other foreign buyer looking to purchase a house.

Landing here as a summer resident from Dubai I perhaps have the classic perspective of a visitor from Mars in being more objective than the people who live in Britain permanently. There is an asset deflation in progress that will also include a big stock market correction on top of what has already been witnessed and a downward adjustment in bond prices because of consumer price inflation levels.

These are poor times to be an investor in real estate, equities or bonds. And by a process of elimination I believe that brings us back to the one asset class that looks still seriously undervalued. Gold and silver are about to have their place in the sun, and values this autumn could soar much higher than generally believed possible as inflation rages and other assets prices slump.

July 20, 2008

UK jobless up, inflation soaring, expats will regret going home

Filed under: Gold & Silver, Oil Prices, UK House Prices — peterjcooper @ 12:43 pm

Expatriates from the UK who complain about high inflation in the UAE and talk of returning to the British Isles should think again. Inflation is just as bad in Britain and job prospects look awful as employers are just beginning huge cut backs in staff numbers, and white collar workers are very much in the firing line.

One survey of the average UK supermarket basket last week put annual inflation at 22 per cent. It is not only in the Emirates that food prices are rocketing higher. This is a global phenomenon linked mainly to energy prices and loose monetary policy in the US, and whatever the cause the impact on your standard of living is only too clear: you can afford to buy less than before.

However what’s more worrying in Britain are the job cuts now emerging and those around the corner. House builders and building material suppliers are leading the way, with plumbing giant Wolseley announcing 5,000 redundancies this week. But talking to my friends this is just the tip of the iceberg, and this is set to be very much a white collar recession.

Unemployment is expected to rise by a million or more as the UK falls into a recession driven by the global financial crisis, local housing market slump and government indebtedness. I spoke to a partner in a law firm which is planning to make 10 per cent of its 800 staff redundant is a couple of weeks time. Another friend was counselling his boss of ten years who had just been laid off at Reuters.

What is more worrying is that this is just the start of a contraction in the UK labour force, which has become bloated by more than a decade of expanding GDP. In such happier circumstances firms are too busy to spend much time on the introspective business of examining the quality of their staff. Today many companies are sat idle and have little more urgent task than deciding on who is to go.

For UK expats who have tired of a life in the sun this is bad news indeed. It is going to become very hard to get a new position in the UK as all these redundancies will flood the job market with qualified staff. You might also ask yourself whether this kind of depressed marketplace is really the right move for the next step on the career ladder. Is not the booming UAE a more attractive proposition?

It is only too easy to accentuate the negative after a few years away from home, and to forget why you left in the first instance. But re-entering a collapsing economy is not likely to do your career prospects any favours, unless you possess immense talent, and even then you might find it better rewarded in an expanding economy.

That the prospects of the UAE are excellent for at least the next five years ought to be obvious to anybody, and they certainly look very bright when viewed from a depressed economy like the UK. For even if oil prices come down a little then oil and gas revenues are likely to continue at elevated levels for years as the supply and demand balance in the world is seriously out of kilter.

Moreover, this money is being spent on a massive expansion of domestic infrastructure in the GCC whose $1.3 trillion in planned project spending actually exceeds China these days. Countries like the Emirates and Qatar are at the epicentre of this economic boom with jobs for expatriates in all sectors, from sophisticated financial services through to building and construction and oil services and even journalists.

This correspondent was made redundant in the mid-90s at the tail-end of the last UK recession and found a job in then booming Dubai to launch the first regional business magazine, Gulf Business as editor. It was a breathe of fresh air after suffering the worst post-war recession in the UK which was as depressing as it was limiting to career prospects.

That is what awaits expats returning from the UAE to Britain this year, and I expect that many who leave will quickly decide to come back. Even the housing recession is starting to put upward pressure on UK rental costs, as those who would have bought are deciding to rent and pushing up rental prices. So the idea that UAE rents are making life here uneconomic is also probably untrue, or at least rents are moving up in the same way in Britain.

Why not save yourself the effort and stay in the thriving UAE or Qatar until times are better in the UK? That could be several years if my experience of the early 1990s is anything to go by, and if you wanted to buy a house in the UK then it might also be worth waiting at least until prices have bottomed. For the moment home sweet home just is not that sweet anymore.

July 18, 2008

Local coin shop runs out of silver bullion coins

Filed under: Gold & Silver, UK House Prices — peterjcooper @ 11:39 am

Yesterday I visited the local coin shop in my home town, Salisbury in England and while full of interesting medals and collectables something was missing this year. The coin counter had shrunken to a small selection in the corner.

I asked the owner of The Castle Galleries, John Lodge what had happened and he explained that it was proving hard to buy sufficient supplies to keep up with demand. Indeed he apologised for only having two silver bullion coins on display: a 1924 Silver Eagle and a 1780 Marie Theresa. So I bought both for $40 and emptied his shop!

However, Mr. Lodge has been in business for a long time, and as a very small boy I used to go to a youth club he ran called the Happy Hour Club. He recalled that in the late 1970s people used to queue down the road to buy gold and silver coins, and nothing like that had happened yet.

Mr. Lodge felt it was remarkable just how long ago the last gold boom seemed. It certainly appeared unreasonable to me that I should pay $20 for an ounce of silver as a coin, exactly the same price as I would have paid in 1979.

In that year I worked as a labourer for my father’s building company and we sold one house for $36,000. Today it would be twenty times that amount.

Nothing else I have bought on my short visit is close to the 1979 price. In just the past year gas prices are up 27 per cent and the average supermarket basket by 21 per cent, according to the Daily Mail. So why should bullion coins be unchanged over 29 years?

Mr. Lodge says it is extraordinary how long the bear market lasted and reminded me that the coins bottomed at $5 each. Yet you look at one ounce of silver and it looks like it ought to be worth $100 or more.

But there is a shortage emerging, clearly and that ought to be driving prices higher if nothing else. Mr. Lodge also thinks the industrial consumption of silver is forgotten, and that means the silver of 1979 has gone, unlike gold which piles up in vaults.

Apparently bullion dealers report a doubling of sales in the UK over the past year with increasing interest among the public in buying silver and gold coins and bars of metal. But if inflation does what it did in the 1970s then the queues down the road to buy from Mr. Lodge will be there again. I just hope he finds some stock.

July 16, 2008

Time to buy a home in the UK?

Filed under: UK House Prices — peterjcooper @ 11:41 am

Many British expats living in the Middle East are contemplating whether to buy property at home now that the UK housing market has crashed. But the same investment opportunity is also available to other nationalities who are all allowed to own property in the country.

This correspondent bought a house in Surrey Quays in London Docklands in 1993 at the bottom of the last housing slump and made a tidy profit selling out in 1998, far too early as it turned out as the housing boom continued through to last summer.

One item that caught my eye in the British press this week was the sale of a three-bed house in Surrey Quays at auction for $350,000, exactly 50 per cent down from the price its owners were trying to get a year ago. This is an extreme case but the RICS reports that transactions in the housing market stand at a 30-year low.

Is this then the moment that offshore buyers have been waiting for, the long awaited correction in UK property? The easy answer is yes. However, the market has probably not hit the bottom yet, and trying to catch a falling knife in any market is dangerous. Besides, many of the houses you see in estate agent’s windows are priced unrealistically – that is to say they reflect what owners hope to be paid rather than true market values.

It will take some time for sellers to become realistic about prices. But there is an air of capitulation about the UK housing market. The quick sale of UK mortgage firm Alliance & Leicester to Bank Santander of Spain this week shows how times have changed; Alliance & Leicester gratefully accepted an all-paper deal worth half the offer made by Santander as recently as last December.

Expatriate buyers have another problem. Getting mortgages as an expatriate has become very difficult. It is a swing back to banking practices of over a decade ago when expats were considered a poor risk. These days even an expat person with a good job will be required to put down a 40 per cent deposit.

UK house prices are one thing but obtaining credit is another. Market analysts contend that this is the most powerful force driving prices lower at present, and until the market bottoms even cash buyers should keep out. The only buyers these days are people who have no choice, or have not thought through the basic economics of their decision properly.

Just consider the position of owners who bought a year ago in the UK. The nominal value of their home is 10-20 per cent lower, perhaps already wiping out their deposit, while interest rates have been edging up. A young couple told me this week that it would cost them 40 per cent more to buy than rent.

Will the average house buyer be any better off this year, assuming that they can find a mortgage lender to suit their financial circumstances? It is hard to see how saving 10-20 per cent could be sensible when a fall of the same amount again is perfectly possible, and if auction prices are a guide that amount should be considered as the minimum likely fall.

This was certainly the lesson of the early 1990s when I was the business editor of Building magazine in London and had a ringside seat reporting on the housing market crash. I can remember advising one colleague to buy a year into the crash and being proved terribly wrong. Two years later he left with his wife for Australia and handed back the keys to the Alliance & Leicester which must have repossessed the flat at a loss.

In fact the tight mortgage market may be doing expatriates a favour in keeping them out of the UK housing market at this stage. Recessions test all the old rules, and there are no magic solutions. For example, the idea that the centre of London would be immune to house price crashes is proving completely wrong, and what has gone up most is coming down with equal velocity.

One of the best pieces of investment advice I ever had was from Dr Marc Faber who contends that buying into any asset class after a recent crash is never a good idea. His view is that calling a bottom and waiting for a recovery takes time and is at best uncertain. Look at the Nasdaq stock market crash in 2000, prices are still 60 per cent lower today.

This could also prove the case for UK house prices which became highly overvalued on any valuation yardstick. It could be that prices get so depressed like the Nasdaq that confidence in housing as an investment is broken for a generation.

In any case, I am not confident about a quick recovery in the financial sector which was not in nearly so much trouble during the housing recession of the early 1990s. Without mortgage finance house prices can not recover, and potential overseas buyers of British property would be well advised to wait for some indicator that the cost of buying a house is becoming cheaper before they rush to buy.

My signal in late 1992 was the pound’s exit from the European Monetary System. After that interest rates came down, and buying property became cheaper. But it was still three years before prices moved up meaningfully. So I would wait to buy or invest in precious metals which have a much better short term outlook.

July 15, 2008

Gold about to break $1,000, silver $20 an ounce

Filed under: Gold & Silver, US Stocks — peterjcooper @ 1:47 pm

Wow is hardly the word to describe the past week in the precious metals market. And now that Wall Street has taken the bail out of Fannie Mae and Freddie Mac badly the US dollar is in free fall again.

Tuesday and we are past $1.60 to the euro and clearly heading lower. Gold is just a whisker short of $1,000 an ounce and silver closing in on $20.

What happens next? It all depends on the flow of news from the financial sector, and my guess is that the constant stream of negative news is far from over.

So that means a further dollar fall and surge in gold can not be ruled out, indeed that looks the most likely scenario. Gold is going to $1,200 and silver $30 in short order.

My longer article yesterday called on gold and silver bugs to head back to the stock market to profit most from this boom in prices. This is going to be like the record breaking rally in late 1974 for precious metal stocks, and there is a magnificent opportunity to buy the bombed-out juniors just before this price explosion.

Let me remind you of this in the autumn when the juniors are trading at a multiple of today’s levels. Just buy a basket of these guys now and sit back – this is one of the best market anomalies I can ever remember seeing but it is typical of stormy financial markets to create what with hindsight are true opportunities.

But even stocking up on the major producers will likely deliver higher returns than the metals at this stage – marginal profits rise strongly for producers as prices really take off, acting as a leverage to the underlying metal price.

July 14, 2008

Time is running out to buy junior exploration stocks

Filed under: Gold & Silver, US Stocks — peterjcooper @ 8:19 pm

The big gold and silver producers are preparing to unleash a round of bidding for junior exploration companies that will bid up the value of the whole sector, and stocks that are good, bad and indifferent will jump in value. You have been warned. Now is the time to buy. It is so obvious with gold and silver prices on the march…

Late 1974 saw the biggest run-up in gold and silver stocks in history, and in 1979 there was something of a repeat performance. Last week’s sudden jump in precious metal prices has gold investors thinking that another stellar increase in stock prices is in the offing, if only because alternative investment classes have such a dismal immediate outlook.

Gold and silver equities have been disappointing performers over the past couple of years. Cost inflation has dented profit margins for the big producers, and capacity expansion has been subject to delays. But these fears may have been overdone, and rising precious metal prices will now begin to feed straight through to the bottom line.

The smaller junior exploration stocks have been hit hardest, and languish at a record low in comparison to the gold price. Indeed, prices have been falling for two years. In terms of asset values the juniors are now outstandingly good value. In 1974 and the late 70s this stock category delivered the highest advances, soaring 20, 50 and even over 100 times in price.

Will history repeat itself? The general of the gold bugs, Jim Sinclair, the multi-millionaire trader whose website www.jsmineset.com is required reading for serious precious metal investors, certainly believes it will be. He recalls how even juniors with poor claims saw their shares rocket in the 70s.

Besides that he is currently leading a campaign against ‘illegal shorting’ of junior stocks, which he holds is the sole reason for their current low valuations. Hedge funds have been going long on major gold producers and shorting their smaller brethren. Yet the fundamentals suggest that time is running out for the shorts, and may be just about up.

How do you value a junior exploration company? If it is just about the hope that its claims will deliver a big strike then this is akin to gambling. Juniors issue shares to fund their exploration activities and the idea is that shareholders will participate in a discovery.

However, in a bull market for gold, especially one like we have at present which about to take off to much higher levels on the back of inflation, financial and banking crises and most likely a stock and bond crash, then the assets of the junior explorers are obviously going to rise in value. What are these assets?

The main asset of a junior explorer is not the money it collects from share sales. Its assets are the parcels of land, the claims which it has staked. These are the future sources of gold and silver. And in a bull market the value of claims rises much faster than the value of precious metals, and so will the value of the owners of these claims.

The analogy of the dot-com boom is a fallacy as the assets of a junior mining company are tangible in terms of contracts to claims which are readily saleable. Where the analogy is correct is that this will be the place to find the best buys and biggest performers of the coming precious metals boom.

Buying a basket of juniors is probably the best option as the risk is then spread among say ten stocks rather than concentrates in one company. These are small companies and things do go wrong with management and due diligence is not easy, so diversification is a proper strategy.

Fortunately there are many specialist website purporting to offer the best advice, often for a monthly fee. It is hard to choose between them but www.goldseek.com and www.golddrivers.com are consistently reliable, and one good cross-check on shares is to only buy those recommended by several different websites.

Buying smaller stocks in exploration companies is not a strategy I would normally advocate to the non-specialist. But the opportunity to gear up on a major increase in gold and silver metal prices is now just so good it is to be recommended to everybody, like the dot-com stocks in 1999.

Of course, you do have to remember to exit at the right time. The dot-com stocks needed to be sold by February 2000, although missing the top of the market did still leave good profits for early players who sold late. Doug Casey, a leading expert on this area of the stock market who writes some excellent newsletters compares the juniors to burning matches that burn bright and then fade to nothing.

And this is really the characteristic of any investment in an asset price bubble, and that is what is going to happen in the junior exploration company sector. That might sound incredible today as prices have been shorted to death and many investors are throwing in the towel.

But you only have to look at the price of gold and silver to know that this is illogical and unsustainable. How can the assets of the companies that search for gold and silver be falling in value when the value of those metals is surging forward? It just has to be a market anomaly.

Market anomalies are how investors make big profits. The price of silver is another example of a market anomaly, as this column argued last week. Silver has underperformed every other metal, except gold in this commodity price boom and yet its supply and demand situation is arguably the weakest of all.

So if you want to hedge your position in the junior explorers with a second opportunity to achieve leveraged performance to the rise in price of the underlying metals, then again silver stocks are to be recommended. The smaller companies might well deliver the best performance but unless you want to deeply diversify you could stick to the bigger names.

July 11, 2008

Why Dubai is right to be buying in Russia

Filed under: Dubai Property, Oil Prices — peterjcooper @ 12:17 pm

With oil prices hitting $147 a barrel Russia is enjoying a similar economic boom to the Emirates, and has amassed $500 billion in foreign currency reserves. GDP has been rising sharply at around seven per cent per annum for the past seven years. And as emerging stock markets like China and India have sold down rapidly since last October, 48 and 35 per cent respectively, the Russian bourse hovers near an all-time high.

Last week came the news that Dubai World and OAO Roskommunenergo are to bid $5.3 billion for Russia’s biggest wholesale power producer before price caps end in 2011. This will be the first Russian Energy investment by a GCC oil state, and part of a $34 billion sale of electricity generation and distribution assets since 2006.

Dubai based entities have a mixed record for buying foreign assets in recent years. Property giant Emaar bought UK estate agency Hamptons just in time for the market to slump, and acquiring the second largest US housebuilder John Laing was arguably even worse on timing. But then Madame Tussards in London proved an excellent buy and was sold on for double the sale price. Then again last August Dubai World agreed to invest $5.1 billion in Kirk Kerkorian’s MGM Mirage company in Las Vegas as part of Dubai’s diversification plans. Since then Las Vegas has gone into an unprecedented slump with tourism falling in a city once thought recession proof.

OGK-1 has four plants in European Russia and two in Siberia, and supplies electricity to Moscow and the oil-rich Tyumen region. Only time will tell if this is the right time to buy. It is only too easy for foreign investors to become the late comers to any investment party. But the omens are very fortuitous in post-Putin Russia. The economic transformation runs deep and is being overlooked by the Cold War mentality of some observers in the West.

Arriving back in Russia after a year’s absence last week there is an immediate sense of economic prosperity in the air, and none of the near panic seen in the UK, US and parts of Europe. Indeed, the most apparent change is that inflation has surged in Russia, usually a sign of economic strength or possibly overheating. The cost of the train ticket from Moscow to St Petersburg has doubled in a year, similarly ballet prices have shot up and even the price of art on the streets is double what it was two years ago. Even gas at the pumps sells for US prices these days.

However, average salaries in St Petersburg are now around $20,000 a month, an amazing transformation from my visit in 2001 when take home pay was around a quarter of that level. House prices are up ten-fold in that time. Russian housing was privatized back in 1990. This combination of rising salaries and house prices has created a large and prosperous middle class of consumers that just did not exist in the chaotic Yeltsin years of the 1990s.

They all seem to be buying new cars. Total Russian new car sales this year are estimated to exceed 3.3 million, and for the first time Russia will overtake Germany as the largest car market in Europe. This is a middle-class on the move, quite literally, and this increase in gas consumption does not bode well for future demand pressure on oil prices either. By contrast Russian oil output is expected to fall for the first time in a decade this year, by one per cent.

The Russian consumer therefore looks well capitalised and prepared to spend. Moreover, Russian consumers do not carry heavy personal debts like their counterparts in the UK, US and even the UAE. Consumer credit is growing but still in its infancy. It is only very recently that mortgage interest rates have fallen to reasonable levels, so the consumer-led economic expansion seems to have much further to go. The economic gap between Russia and the European Union is closing but far from closed.

Against this background Dubai’s bold move into energy assets looks intelligent, although the specifics of the price paid are hard to judge without access to the accounts. Russia is deregulating electricity prices and will free prices completely in 2011. The country needs to invest $185 billion to modernize and expand power plants and infrastructure in the run up to this historic price liberalisation.

DP World’s Limitless subsidiary has also said it will build a new Moscow suburb with a local partner to create homes for 12,000 people, and clearly sees Russia as a prime emerging market for expansion. But an earlier property deal in Russia by Limitless was cancelled without explanation. This does remain an emerging market with higher than average risks as BP has found in managing its difficult relationship with joint venture partners recently.

But ultimately Russia may prove the best investment in emerging markets at the present time, ahead of China, India and even Brazil. Commodity prices are sky high and keeping the economy red hot at a time when the European Union looks set to join the UK and US in recession before long. The big question is how long commodity prices can stay up when the consumer economies are heading down?

For all its foreign exchange reserves and consumer strength, the Russian economy is quite highly geared to expansion and would take a commodity price fall badly. But OGK-1 could still prove a very good deal for Dubai and another Madame Tussards rather than a John Laing Homes, although this is likely best seen as a long term investment in a country that is in the process of achieving a permanent upward shift in its standard of living.

Next Page »

Blog at WordPress.com.