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Monday, October 22, 2012

So, The Gold Bug Still Bugs You

A very interesting article that I read last weekend regarding gold and the monetary system. It's quite long winded, but very informative and I think it's appropriate to share it here since we have been monitoring the gold price for quite some time already.

It gives us the insight of gold and how gold are ties to the money value, even how often countries stray away from Gold Standard and then coming back to it, and then moving away from Gold Standard again and back and forth. The writer gives advice that if we do really want to hold physical gold, we should not do it in a rush, gold bug or not.

The article is as follow:-

KEYNES called it a “barbaric relic” in 1924. Scarce, attractive, malleable and immune to corrosion – gold used to be ideal money before the advent of modern paper money. Today, just like diamonds, gold is also a girl’s best friend.

In Asia, it is the masses’ darling. Most Asians are showered with gold when they are born; gold is figuratively given away during Chinese New Year; blessed with it when they get married; and even when they die – gold paper is burnt to accompany them to wherever. Money aside, gold plays an important part in the social lives of most people in Asia.

Monetary gold

Britain went off the gold standard in September 1931 in the midst of the Great Depression (1929-32). Two groups of European “gold bloc” nations (including Germany and France) held on and did not abandon the gold link until 1936.

By then, rigid adherence to the gold standard had made the Depression worse. Between 1934 and 1940, some US$16bil of gold flowed into the US, giving it ¾’s of global official gold holdings. By the end of World War II (WWII), it was clear that the US dollar was as good as gold. Indeed, it was even better since US dollar holdings earned a regular return.

After WWII, the Bretton woods system was put into place. The original system worked well for 25 years mainly because the US dollar was convertible into gold at a fixed price (US$35 an ounce). The International Monetary Fund (IMF) served as administrator for this gold-anchored monetary system of fixed (but adjustable) exchange rates among currencies.

However, in August 1971, President Nixon closed the vestigial gold window and the world off this gold-exchange standard. So, for the past 38 years, the world has been engaged in an experimental monetary system based essentially on a single reserve (the US dollar) with no link to gold.

This new arrangement of flexible (and managed) exchange rates worked flauntingly in the early years of the 1970s; and passably well in the next two decades.

Lately, however, the dollar exchange standard has been blamed for everything from promoting global imbalances to the recent economic crisis – and a future of rampant inflation yet to come. For more, read my Aug 8, 2009 column, “The Dollar Quagmire”.

The gold bugs are having a field day since. A Canadian gold-watcher friend talks enthusiastically of “gold being the only currency central banks can’t print” and “gold as an attractive new pillar of the global monetary system since it is not beholden to national politics, nor dependent on the whims of any central bank.”

World running out of gold?

The continuing interest in gold by commodity investors, central bankers, savers, speculators and consumers make it unique among commodities. Indeed, contrary to recent talk of “peak gold”, the world is not running out of gold.

Rising prices and faltering mines do not imply scarcity. Gold is constantly mined, bought, held and sold. Every year, over four times as much gold is mined and over twice as much recycled as is needed by industry.

Contrast this with say, oil. Annual crude oil supply more or less matches demand. Global oil stockpiles satisfy up to 40 days of crude demand.

The World Gold Council estimates that gold above ground today amounts to 163,000 tonnes, which would last 375 years, or nearly 3,000 times longer. Of this, holdings by central banks, IMF and governments (i.e. monetary gold) aggregated about 25,000 tonnes (15% of global) of which, the largest hoard is in the US – 8,100 tonnes. China, the world’s largest gold producer, holds only 1,054 tonnes (up 76% since 2003).

Even so, the very threat of any scarcity triggers off substitution. The 1970 price spike boosted porcelain in dentistry. Jewellery demand may possibly be more price inelastic.

But that’s also a matter of fashion, as recent slide in sales suggests. What’s more, psychology rather than supply and demand, remains critical.

Man’s addiction to gold

Gold and its mystique are deeply rooted in our human psyche. What’s clear is the absence of any rationale to tie money to gold; it is an anachronism of our modern world. Why hold gold then?

The context is revealing. The US$1 bill (its current basic design was from 1957) has since lost 87% of its purchasing power against the US consumer price index-CPI (average annual rate of 4%, as against 2% in Europe).

According to Harvard economic historian Prof Neil Ferguson, if you exchanged US$1,000 of savings for gold before the window was slammed shut in 1971, you would have received 26.6 troy oz of gold. Sold at even US$1,000/oz, the savings would have been worth US$26,596 today! But that’s history.

Is gold a good store of value? No. On the surface, it seems so. Look at the facts. In 1980, gold price was US$400. By 1990, the US CPI had risen more than 60% but the gold price stayed at US$400.

By 2000, the gold price fell back to US$300, while the CPI more than doubled! Even when the gold price peaked to US$850 in 2008, it fell back quickly in the face of falling demand.

So, over 20 years, gold prices had failed to keep up with the rise in CPI. When investors are scared – about inflation, political turmoil, financial crises, deflation – they run for cover to gold. Its price trend has been tracked and labelled the “index of anxiety.” But, clear as day, when things calm down, gold price always retracts.

Is gold a good hedge against the weak US dollar? Again, no. History shows gold does not hold its value against the euro or yen when the US dollar depreciates.

In 1980, US$1=200 yen. And, 25 years later, US$1=110 yen. The price of gold had remained during this period at about the 1980 level, i.e. US$400. So holding gold did not offset the fall in the value of the US dollar.

Surely, there is more to just “flight to safety” in gold. Recent experience shows that gold had performed well. Admittedly, gold is no slouch; it can have legs. But the future is changing.

In 2009, the gold price averaged US$972, 10% higher than what the London Bullion Market Association (LBMA) analysts and traders had predicted early in 2009.

The median forecast for 2010 is an average US$1,100. Gold reached a record US$1,226 on Dec 3, 2009 – best ever since 1948; by year end, it was US$1,096.2. Gold stood at US$1,121 when I last checked. So gold did have a good run in 2009 – up by about 35% to its all time high.

Is gold looking less barbaric?

Several reasons account for the bullion’s price rally. They also suggest gold to be a high risk and highly volatile investment as an asset class with other commodities.

First, there has been (and still is) unprecedented investor interest, prompted by continuing uncertainties of all sorts, including doubts about the US dollar’s long-term role as a reserve currency.

Second, the shift by many central banks to be net buyers of gold (net sellers since 1988). Recent buying by China and India excites the market.

Third, worries that continuing government stimuli to counter the credit crunch could well be inflating another round of asset price bubble. I already hear LBMA traders complaining that gold is trading above “fair value”, as reflected by the current state of the fragile and anaemic global economy.

Fourth, rising sovereign risk (Dubai, Greece, Ireland and Spain) is raising doubts about the political will of the US and European governments in putting a credible back-stop on the “too-big-to-save” financial system.

Fifth, rapid changes have taken place in the mechanics of investing in gold (including more complex modes of investing in gold mining stocks and exchange-traded funds – ETFs) to effectively own gold without the hassle of actually owning physical gold.

Sixth, there is the ever present herding behaviour and “momentum trading” by ever bullish traders, reaching for new highs. Overhanging the market is the unravelling of the US dollar funded carry-trade.

Finally, instability of the current gold-free international monetary system poses new risks of price volatility that cannot be readily identified nor easily explained.

Last year’s financial implosion had led to great loss of confidence in paper assets. There is now a definite shift to holding tangible assets.

Gold’s uncertain future

I don’t see how gold can become a really attractive investment. Over its very long run since 1971, the yield on gold averaged 2% annually. Stocks were up 8% per annum by contrast. I do know some who look at buying gold as an insurance policy. As I see it, investors in gold are in it for the excitement of making money. The recent increasing involvement of commodity traders and private investors in gold points to continuing volatility and speculation.

So, expect boom-and-bust-like movements in gold prices. The new players providing any element of stability are the rich emerging countries’ central banks, that are essentially long-term players. If nothing else, they have staying power. The IMF will remain, in the short run, at least – a net seller through its limited gold sales programme (403.3 tonnes).

In the end, I share the views of my Harvard mentor Martin Feldstein and the ever pessimistic Columbia Prof Nouriel Roubini that gold is just not a good hedge, period.

It must be remembered that gold really has no intrinsic value. It is sterile. Hence, there is the ever present danger and risk of constant downside corrections. Indeed, I can see gold going back to previous peaks of US$750-US$800 with ease.

So if you want to hold some gold, there is no reason why you should do it in a rush – gold bug or not.


Half of self-made women billionaires from China

HALF of the 22 women on a list of self-made billionaires released last Friday by Shanghai-based Hurun Research Institute are from China.
According to the 2012 Global Self-Made Rich Women List, 48-year-old Longfor Properties Co Ltd chairman Wu Yajun is ranked No. 1 with a fortune of 38 billion yuan (RM18.2bil), followed by 71-year-old Chan Lai Wa of Fu Wah International Group (No. 2), Zhang Yin of Nine Dragons Paper Holdings (No. 4) and Zhang Xin of SOHO China (No. 5).
These four billionaires maintained their top five ranking from last year.
The other top 10 richest women are Spain’s Rosalia Mera of Zara (No. 3), US celebrity Oprah Winfrey (No. 6), American clothing giant The Gap co-founder Doris Fisher (No. 7), Huabao Group chairman Chu Lam Yiu (No. 7), mum-and-daughter pair of Lv Hui and Diana Chen Ningning (No. 9), China Orient Landscape chairman He Qiaonv and Specsavers founder Mary Perkins from Britain (both No. 10).

The minimum wealth requirement for this year’s list is US$1bil (RM3.05bil) and the number of rich women on the list dropped from 28 to 22 with an average wealth of 13.7 billion yuan (RM6.6bil), which was a 6.8% decline from last year.
Rupert Hoogewerf, who is the chairman and chief researcher of Hurun Report, which has published the list and several other rich men lists equivalent to Forbes dedicated to China over the past decade, said the most interesting feature of the Global Self-Made Rich Women List was the dominance of wealthy Chinese women.
“The numbers are overwhelming. Chinese women in business, are like the Chinese table tennis team, at the moment, unbeatable.
“Today people are talking about the internationalisation of Chinese business. What is completely international is the women in business,” he said in a statement.
Fortunes of most of the Chinese female billionaires declined due to the weakening of the global economy and China’s sluggish property market.
Wu Yajun’s wealth decreased 10% from last year’s 42 billion yuan (RM20.2bil) while the assets of Zhang Yin and Zhang Xin slumped 28.6% to 20 billion yuan (RM9.6bil) and 19% to 17 billion yuan (RM8.2bil), respectively.
Only Chan Lai Wa, Lv Hui-Diana Chen and He Qiaonv saw increases in their fortunes to 34 billion yuan (RM16bil), 12 billion yuan (RM5.8bil) and 10 billion yuan (RM4.8bil), respectively.
Around 30% of the rich women in the world listed in the Hurun Report are engaged in property development, 20% in manufacturing and 14% in the apparel industry.
Eight of the 11 Chinese women are deputies of the National People’s Congress (NPC) and representatives of the Chinese People’s Political Consultative Conference (CPPCC). NPC is China’s top legislative body and CPPCC is its foremost political advisory body.
Also noteworthy is that Wu Yajun and Chan Lai Wa made it to the top 10 of the 2012 China Rich List (for both men and women) released last month.
In its past 14-year history, two women have topped the China Rich List. Zhang Yin was ranked China’s richest person in 2006 with a fortune of US$3bil (RM9bil) while Yang Huiyan inherited US$18bil (RM54bil) in assets from her father at the age of 25 to become the richest the following year.
This year, a total of 251 male and female billionaires in China made the list, albeit down 20 from last year, it was still up by leaps and bounds when there were only 15 billionaires six years ago.

Monday, October 1, 2012

Can you retire with 1 Million?

A very interesting article that I read from the Star newspaper last Saturday on whether we can retire with RM1 million since it officially makes one a millionaire. But will one million enough for one to retire?

A MILLION ringgit is a lot of money. In the past, it was always considered “the benchmark” in terms of a person's success. After all, having RM1mil officially makes you a millionaire.
However, realistically, is RM1mil big enough to survive on today, especially once you retire?

According to official statistics, the average Malaysian male has a life expectancy of up to 75 years, while for females its up to 77 years. This means that a retiree aged 55 has to support hinself or herself for another 20 years or more.
But let's be a little bit conservative for the purpose of this article, let's put the average life expectancy at 80 years old. With RM1mil at 55 years old, you would need to divide that money to last you another 25 years, which comes to an average of RM3,333 a month.
Dwindling value: With the high cost of living and rising inflation on an annual basis, RM1mil won’t be sufficient to retire for long. Dwindling value: With the high cost of living and rising inflation on an annual basis, RM1mil won’t be sufficient to retire for long.
Is that enough to sustain you?
“It really depends on your living standards,” says Whitman Independent Advisors Sdn Bhd managing director Yap Ming Hui.
“With rising inflation on an annual basis, that monthly sum (of RM3,333) will be worth a lot less as the months and years go by, so it's definitely not enough to sustain you for 25 years,” he tells StarBizWeek.
Yap nevertheless believes that a person is able to “make do” with RM1mil once he or she retires.
“You would definitely need to readjust your lifestyle,” he says, adding that a person without financial obligations, such as a pending house or car loan can still survive on RM3,333 a month.
“Of course, if you have a posh lifestyle, especially when you're living in Kuala Lumpur, then that amount won't be enough. But if you live outside Kuala Lumpur and live within your means, then it's still possible.”
MyFP Services Sdn Bhd managing director Robert Foo says living for 25 years with RM1mil in today's environment “would be tough.”
“If you're married and have a few children and ongoing commitments such as a loan, it's tough. If you're not generating any more money after 55, it will definitely run out.
“By the time most people are 55, their children are probably working but some of them might still depend on their parents. They could be living under the same roof or might need financial help to buy their first car, for instance.”
CTLA Financial Planners Sdn Bhd managing director Mike Lee also feels that RM1mil would only sustain a person for a limited period of time.
“RM1mil might be enough for the first few years. However, with the high cost of living and rising inflation on an annual basis, that sum won't be sufficient.”
Foo maintains that it is ultimately up to how the individual manages his or her lifestyle.
“It truly depends. For some people, RM1mil might not be enough to even last them 10 years.”
He says RM1mil might not be sufficient for a bachelor with no commitments to retire on.
“As a bachelor, you're probably going to want to go out with your friends and see the world. You're unlikely to be cooking your own food, staying at home everyday and living hand-to-mouth every month.
“That's not considered living, that's existing!”
How to retire with RM1mil
While RM1mil might not be enough to retire with, it's still a lot of money, which can be used for investment purposes and to grow your wealth even further.
Foo believes the best thing to do is to continue working well into your retirement years if health permits,.
“Don't retire! We advise our clients that if it's possible, they should continue working. At 55, you're still young enough to generate more income for yourself. Even if it's just half of the amount that you used to earn, it's still money coming in,” he says.
Yap says readjusting your living standards would also help, adding that an individual could further invest his or her money in shares, unit trust or even property.
In terms of shares, Lee says a retiree should put some of his money in stocks that provide good dividend returns.
“Real estate investment trusts also give good dividends. Have a mixture of investments and don't just leave everything in your fixed deposit account.
“Leaving all your money in the bank is not a good idea, as it won't generate good interest rates. With the inflation rate growing at an even faster rate, you'll just end up losing out.”
Foo says it's also a good idea to start your own business.
“By the time you retire, you would have acquired valuable skills that still make you marketable,” he says, adding however that starting your own business can be either a rewarding or risky endeavour.
“Starting your own business can generate high returns. But you can either make it or lose everything.”