All posts by David Allen

Islamic hedge funds find a way of going short

Filed under: Islamic Finance, UAE Stocks, US Dollar — peterjcooper @ 2:34 pm

Barclays Capital, and the Dubai Multi Commodities Centre Authority, an agency of the Dubai government, today announced the first Shariah compliant hedge funds on the Al Safi Trust platform. This breaks new ground for Islamic investors and opens up an entirely new asset class of alternative investments.

DMCC has committed to seed five commodity hedge fund managers on Al Safi with $50 million each, a total of $250 million, for a Shariah compliant fund of funds product to be offered under the Dubai Shariah Asset Management brand.

The commodity strategies and hedge fund managers approved by DMCC are: Tocqueville Asset Management Gold; Lucas Capital Management LLC Energy/Oil & Gas; Zweig-DiMenna Intl. Managers Natural Resources; Ospraie Management Agriculture; BlackRock, Inc;

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Al Safi is a comprehensive Shariah compliant platform comprised initially of single strategy alternative investment managers with London-listed Shariah Capital as the Shariah advisor and Barclays Capital as prime broker and structured product distributor.

Conventional short selling is unacceptable in Islamic Finance because Shariah Law prohibits an investor from selling something that he does not own. Under Shariah, an investor cannot borrow shares from a brokerage house or bank and sell them in the market for an eventual gain.

Under the guidance and approval of Al Safi’s Shariah Supervisory Board, different mechanics for the transaction have been developed. This process establishes ownership before the sale of the asset to the market. In order to accomplish this, a classical Shariah commercial model, known as the Arboon sale, has been used. Then while the mechanics of the sale may be different, the economics of the transaction are the same as a conventional short sale.

For the hedge fund manager, Al Safi is a turnkey solution that provides portfolio screening and related Shariah solutions for hedge funds which enable managers to operate within Shariah while remaining consistent with their existing investment strategies.

Through the prime brokerage resources of Barclays Capital and with the oversight of Shariah Capital, along with the guidance of the internationally-recognised Shariah scholars comprising its Shariah Supervisory Board, Al Safi tracks each trade and each position of every manager through separately managed accounts in order to ensure Shariah compliance.

In addition to the above commodity fund managers, other long/short equity hedge fund managers available on the Al Safi platform will be announced shortly. The Al Safi platform expects to include a range of alternative investment strategies as well as specialised investment funds.

Gold and silver prices to rocket as inflation grows this summer

Posted on 18 June 2008 with no comments from readers

Inflation is all around us these days, whether buying food, petrol or searching for new accommodation. Interest rates are negative, and no government seems serious about putting rates up as the global economy slows. In this environment only one financial investment class is guaranteed to shine, and that is precious metals.

Unless you seriously believe that the US dollar is about to stage a spontaneous recovery with Fed interest rates at two per cent, then stocking up on gold and silver this summer while prices remain low after the March hiatus, makes excellent sense.

Over the past week precious metals have taken a hit after remarks from Fed chairman Ben Bernanke that he is turning hawkish on inflation. But there is no action to back up this rhetoric in the markets. Do not hold your breath for a rate rise on August 4th. It is not coming anytime soon.

Lest we forget: US unemployment rose 0.5 per cent last month; US home sales and house prices are in free fall, and not expected to bottom for 18 months; high energy prices are dampening consumer spending and axing confidence levels. If Bernanke raised interest rates in this environment Americans would send out a lynching party. More seriously any increase in interest rates would crash the bond and stock markets.

Indeed, it is far more likely that the pressure will come in the other direction, either this autumn or early next year. Bond prices look expensive against surging inflation, while corporate profits are being squeezed by inflation threatening stock valuations. Both the stock and bond markets are set up for a crash, and that would mean lower and not higher interest rates.

Now if interest rates fall, say from the present two per cent to ‘an emergency’ one per cent, then the US dollar will take yet another tumble. Gold is inversely correlated to the greenback – so it will head in the opposite direction, and upwards in value. Silver is the precious sister of gold and will follow and perhaps out perform as it has historically.

There is a seasonal pattern to precious metal prices which has more to do with Indian festivals and their gold buying than the US dollar. That leaves prices weaker over the summer months with a tendency for a strong upward lift in September.

Last summer we saw gold prices trailing around the $650 an ounce mark, and then an autumn price surge from September that took prices to a peak of $1,030 by March. With prices hovering around $870 today that is still an advance of one third in price on a year ago. And with world inflation set on an upward march, and the US dollar poised for further weakness in the near future, the bull market for gold is far from finished.

Oil is far above its previous inflation adjusted, all-time high of 1980 and more than three times its nominal price level in 1980. If gold prices are inflated by the same factor as oil since 1980 then the price of gold is $3,100 per ounce.

Now that is not to say that gold prices are about to surge to $3,100, although in an inflationary environment anything is possible. But this does make predictions of $1,200 this autumn and much higher next year looks very reasonable as investors become increasingly desperate to find a hedge against uncontrolled inflation.

There will also be more and more money pursuing fewer and fewer solid investment opportunities. The global central banks are effectively printing money with low interest rates to offset the deflationary impact of falling house and other asset prices.

This new money searches for a home, and is not necessarily attracted to assets whose valuations and price levels look uncertain. The money will go where it is most likely to earn a return, and precious metals with their comparatively fixed supply will rise in value as the supply of paper money grows, creating a virtuous investment cycle.

But precious metals do not go up in a straight line. There is considerable volatility along the way. That is why buying cheaply during a temporary lull in metal prices is such a good idea. It worked last summer, why not this summer?

And do not get so mesmerized by gold that you forget about silver. In the late 1970s it was silver that delivered the biggest price rise of all when the Hunt brothers formed a pool with Middle Eastern partners to corner the market.

Only last week the Hunt family sold its privately owned Hunt Petroleum business for $4.2 billion leading to some speculation about how the family might decide to invest its new fortune. History does tend to repeat itself, and precisely the same arguments that first took the Hunts into the silver market at $3 an ounce in 1973 apply now. When their pool crashed in 1980 silver was $54 an ounce.

If silver is inflated by the same factor as oil since 1980 then the price is $194 per ounce, a considerable increase on under $17 today. And silver is the only commodity not to have passed its previous all-time high in the current commodities boom. Perhaps the Hunt family will prove once bitten and twice shy, but to invest in silver in present market conditions would appear shrewd.

The demand for the yellow metal is at an all time high and as Charles Dickens summed up, it was the best times, the worst times, the spring of hope and the winter of despair, learn here for how the inflation is keeping the prices of gold and silver at high priced metals.

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Will the Hunts buy silver again after selling Hunt Petroleum?

Filed under: US stocks, gold — peterjcooper @ 3:59 pm

This week XTO Energy finally agreed to buy Hunt Petroleum for $4.2 billion after a long legal tussle between Hunt family heirs. The firm was founded by the late billionaire HL Hunt whose sons Nelson Bunker Hunt and William Herbert Hunt once cornered the world silver market in the 1970s.

Hunt is a privately held company which makes no public comment on its affairs. But commentators think the Hunts are calling the top of the oil market and that the price for Hunt Petroleum suggests a quick deal was the objective.

However, market watchers are bound to wonder if the Hunts are planning to re-enter the silver market which they so dramatically dominated in the 1970s.

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It was in 1973 that the family first decided to buy precious metals to hedge against inflation, much as many rich investors are doing today.

Together with several wealthy investors the Hunts formed a silver pool and by 1979 held half the world’s deliverable silver supply, some 200 million ounces. Having effectively cornered the markets, the pool used leverage to drive the price of silver to $54 an ounce. But the authorities changed the rules on margin trading and crashed the market. The Hunt brothers eventually declared bankruptcy and by 1987 their liabilities of $2.5 billion exceeded assets of $1.5 billion.

After that experience you would have to have a pretty thick skin to try playing the same game again. But history does have a habit of repeating itself, and you have to wonder what investment options are open to a family with $4.2 billion to tuck away in present markets.

Precious metals are once again an attractive diversification strategy at a time of high and mounting inflation. Nothing erodes the value of cash deposits like inflation. The ever secretive Hunts could learn from their past mistakes and avoid margin trading, and still take a commanding position in the silver market, although this sum is too small to impact much on gold.

Of course, the irony of the 1970’s episode may not have been lost on the next generation of Hunts. They did indeed select one of the best possible investment strategies for that decade, and if they had not gotten too greedy with margin trading their position would have been unassailable.

So personally I would imagine the Hunts might well venture back into precious metals, and probably in a big way. But don’t expect to read any announcements or for the family to get carried away trying to corner the market again.

How high could silver go? We are still a long way shy of the $54 an ounce high of 1980 reached courtesy of the Hunt pool, and every other commodity is now past its previous all-time high. The silver market is a relatively tight and small one, so any renewal of serious investor interest, perhaps on the back of another bull run for gold is likely to take prices far higher.

An inflation adjusted all-time peak silver price would be $120 on simple adjustment to the consumer price index and much higher if related to the money supply increase over 28 years. Could the Hunts again invest in the most undervalued commodity in the world to beat inflation? They would be foolish not to!

Peter Cooper

peterjcooper

Peter CooperPeter J Cooper is a freelance financial journalist based in the Dubai Media City, and a former partner in the Middle East’s best-read English language website http://www.ameinfo.com.  He is also a columnist for http://www.business24-7.ae/cs the new UAE business newspaper.

With more than two decades of business journalism and a specialist knowledge of Middle East business and finance, he offers a different perspective on investment from an Arabian viewpoint.

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Mr. Cooper spent a decade in London as a business journalist specializing in construction and real estate from 1984-95, and then moved to Dubai as the launch editor of Gulf Business, the first-ever business magazine in the Gulf. He is also the author of ‘Building Relationships: The History of Bovis 1885-2000′.

As an investor Mr. Cooper has made only a few significant moves: buying Docklands property in 1993 and selling out in 1998; starting a dot-com company in Dubai in 2000 which later merged with AME Info; and being an early buyer of Dubai property in 2002. He is currently invested in gold and precious metals, and a minority shareholder in Linux Gold which owns claims next to existing large gold mines.

Mr. Cooper holds a Master of Arts degree in Politics, Philosophy and Economics from Trinity College, Oxford University, and studied French at institutes in Tour and La Rochelle before becoming an administrative trainee in the European Commission in Brussels where he specialized in development economics.

How to make the biggest profits from gold and silver

Filed under: Gold & Silver — peterjcooper @ 11:00 am

Investors are being won over to the case for precious metals on a daily basis, and the case against this asset class is also weakening by the day. Time then to consider how to gear up to achieve maximum returns in this asset class, albeit with higher risk.

With the UK’s second largest bank, Royal Bank of Scotland predicting a stock market and credit crash within the next three months, it is hardly surprising that the bank’s latest fund for expatriates has a heavy weighting for gold. The ongoing geopolitical tensions between Israel and Iran are also reason enough for nervous investors to seek refuge in this traditional safe haven asset.

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Royal Bank of Scotland has given gold a 25 per cent weighting in its latest Autopilot capital guaranteed deposit account targeted at UAE expatriate customers. Performance is weighted equally across four sectors: emerging equities, developed equities, property and gold. The new fund will track performance of the four sectors when rising, and divert to cash when a falling trend is identified, so gold could be its sole investment class.

The role of gold in this new account is bound to raise eyebrows and comes as the bank is warning customers to expect turmoil in equity and credit markets over the next three months, an unusal statement for the second largest UK bank. Time indeed for UAE investors to consider a little diversification into precious metals.

This column has recently presented quite a detailed case for investment in gold and silver both on the grounds of the supply and demand imbalance in the market, and because speculative interest is likely to build in an increasingly inflationary global economic environment.

Buying bullion or coins and storing them is one approach. But what if investors want to gear up to achieve maximum leverage against the price movements that seem highly likely in gold and even more so in silver?

The most obvious vehicle is a futures contract. The Dubai Gold & Commodities Exchange has contracts available for gold and silver. They are intended primarily for jewelry manufacturers for hedging price movements but they are equally useful if you want to achieve a considerable level of exposure to precious metals without having to come up with more than a down payment.

The problem with options – when you are not using them to hedge against physical metal actually being delivered on a particular date – is that timing is crucial and very difficult. If you get the timing wrong by as much as a few hours an option can expire worthless, and you will lose the entire deposit.

This is why some professional investors in precious metals choose to avoid options altogether, and instead plump for buying the most risky class of shares in the sector: the junior exploration companies.

These companies are sometimes unjustly likened to dot-com stocks. It is true that the juniors raise and burn cash while they look for gold. But unlike the dot-coms they do actually own valuable assets in the form of exploration concessions. Such land claims will rise exponentially in value during a precioius metals boom, particularly if they are well located, for example near to existing operational mines.

The argument for buying juniors is the same as buying land during a property boom: the value of land claims will soar as a boom takes off. After 1978 in the last great gold boom junior exploration stocks jumped in value with 100 and 1,000 fold increases, and even the firms with the worst claims in poor locations did well.

Creating a portfolio of junior exploration stocks, with a basket of top stock picks, is a sensible approach rather than concentrating into one company. Then if a few turn out to be real duds then the performance of the rest should still deliver a handsome return. There are many specialist websites on the Internet offering good advice on junior exploration stocks, such as www.goldseek.com and www.golddrivers.com.

Another approach to leveraging precious metal prices is to gear up on what should be the outperformance of silver versus gold. So far in the 2000s silver has kept up its tradtional outperformance in a bull market, delivering twice the price appreciation of gold, albeit with greater volatility. This greater performance is a gift for the clever investor in precious metals.

Shares in pure-play silver companies should deliver an even higher performance than the metal itself. It is not hard to see why. Silver producers have relatively fixed production costs so if silver prices rocket then their profits will rise by an even higher percentage. Hence the share price is leveraged to the price of silver.

Again the smallest silver exploration companies may deliver the best absolute returns. But there are some very large pure-play silver companies like Hecla, Pan American Silver, Silver Corp and Silver Wheaton that offer strong leverage to the silver price without the additional risk of a smaller company. For more information there are specialists websites like www.silverseek.com and www.silver-investor.com which can offer more detailed advice on silver.

To conclude, UAE investors looking for an aggressive portfolio in precious metals with maximum leverage to price changes should be looking beyond bullion and coins, and towards investments in junior exploration companies and pure-play silver producers. In the final stages of this boom in gold and silver this is where the best returns will come just as in the late 1970s.

S&P reckons oil market not like the 70s but good for gold

Filed under: US stocks, gold — peterjcooper @ 3:59 pm

Today I caught up with Standard & Poor’s VP for commodities, Eric W, Kolts who was over from New York speaking at a conference in Dubai. He is resolutely bullish on oil prices, and rejected my comparison to the 70s.

‘I can remember what happened then personally and it was not the same. The 70s oil price spikes, and there were two big ones were caused by political interference in the marketplace, not the fundamentals of supply and demand.’

Mr. Kolts is of the opinion that the oil market has undergone a structural shift with demand way out of line with the capacity of existing installed infrastructure to deliver supply. This is very different from political interference –

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the Arab oil embargo of 1973 or the Iranian revolution in 1979 – and makes a correction in price far more difficult.

‘We have seen forward oil prices move up by an unprecedented $45 since the beginning of the year,’ he says. ‘Of course there is a speculative element but this is also the start of including the cost of new infrastructure in the oil price. It is a structural shift and if you are going to tap oil offshore in a place like Brazil this is necessary to pay the cost of extraction.’

On the demand side Mr. Kolts is convinced that the tripling of the GDP of China and India since the year 2000 has also produced a permanent increase in demand for oil as China’s one million new car owners a year are not about to go back to their bicycles. Yet the oil market is still puzzling.

‘We have seen the open position in WTI crude declining since July 2007 which implies short position covering and should be producing a decline in the price,’ he says. ‘But it looks as if over-the-counter trading is more than compensating with prices rising further out.

‘I think oil prices will prove far more resilient in this climate and that we are in a super bull market due to the long-term fundamentals of emerging markets which have now emerged.’

At the same time Mr. Kolts believes petrodollars will find their way into gold as a dollar hedge with silver ‘riding on the coat-tails’ of gold. ‘The Middle East and Russia were always the big buyers of precious metals when I was a trader in the 1980s and this is of course a hedge against inflation and a declining dollar.’

But clearly S&P’s top commodities analyst does not see the oil boom fading away anytime soon because of market fundamentals. ‘That would take a very deep and long US recession,’ he concludes. Interestingly Mr. Kolts is very bearish on the outlook for US equities.

Silver my top tip for 2008 as ABBA returns!

Posted on 25 May 2008 with no comments from readers

If you asked me today what would you do with a $10,000-$50,000 windfall, or $5-10 million for that matter, my answer would be simple: buy silver bullion. Silver is a leveraged play on the gold price and physically in very short supply. The same thing happened in the late 1970s when ABBA ruled the pop charts.

Silver is often over looked. Consider last week’s gain in the gold price which hit the headlines, up two per cent. Silver was up five per cent in the same week but you will not see that in a newspaper headline.

Maybe this is because silver is still regarded as a poor man’s gold. Silver sells for $18.10 per ounce compared with $925 for gold or cheaper by a factor of 52. But this factor is on a falling trend. It was 53 a week ago.

The long-run gold to silver ratio is 15. That means silver has to triple in price just to match its long-term average relationship to the gold price. It is absurdly cheap.

Just how cheap is silver? Consider the absolute price: $18.10 is still a substantial discount off the $50 all-time peak of 1980. Then I was an economics undergraduate at Oxford University and British Rail tea cost 19p a cup – today it costs more than five times that amount.

Indeed, I can not think of anything apart from silver that is cheaper in absolute price than in 1980. Even gold is up on the $850 spike of 1980.

The big difference between gold and silver is that silver is consumed by industrial processes while gold just accumulates. That is why there is only a tiny fraction of the amount of physical silver in existence compared with physical gold. If you are thinking about scarcity it is silver that should more highly priced than gold, not vice-versa.

Back in March this was only too evident. It was not the bullion dealers that ran out of gold in the price spike, it was silver coin shops that saw their stocks quickly exhausted. Even the Perth Mint is taking a few weeks to convert unallocated silver to allocated metal because the demand exceeds immediately available supply.

But the nice thing about silver is that it is affordable to the retail investor, at the moment. Gold coins are expensive, silver is not, if you can find them.

The demand for coins from retail investors is similar to what happened in the late 1970s. As a young student I found that pre-1947 UK coinage was valued above its face value for the silver content and fortunately my father had coin-operated launderettes as a business – so I used to sort the coins and make a profit selling the ones with a high silver content.

Later the silver price crashed and my little sideline was not worth the trouble. But looking back the sudden interest in silver coinage was an indicator of the boom, spike and crash that was to come in the silver price.

You can do your sums as to how high silver might spike this time. It is a narrow market open to retail investors – although buying by the ton is also possible. In the late 1970s the silver spike outshone the gold price spike but tracked the same chart for the same reasons as the tail-end of a money supply boom.

What we are seeing now is a repeat of the late 1970s with oil prices seemingly on an uncontrollable upswing and precious metals following upwards as a safe haven and hedge against inflation. And while it might be impossible to bring back the pop group ABBA from that decade, as they have all got older, price trends for gold and silver are a different matter altogether.

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