Gold, cash and short ETFs for 2010
Posted on 09 December 2009 with no comments from readers
Having dismissed equities as an investment for 2010 unless or until there is a substantial correction or crash (click here), then readers are still owed a more positive view of how to actually invest. For even dollars in a bank account are a play on the greenback and the bank.
Yesterday I had lunch with my old friend and Dubai’s Dr. Gold, Andre Homberg and we chewed over the question of gold versus cash for 2010.
Dr. Homberg, and he holds a doctorate in investment analysis, is a gold broker and presently working 18 hour days, such is the local interest in precious metals right now. He not surprisingly thinks every investment portfolio should have a gold allocation.
Buying opportunity
But even Andre concedes that the US dollar looks to be on a roll and that could set the gold price back to $1,050 or even $1,000 within the timeframe of a couple of months. That would be a great gold buying opportunity for the price outlook is very good on a one to three or four year view.
For short-term gains then the US dollar is a good bet, and the greenback only started to strengthen at the end of last week, so investors have not yet missed this trend. But hurry up, the sudden unwinding of the equities rally and a collapse in many commodity prices, including a downslide for gold, will power up the dollar.
Dr. Homberg likes the UAE dirham for it is essentially a US dollar with a higher yield as the exchange rate is pegged and the interest rate set by the UAE Central Bank. And with all Dubai’s current debt problems the risk of a flight of capital demands that interest rates be set higher than elsewhere.
Yet the real risk of holding dirhams has to be one of the lowest imaginable. You have an explicit guarantee from what is arguably the world’s richest country per capita, and a net creditor nation whatever Dubai’s debts might be. Is that not better than US T-bonds?
As a leading local gold broker Dr. Homberg is not without an interest in recommending a switch to gold once the US dollar rally is done. But he does have a very logical point.
Devaluation and deficits
The US deficits continue to mount and no currency can rally for long under such circumstances if history is to be our guide. Therefore, a dollar rally and weakening of the gold price would be a great opportunity to switch to the currency that can not be printed by central banks.
For leverage to the gold price you can not do much better than silver, but this is only for investors who can ‘handle 50 per cent price volatility’ says Dr. Homberg.
In the meantime, there is a good deal to be said for shorting global stock markets. Those who understand options know how to go short. For those with less technical knowledge but confidence about the direction of the market there are the short ETFs.
You do have to be careful with short ETFs. These are instruments with an element of leverage. That is fine if you get the directional trend right, but not if you get it wrong. On the other hand, if markets move sideways the losses are quite small and exact market timing is only really an option for time travelers or insider traders.
Short ETFs have been terribly battered by the rally since March, and that ought to make them among the best bargains in the stock market if a correction is due as I have argued very recently (see this article).
Short ETFs
You do have quite a choice. To short the S&P financials then FAZ and SKF are available. Personally I like QID to short the Nasdaq and EDZ as a short on emerging markets.
Of course, the moment markets turn down these ETFs will react instantly – or at least they should do, there are court actions pending from investors disappointed by some tracking performance but you will capture the direction and a leverage of the movement.
The problem is more that jumping in at the last minute is going to be costly in terms of missed performance. Perhaps the best thing is to buy when markets are moving sideways, or even better falling very gradually as they are this week, and then you have a position for when the real action starts.
However, short positions or short ETFs should never be more than a kicker in a portfolio. There is the risk of losing money as well as making a great deal in a serious stock market correction. Experts will tell you actual market short positions are less expensive.
That is true but a short ETF has a manager to handle the options for you, and to keep them rolling over, which individual investors with other concerns might forget to do. So keep a few short ETFs in your portfolio for 2010 and you should be pleasantly surprised as these instruments will rocket as markets plummet.
Indeed, the nicest thing about short ETFs is that they should leave you in the money when everybody else has just lost a fortune. That will make you keen to buy stocks again at exactly the right moment.
Buffettology
Remember at the end of last year when Warren Buffett called the market bottom? He was a little early but if you had bought then and held for this year’s rally you would have done very well.
If markets plummet in 2010 then with cash, gold and short ETFs you are well placed to go bargain hunting with the Warren Buffetts of this world.
If markets drift sideways then you will preserve your capital with the upside on gold compensating for losses in the short ETFs. Only if stock markets manage another leg upwards to even more astonishing levels of overvaluation will you loose out.
Sat in Dubai watching the local stock markets crashing this week perhaps makes me particularly clear on what the outlook for 2010 might hold, so I offer this as a different perspective on financial markets.
