Performance of 2011 and Future Outlook

Happy New Year and best wishes for all success and safer investment opportunities going forward!

I would like to share two websites if you wish to deal in physical gold/silver which are a good resource for comparing prices across gold and silver brokers:

www.comparegoldprices.com
www.comparesilverprices.com

Let's analyse a few investment opportunities, both on profit making and loss making sides for the year gone by:

Bonds were the best asset class aside from gold while all other asset classes such as real estate and stocks tumbled across countries and some individual stocks hit rock bottom.

Let's start with the good ones...

1.
Gold closed last Dec 2010 at USD 1,420.
Gold closed Dec 2011 at USD 1,566
A solid gain of 10.28%

If you sold it around USD 1,800 or USD 1,900 levels in Aug/Sept, the gain would have locked in, but this continues to be one of the best ideas even going forward. Gold when compared to stocks or bonds over the last 11 years since Jan 2000 shows a rise of 556% until Dec 2011 while S&P 500 shows 87% and Emerging Markets EAFE (Europe, Australia and Far East) Index shows only 84% OVER 11 years. This shows Gold has outperformed every single asset class over the past 11 years AROUND THE WORLD. Please see attached chart.

One thing, I would like to say here is that unlike stocks, bonds, funds, ETF's, fixed deposits (GIC's for the Canadians), real estate etc, gold and silver 'assets' besides diamonds, art, wine etc that are not taxable if purchased in physical form and sold anywhere in the world. There is no accounting for physical gold when you buy or sell anywhere i.e. no capital gains taxes etc. Wealth taxes may apply in US or India etc but can be protected.

This is the 'trick' many seriously rich investors have used over centuries to protect and grow their wealth.

This is one more reason why gold will not fall and has been my profitable idea for quite some time now.

2.
My most favourite bond from Govt of Singapore AAA rated.

This bond closed Dec 2010 at USD 102.50 with yield of 3.95%
Now, Dec 2011, Temasek bond 2019 closed at USD 110.

So, a gain of USD 7.50% plus interest of 3.95% for a solid gain of USD 11.45%!

This bond could have been sold at USD 111 levels as well couple of times in between or loan/overdraft taken against it to create liquidity.

This bond compares to US Treasury 10 year whose yield declined from 3.29% yield to 1.87% p.a. but the US Treasury bond price rose only from USD 94 to USD 107 over 1 year, and gave a return of 13% gain plus 3.29% interest for a net yield of 16.29%, however, it was a very impossible task to predict this last year, with all the uncertainty surrounding America and its banks etc.

That's because, no one in the world could have predicted the Japan earthquake in March, Arab Spring from Feb 2011 onwards or the catastrophic Greek/Spanish problems due to which USD became stronge - despite being weak - purely because it is the world's sole reserve currency and has some safe haven status still left.

In reality, while investing from here in Asia and Middle East, Temasek is the only bond which is a real AAA, at least it was, all through this last year and I believe it will, despite oncoming issues in Singapore per se (lower GDP, slow trade, weakening real estate etc) but Temasek is a stand alone cash rich financial company holding over USD 1 trillion if not more in assets. Temasek is exiting major stake in a Pakistani bank NIB and booking losses due to UBS investment etc.

This was the best bond out there through 2011 and almost nothing compares to it and you will know that I have been a strong believer in this bond for two years now due to its inherent strengths.

If you know of any bond, whose price went up 7.5% or even 5% in USD, I would like to hear from you and find out more about the company.

I do know Taqa Abu Dhabi 2017 bonds rose during 2011, due to their safe haven status by about 3% and Mubadala 2016 as well by 2%. But, this was due to the unprecedented Arab Spring events where Abu Dhabi when compared to Egypt and Bahrain etc shows strength in 2011, more so than it did in 2010.

This idea of mine has paid rich dividends even during the world's worst crisis and not only safeguarded the wealth but grew it above inflation and when compared to other assets, was a superb and an outstanding performer!!

3.
AUD
It was at 1.02 level last year and finished 2011 also at 1.02.

Which means the return on currency appreciation was zero!

However, of course, like astute investors, we booked gains of 4-5% and more, at least twice during the year, by buying AUD each time it dipped below 1.00 and selling when it went to 1.03 or 1.10 levels.

However, last year this currency gave 6% in fixed deposits and 5% in bonds and still does as on date.

I would really not like to compare this zero performance with any other currency, but since you ask...

GBP started at 1.56, ended at 1.55, loss of 0.5%.
EUR started at 1.33 and ended at 1.29, loss of 3%.
BRL started at 1.66 and finished at 1.86, loss of 12%.
INR started at 44.70 and finished at 53.06, loss of 18.70%!

Except for JPY and CNY, all other currencies had a loss, some of them very significantly.

Even high interest rates in Brazil and India could not protect the downfall of the currency.

Hence, in USD terms, all investors who invested in Brazil and India or many other places lost money in simple fixed deposits as well. We cannot compare investors who invested in bonds and stocks because India, for example, had the distinction of being the worst performing market globally in 2011 and all USD bonds have losses of 5-10% while stock market declined over 25% .

AUD, again, has been one of my most profitable ideas for over 2 years due to its basic strength and its strong correlation with China and supplier of 37% of world's coal exports and substantial metals.

4.
S&P 500 was a good place to invest last year. It comprises 500 of the world's and America's largest companies. It gave a loss of 0.003% all through the year despite a 30% volatility between 1,099 to 1,363 points. It started at 1,257.64 and also closed at 1,257.60

I had said this last year that US economy will go down but its stock markets will rise and both will disconnect. This theory of mine has been now verified and did extremely well and the facts point to the same. At least, it did not lose money, when compared to most other countries worldwide in 2011 and same will continue going forward.

Now, on to the bad ones...

1. Most investors talked about Citibank shares, at least until last year. Citi was reverse split in May 2011 so price could rise from USD 4.50 to USD 45 level.

I was asked by many for my views to buy again and I have been negative on banking sector especially in Europe and USA for almost 2 years or perhaps even longer.

Citigroup shares started the year at a phenomenal price of USD 47.30 and closed at an even more phenomenal price of USD 26.31 for a loss of 44.3% over the full 2011.

Same was case for all banks in US and Europe. JP Morgan tumbled 23.3%, Bank of America tumbled 60.8% and the mighty Goldman too tumbled 47.75%.

BNP lost 37.4%, UBS lost 28.2% while Deutsche lost 24.8%. This is without accounting for any EUR currency losses if you earn and save in USD.

2.
Greece and Italian Govt bonds and all European bonds declined significantly.

Greek 2019 bond declined from EUR 70 to EUR 34 today, so you would have lost 51% while earning 10.75% return for a net loss of 40.25%.

Italian Govt 2020 bond declined from EUR 100 to EUR 82 today while earning 4.45% p.a. leading to an effective simple loss of 13.55%.

If you were 'lucky' to hold a fixed bond of RBS, one of the world's largest banks in Europe, from UK, it declined from EUR 95 to EUR 80 levels while earning 7% pa for a net loss of 8%.

Most other European bank bonds were same, with losses between 5-15%.

If you bought Perpetuals of European banks, then no one could have helped you.

Credit Agricole bank (one of the Top 3 in France) whose Perpetual declined from USD 105 to USD 87 today for a loss of USD 18% while earning 9.75% p.a. for a loss of 8.25%.

One of the classic cases was Perpetuals of HSH Nordbank, a German bank, which WAS one of the banks who used to finance shipping around the world. Its perpetual declined from USD 40 to USD 21 with a coupon of 7.25%, if they paid that. Loss being 11.25%. Imagine, in end 2008, this was at USD 95 levels and declined to USD 30 levels stayed there until 2011 when it went to USD 60 levels in Apr 2011 and then went down to USD 21 today. Of course, this bank has filed for bankruptcy and their CEO and others sued for 'accounting mistakes'.

3.
We have covered currencies like Turkish Lira, South African Rand, Indian Rupee, Brazilian Real, Malaysian Ringitt, EUR etc which incurred substantial losses for holders of those currencies.

These currencies shall continue to decline as not only the USD provides a safe haven status but US economy is showing signs of recovery over 2012 and 2013 and will be the first one to recover due to its geo political strategy (think Iran, Libya, Egypt etc) and when compared to China, India, Europe, it will certainly do better.....

Stay tuned....and have a Fantastic 2012!

Bonds Prove Best Financial Asset for 1st Time Since at Least ‘97
By Cordell Eddings- Bloomberg