-- Posted Friday, 22 August 2008 | Digg This Article
| Source: GoldSeek.com
By: Peter J. Cooper
There has probably never been a better moment to buy UAE stocks and precious metals. Both asset classes have suffered a dramatic and completely unjustifiable sell-off over the long summer months of thin markets, and the upside looks considerable for anybody with the courage to invest.
Those who doubt the potential of UAE stocks to show their usual autumn rally, especially after Ramadan, should take heart from the news that Goldman Sachs is establishing its own $300m proprietary investment fund for the region, so that its own partners can invest their own money in the region. Goldman’s analysts have just repeated their view that oil prices are going higher over the next couple of years, and added that this autumn will see another all-time high for oil.
The conclusion is simple: the profits outlook for UAE firms in 2008 is excellent, after a very strong first half; and there is still no sign of a slowdown in the oil boom in subsequent years. Standby for another leg in the bullish trend for UAE stocks, albeit volatility is always going to be a part of this game.
I wonder if the worries about global capital markets and possible contagion in Dubai and Abu Dhabi are not overdone. The most likely cause of such a US stock market correction or crash would be high oil prices, spiked higher perhaps by some global emergency, possibly one yet to be imagined like the Georgia crisis this summer. But if oil prices go up that is good for profits in the Gulf States, and share prices should surely be a multiple of profits if nothing else.
The recovery of the dollar this summer will be positive for inflation in the Gulf and should ease back on the cost pressures that are impacting profits at the margins. On the other hand, if the US dollar resumes its decline due to a second leg of the financial crisis – which looks pretty inevitable really – then that will again be reflected in higher oil prices and higher oil revenues which are the linchpin of the regional economy.
There is also no sign of an end to the real estate boom. On the contrary it is spreading across the UAE, and Dubai is tightening up its market regulation at just the right time to keep confidence moving. Expect to see the now traditional real estate price spikes in September and after Ramadan. All the forces that having been driving real estate prices upwards, notably high demand for space and not enough of it, are still in place and again this will be good for share prices, particularly the major developers and banks.
My other strong recommendation for investors this summer was to stock up on precious metals and especially precious metal stocks. This was my advice before the summer, and it is the same now, all the more so as precious metals have suffered their typical seasonal decline and are now set up for their typical autumn upturn.
Besides if you accept the logic underpinning the enthusiasm above for UAE stocks then you ought to have a similar confidence in precious metals. Higher oil prices and a reverse in the dollar’s fortunes are going to be good for gold, silver and associated stocks.
At the same time fears over the very stability of the US financial system will resurface with a vengeance. There could be one major bank fail, as a former IMF chief economist has suggested, or a series of bank failures as tracked by one website that lists several dozen at risk. We will also see an appallingly expensive bail-out of the two US mortgage giants Fannie Mae and Freddie Mac which will call into question the size of the US national debt and its implications for the dollar.
In this environment precious metals will come to the fore as an asset class not linked to any third party or government risk. And economic problems in Europe and Japan should add to this perception and not just mean competitive devaluations as over this summer. Several top forecasters expect gold to reach $1,600 within twelve months, and given silver’s gearing to the gold price that could mean $50 an ounce silver.
Precious metal shares are levered against the gold and silver price so buying these currently very depressed stocks is one excellent way to play this market. An even better buy are the junior exploration stocks which have laid very low over the summer months and offer the highest leverage to precious metal prices. It is totally illogical for the juniors to see their price fall while the gold and silver prices have been rising in recent years, albeit with considerable volatility.
The gains for junior exploration stocks in the coming years should prove similar to 1975-80 and I am indebted to one reader for sending me this list of stock price gains during this period.
Lion Mines: 1975 price seven cents, 1980 price $380; Bankeno: 1975 price $1.25, 1980 price $430; Wharf Resources: 1975 price 40 cents, 1980 price $560; Steep Rock: 1975 price 93 cents, 1980 price $440; Mineral Resources: 1975 price 60 cents, 1980 price $415; and finally Azure Resources: 1975 price five cents, 1980 price $109.
These are actual examples of what happened to many junior exploration stocks during the second and final stage of the last great precious metals boom. Who is to say that it will be any different this time? If these price gains look fantastic, let me just say they are a historic fact, and history has a habit of repeating itself, particularly in the investment world.
Peter J. Cooper
http://arabianmoney.net/
-- Posted Friday, 22 August 2008 | Digg This Article | Source: GoldSeek.com
