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Daniel Zurbrügg
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Daniel Zurbrügg is the Managing Partner of Swiss Infinity Global Investmetns GmbH(http://www.swissinfinity.ch), a Swiss based independent asset management firm. The firm provides clients with independent investment research, asset management and asset protection services. With a global network... More
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Swiss Infinity Global Investments GmbH
  • China – Opportunity or Treat
    The recent visit to the United States by Chinese president Hu Jintao got a lot of attention and coverage in international media and the fact that so many important people showed up for this meeting shows how important it was for both sides. For China this visit was important, not only for political reasons, but also for building its prestige on the global stage. From an economic point of view, they are able to act from a position of strength. President Hu Jintao said a few days before the visit that (quote)…”the Dollar dominated currency system is a product of the past”…at the same time, he said that the Chinese Yuan is not yet ready to takeover as the new world reserve currency. It remains to be seen what “not yet ready” means according to the Chinese definition but we think China will make a number of very significant changes in coming years that could have a lot of consequences for the West.The strategy of China for the last 30 years has been to keep its currency artificially low in order to promote exports and the country has been extremely successful in doing so. However, this has resulted in significant imbalances in the world economy that sooner or later need to be reversed. China has been accumulating huge amounts of foreign currency reserves and a lot of it was reinvested to buy U.S. treasuries, therefore financing “America Inc.” and other countries which are now running large deficits. Let’s be clear, China has a number of very serious problems, different problems compared to Europe or the United States but equally challenging. The growing imbalance between the booming cities and rural areas continues to drive more and more people to the big cities. This growing imbalance is increasing socioeconomic tensions and coupled with strong inflationary pressure makes it increasingly difficult for people to make a living, especially in more rural underdeveloped areas. There is also a large infrastructure and pollution problem in China and these problems need to be solved in coming years. The key advantage that China has is that it is not a democratic system and that the ruling party can make and implement much needed changes quicker than most other countries. That should help China to continue to grow their economy and keep adding jobs for many millions of people. I think we are at a very important turning point in the history of China. For the past few decades, the focus was on producing and exporting goods and at least in that context, China has been very successful. Going forward China needs to focus more on securing a stable supply of energy, commodities and technology and therefore its interests are not so heavily biased towards keeping a strong currency anymore. Imports are growing faster than exports, currently at a rate of about 25%, compared to export growth of only about 17%. The overall trade surplus of China has fallen about 9% from the previous year and about 34% from 2009. There is another factor that needs to be considered, China needs to deal with its inflation problem and we think it will tackle it from two sides. They will continue to hike interest rates further and therefore control domestic growth and prevent the economy from overheating, at the same time, they will change their currency policy by allowing Chinese companies to hold large foreign currency balances abroad and use them for investment purposes. That will help the Chinese central bank because it is no longer forced to buy foreign currency reserves and issue cheap domestic currency, which had in turn caused further inflationary pressure in the past. I think that this will help the Chinese central bank to bring inflation under control and will probably allow them to keep further interest hikes moderate and diminish the risk of them over-tightening, which should also be positive for Chinese stock prices. So even a small, controlled appreciation of its currency will help them eventually to bring growth and inflation at home under control. That’s why we think that China will let their currency appreciate, but, as always they will do it when it serves their purpose and that might now be sooner not later. At the same time, the effects from such developments would be negative for the west. In a time when western governments are so dependent on countries like China to buy their debt, we expect the purchase of government paper to decrease in coming years, which will make it a lot harder and more costly for troubled governments to issue debt. This will eventually lead to higher interest rates in the west and that would come at a time when inflation is already on the rise because of rising commodity and energy prices. Central banks in the west will probably try to keep short-term rates low for as long as possible in order to stimulate their domestic economies, but the longer-end of the yield curve could experience a significant increase in yields. We feel that adding further exposure to Chinese Yuan and possibly other Asian currencies is the right thing to do going forward and also caution investors to hold bonds with long maturities.
     
    Feb 01 6:19 AM | Link | Comment!
  • Rare Earths – Update
    The investment theme “Rare Earths” has received a lot of attention since we wrote about these investment opportunities last year in our October issue. Remember, the term “Rare Earths” refers to a group of metals, minerals, chemical elements with exotic names like scandium, yttrium, lathanides or lutetium just to name a few. These elements are used in a number of applications and devices, such as mobile phones, TV’s and microprocessors. With China dominating the market with about 90% market share in rare earths mining, it is obvious that China has the power to control prices and has recently begun to use its dominant market position politically and strategically. The recent tensions between China and Japan were the first example of this. China pretty much stopped the export of rare earths to Japan, which presents a big problem for Japanese manufactures that depend heavily on this supply. China states that it is implementing these export restrictions to secure the supply for their domestic market and that this export control measure is not targeted at foreign competitors. China has recently announced further reductions in their exports of rare earths which means that prices might continue to soar. The basic investment case hasn’t changed since last year and we think that there is going to be a lot more investment activity in the sector in order to increase the ex-Chinese supply of rare earths. Eventually, since they are not as rare as the name suggests and can be found in many other places in the world, the increased exploration activity will bring prices down to a new equilibrium price. We believe that the sector continues to offer an attractive investment opportunity for the next 12 to 24 months as a growing number of companies want to secure ex-Chinese supply of rare earth minerals. It remains to be seen whether the sector represents a longer-term investment perspective, but that will depend on the future development of rare earths prices when more supply will eventually come to market.
    Feb 01 6:16 AM | Link | Comment!
  • Gold Update – It’s not a one-way street
    In our last update in October 2010 we said that gold prices might start to enter a period of consolidation and that the market would start to look for new catalysts to support the next upward move in gold. Now, three months after we made that statement, gold prices have moved down to around USD 1’330, which is about 6% lower than when we wrote our last report and almost 10% lower than the highs seen in November. Given the correction in gold, it is important to review the investment case for gold and decide whether the current price correction is indeed just a consolidation or whether a larger correction is in the cards. What is obvious right now is that there is lower demand for gold and volumes have been relatively thin. We saw a first wave of profit taking in late December and, since the start of this year, we have been seeing lower buying interest and lower volumes. We believe there are a number of factors responsible for the current price consolidation. The main reason is that gold had an incredible bull run the past two years and an increasing number of investors want to lock in the gains. Also, buying activity in Asia has been very low and will probably not increase until after the Chinese New Year (early February) when market participants are finally back at work. Another reason in our view is that the general fear about future inflation and possibly hyper-inflation caused by money printing world wide has diminished somewhat. Don’t get me wrong, we still believe we have laid the groundwork for future inflationary pressure, but it might take longer for it to materialize. Since this is not a new topic, people have gotten used to it and, when things become old news, people usually don’t show much reaction anymore; that’s just how the mind of the market is working. Another factor that needs to be kept in mind is the recent increase in longer-term interest rates that has made it more costly for investors to hold gold relative to other assets, since it is not paying any interest. However, as long as the short-end of the yield curve remains at very low levels, the impact on gold prices should be moderate. The recent downward move in prices to levels around USD 1’310 is nothing more than a reversion to mean, or a reversion to the long-term upward trend as can be seen from the chart below. After unsuccessfully testing upper limits a couple of times, the prices are now moving to the lower end of the trading band in the absence of larger buying interest.
     
     
     
    In our view, gold will only be able to move to fresh highs once the market receives real news that is currently not priced in. This could come in the form of a sudden spike in inflation, announcements of further measures to provide liquidity (QE3?) or a sudden market sell-off caused by external factors such as a worsening of the sovereign debt crises or a military conflict (Korea, Iran). In our view, the recent consolidation is not the start of a larger correction in gold prices but we might see gold in range trading for another couple of months. The longer the price can stay above important support levels and therefore forming a new base, the better the downside is protected. In any case gold remains an important part of our core holdings for the time being.
    Feb 01 6:14 AM | Link | Comment!
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