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GLD: The Hurdles Still Remain

Summary We continue to have several things working against the gold sector at the moment. I have been selling more over the last week as this rally looked to be petering out somewhat, but I still have positions established in several gold and silver companies. If gold goes under $1,000 per ounce, then it will probably be the last time you will be able to buy it at that price ever again. The bearish hurdles that I talked about a few weeks ago in my last article on the SPDR Gold Trust ETF (NYSEARCA: GLD ) are still in place. In fact, they have become even larger since that time. We continue to have several things working against the sector at the moment. Those include the divergence between GLD and the gold stocks (HUI and XAU), the long-term downtrend that is still in place, tax loss selling into the year-end, and possible interest rate hikes at the December Fed meeting. The gold sector needs to overcome these before you can even start to talk about a new bull market. The latest sell-off in the precious metal sector began in early June, and since that time GLD has almost gotten back to even while the HUI is still showing a sizable loss. There have been many instances in the past when you suddenly get big divergences that occur in terms of where GLD/gold is priced at in relation to where the gold stocks are trading, and they usually don’t last long. At one point this month, the HUI was down about 35% while GLD was only down about 2.5%. That performance gap was extreme and it simply wasn’t going to be able to continue. Since that time, the HUI has outperformed, but it’s still lagging the price of gold by a fairly large margin. One of them is right though, and one of them is wrong. Either GLD reverses hard over the short-term, or the HUI makes some substantial gains during that time. ^HUI data by YCharts Given the price action in the HUI since the Fed meeting, one could argue that it’s the gold stocks that are correct. But it’s too soon to determine if this rally since the August lows is just a bear market bounce. Technically, the gold stocks appear to be breaking down, but I don’t like to rely on events that happen immediately after a Fed meeting, as the initial move isn’t always the correct one. Without question though, the long-term trend is still down. If the HUI can’t make a charge higher over the next several weeks, then investors will most likely start taking some tax losses in these gold stocks (if they haven’t already), as many have dropped substantially since the beginning of 2015. This will further fan the flames and we could get some major declines into the end of the year. I showed the YTD percentage loss for the following stocks in my previous article. Over the last few weeks, they have decreased even more, and the chart below reflects their current losses year to date. GG data by YCharts We also have the Fed and interest rates weighing on the gold market. Last time, I talked about how the Fed has been consistent with its message since 2012, in that the majority of members have been signaling for the last three years that they believe 2015 is when the first rate hike will occur. My argument remains that the Fed is going to lose credibility if it doesn’t raise rates this year. The weak jobs data in September had everybody believing that the Fed was on hold for the rest of 2015 and maybe well into 2016. As I said in my last update: I believe that rate hikes are still on the table, and this should be clear at the conclusion of the next Fed meeting in a few weeks. If this occurs, then gold could come under pressure again. Given the following statement out of the Federal Reserve, a 25 basis point increase at the December meeting is still a high probability event: In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Translation: baring a major decline in the U.S. and global stock markets between now and the end of the year, and assuming economic data doesn’t collapse, the Fed is most likely going to raise rates at the December meeting. GLD and the HUI could remain under pressure over the remainder of 2015, but I continue to believe this will be a “sell the rumor, buy the news” event, and gold will finally bottom soon after the first rate hike. It might not happen right away though, as there could be a slight lag. Contrary to popular belief, gold doesn’t perform poorly when rates increase. The last time the Fed embarked on a rate hike program was in 2004-2006, as the Fed Funds rate went from 1.00% to 5.25%. Gold went from just under $400 to… well, take your pick on which date and price you want to use. Clearly there was a huge bull market in gold occurring at the time. (SOURCE: FRED ) If you go back the the 1970’s, it was the same situation. And notice in both charts how gold increases immediately (or almost immediately) with the Fed Funds rate. In the chart above, gold was up about 20% in the 4-6 months that followed the first rate increase. (SOURCE: FRED ) There is one additional hurdle that the gold sector is facing at the moment, and that is the recent strength in the U.S. stock market. Anybody that has read my previous articles on GLD knows that I’m bearish on the U.S. indices. While I don’t expect a major collapse to occur, I do believe we could see a multi-year bear market with a 25-35% decline, or at best a sideways trading pattern. Stocks need to digest the massive gains that have been racked up since 2011. In other words, it’s time for a breather. But November and December are always strong months for stocks, and it seems like they are trying to have one last hurrah before finally giving way. You can see how GLD and the S&P have been trading inverse to one another over the last few weeks. Should the stock market continue to hold up, then gold wouldn’t have that firm bid underneath it as money would still be chasing these highflyers. Only when we see the S&P roll over we will see gold start to take flight. ^SPX data by YCharts My Updated Plan Of Action On October 16, in the comments section in my previous article on GLD, I told readers that I had started booking some profits in a few precious metal stocks. The reasoning was many of these were hitting their 200 day moving averages, so I thought it might be prudent to lighten up a bit. I have been holding many of these stocks since the August lows, as that is when I jumped back in. Some positions were established on the morning of October 2, as GLD had a huge move to the upside. I thought it might be wise to take some gains and see what happened over the next few weeks. My plan was to buy these positions back only if a breakout was confirmed. (Source: StockCharts.com) I have been selling more over the last week as this rally looked to be petering out somewhat, but I still have positions established in several gold and silver companies. I’m just going to hold these and see what develops. I have no desire to buy anything at the moment given the recent weakness, I would need to see some positive price action in the HUI first. Right now 104 and 130 are the two levels I’m paying attention to. Below 104 and it’s time to get very bearish, above 130 and the rally could go further and possibly develop into a bull market. As long as the HUI remains in the middle of those, then I’m just going take a wait and see approach. My Strategy With Timing This Gold Bottom I want to talk a little more about my strategy when it comes to the gold market and why I was buying in early August, even though I still believed there was more downside over the next several months. To me, this all comes down to the math and probabilities, and buying at that time was a win-win scenario. I had two options: wait for a final capitulation and preserve 100% of my capital, or start to buy in and run the risk of losing some money. This is not about the amount invested, it’s about the percentages invested. The HUI peaked at 630 in 2011, in early August it was just above 100, or an 84% decline from peak to then-current trough. I know that the HUI isn’t going to zero, as no index has ever been wiped out completely. So the question is what could be left on the downside from the roughly 100 level. The Dow declined 90% during the Great Depression, a similar decrease in the HUI would take it to 63. That price target seemed to be a very real possibility. That would most likely result in a 50% haircut in the major gold stocks that make up the index. My thought process was to buy in 20% at the August lows, and see what transpired from that point. If I lost 50% on that capital invested as the HUI went to 63, but still had 80% cash on the sidelines, then I would gladly take that. For two reasons. One, being able to buy 80% in at 63 would be an incredible opportunity for some serious long-term gains. But even if the index declined further after I bought – to say 40 to 50 – didn’t matter so much. I know that the absolute lows during capitulation events don’t hold for long, and those losses that occur at the tail end are made up in just a matter of months. It only took a few months for the Dow to double off of the bottom, and a year later it had tripled from the lows. So if the HUI plummeted to 63 or lower, it would increase back to 100 in short order. I would also quickly gain back that money lost on the initial capital outlay in that scenario. Conversely, using 20% of my allotted capital to purchase gold and silver stocks at the August lows protected me from getting behind the eight-ball, if that turned out to be the absolute bottom. I’m always trying to stay ahead of the curve. And when I get ahead I want to keep pushing that envelope and increase my distance even further. Not taking advantage of this opportunity given would have been risking losing that positioning. Plus, if the bottom was established at that point, it would have meant I would have started to buy at the absolute lows. Worse case it would be a good trade as it was clear that these stocks were turning up in the short-term. So either scenario had a very positive outcome, which is why it was a win-win type of event. Let me be clear, this is only applicable to the current price environment of the gold stock sector or when trying to time the bottom of a sector that has already experienced a massive decline. The Last Time Gold Will Trade Under $1,000? Nothing really bullish has occurred yet in the gold sector. And with all of these hurdles that it faces between now and the end of the year, it opens the door for further downside. My ultimate target since the Fall of 2014 has been 90-100 in GLD, or roughly $950-$1,000 in gold. I still believe that if there is one more decline, that it’s most likely going closer to the 90/$950 target. If that occurs, then it will probably be the last time you will be able to buy gold under $1,000 per ounce ever again. Prices of all assets continually rise over time as the money supply increases. The fair value of gold is around $1,400 an ounce (my estimate given the growth in the money supply and just looking at the current cash cost environment). That’s not going to decrease as time progresses, it’s only going to increase as the consistent trajectory of M2 is higher, not lower. Gold is no different from other goods that are produced. It costs money to extract gold from the ground, and as the money supply increases, then so do those costs. Where those costs are at gives us a good idea of where gold should be trading. But all assets can trade well above or below fair value for a given period of time. Eventually though, the rubber band gets stretched too much (in either direction) and you get a reversion to the mean or an overshoot. Gold below $1,000 would be a stretch already at current money supply levels and growth rates. In 10-20 years, it would be impossible to have gold under $1,000, given the amount of inflation that would be introduced to the system during that time. Just like today it would be impossible to have gold under $300, which is where it was at 15 years ago. So if the price does get to under $1,000, enjoy it will it last, because it will most likely be the final time gold ever trades in the three digits. That just shows you how much upside potential this sector has.

VinaCapital Vietnam Opportunity Fund: Invest In Vietnam’s Growth At A 23% Discount

Summary Vietnam trades at a substantial discount compared to other countries in Asia, and has a flurry of advantages ahead of it; now is a strategic time to consider investment. Vietnam stands out as a positive outlier among the current emerging market turmoil, as it has lower FX risks and higher growth, compared to its Asian peers. The recent initiation of the TPP and Vietnam’s removal of the FOL will both serve as major economic catalysts for the country. U.S. investors should strongly consider VinaCapital’s Vietnam Opportunity Fund as an outlet to gain exposure to Vietnam’s growth. Vietnam is poised to be one of the top winners from the newly initiated TPP, yet I argue that Vietnam was already good value before this, and the country has a flurry of advantages ahead of it that will also serve as a catalyst for increased economic growth. Trading at a 30-40% discount to Asian peers such as Malaysia and Thailand, Vietnam is a superior location for value investors. Although the country’s P/E has long remained near 12, the country’s soon to be transition to an emerging market should result in higher valuation in the future. Furthermore, Vietnam’s benefit from the TPP invitation will result in the country’s GDP growth increasing to 11% by 2025 , according to Eurasia Group. This article will focus on the benefits of profiting from Vietnam’s upside by investing in the VinaCapital Vietnam Opportunity Fund ( OTCPK:VCVOF ). (click to enlarge) Source: LSE VinaCapital’s Vietnam Opportunity Fund has strongly outperformed the IT Country Specialists Asia Pacific, reflecting Vietnam’s superiority and the benefit of considering locally managed funds. The fund has had a NAV return of 33% over the past five years, compared to the VN Index gain of 7.7%. Most impressive is the fund’s extremely high discount, which has also been higher in the past. Lower FX Risk With currencies in Asia facing strong devaluations, Vietnam stands out as a positive outlier, as its currency was only devalued by 1% last month , and the VND has only had a 4.5% YTD depreciation against the USD. While much of emerging Asia is struggling with FX risks, Vietnam has been able to cope relatively well with FX risks, and I argue that the other benefits of investment in Vietnam drastically offset this risk. Inflation recently fell below 1% , a drastic improvement from the beginning of 2014, when inflation was near 5%. The VN index has had a YTD return of 5.79% , compared to the 6.06% decline of Malaysia’s KLCI index , and the 7.23% decline of the SET index . Furthermore, FDI inflow growth into Vietnam has been substantial, with a YTD increase of 30%. Mark Mobius recently announced his plan to invest $3 billion into Vietnam, which is a shockingly high amount for Vietnam. Franklin Templeton has invested a similar amount into Thailand, yet the stock market is 10 times larger in Thailand. Economic Growth and FOL Removal Economic growth will serve as a further catalyst for the country’s stock market, and is a strong complement to the country’s low valuation: Retail sales YoY growth has consistently been high ; 26.7% in July, 10.3% in August, and 5.2% in September. Consumer spending has been consistently and rapidly increasing. Annual GDP growth expanded to 6.8% during the 3rd quarter of 2015. Infrastructure spending has risen drastically, and the country’s new 5-year plan projects 300% growth in road building. The country’s decision to relax the foreign ownership limit, in certain industries, will serve as a catalyst for an increased flow of FDI, and was one of the last items on the checklist for Vietnam to move forward as an emerging market. A recent report prepared by Edmond de Rothschild made the following comment regarding the impact of the FOL removal on Vietnam’s low valuation relative to its peers in Asia: “A major effect of the implementation of the foreign ownership limitation decree will be to narrow this discount, allow a re-rating of the market, and to improve liquidity.” Investing in funds on the ground that have pre-positioned themselves is a crucial step to buy into shares of these companies early, as stock prices of these companies are bound to rise with the new relaxation of FOL and a new inflow of FDI that is ahead. The VOF fund already has a large holding of Vinamilk, a company foreigners typically pay a 20% premium to invest in. The VOF fund has been a long holder of Vinamilk, and was able to invest in this company prior to its listing. The government has recently authorized the SCIC to sell its 45.1% stake in Vinamilk . VinaCapital VOF The VinaCapital Vietnam Opportunity Fund is an excellent means for investors to access Vietnam’s future upside. The VOF is the largest and most liquid closed end fund in its peer group, and its London listing is impressively trading at an 23% discount . The fund currently trades on London’s AIM board, and is in the process of moving to main board of the London Stock Exchange ; the shares will be migrated from the Cayman Islands to Guernsey to achieve the same efficient tax structure, while being under a superior compliance and regulatory environment. The company’s EGM held on October the 27th confirmed that the process has been approved, and the migration is expected to take place in mid-November. Its U.S. OTC listing is a very feasible and liquid option for investors, as its 3-month trading volume is currently 13,849 . This fund has a unique approach of investing in listed equity, private equity deals, and investing in companies and eventually taking them to the stock market. The company has invested in key players like Vinamilk and Hoa Phat Group prior to its listing, companies that now have the dominant market share in their respective industries, and are highly sought after by foreign investors. Source: VOF August Report The fund’s diversified approach is as follows: 49% of the fund’s assets are invested in listed equity. 14.9% of the fund’s assets are invested in the real estate industry, and the VOF is currently emphasizing an increased shift to listed real estate equity for higher liquidity. 11.1% is invested in private equity. 10.7% of the fund’s assets are invested in hospitality projects. The fund utilizes a diverse sector approach: 20.4% of the fund’s assets are invested in the food and beverages industry, a strategic approach for Vietnam’s consumption growth story. 14.9% of the fund’s assets are invested in real estate projects, and 12.1% are invested in real estate equities. 10.2% of the fund’s assets are invested in the construction industry, which is poised for further growth due to the increasing demand for construction and building materials . 6.5% of the fund’s assets are invested in the financials services industry, which is an appropriate low level due to the issues of bad debt with banks. Exim Bank is a positive outlier in this industry, and a company fully held by foreign investors. The fund also has smaller holdings in agriculture, pharmaceuticals, and other industries. Top 10 Holdings Vinamilk : 11.5% of the fund’s assets are invested in Vinamilk, which is Vietnam’s leading dairy company, with dominant market share in Vietnam. Foreign investors typically pay a premium of up to 20% for shares of this company, yet investors can indirectly access Vinamilk shares at a substantial discount through the VOF. Source: Vietstock Sofitel Legend Metropole Hotel : 10.1% of the fund’s assets are invested in Sofitel Legend Metropole Hotel in Hanoi. Hoa Phat Group : 8.4% of the fund’s assets are invested in Hoa Phat Group, which has a 22% market share for steel production in Vietnam, and whose growth is being driven by the rapid growth of Vietnam’s real estate industry. Apart from this core business, the company also operates in real estate, furniture, and agriculture. Source: Vietstock Eximbank : 5.3% of the fund’s assets are invested in this company. The State Bank of Vietnam has set a target of reducing to bad debt in banks to 3% , and Exim Bank has responded by selling $68.2 million worth of its bad debt during the first half of this year. Source: Vietstock International Dairy Product : 5.3% of the fund’s assets are invested in this company, which is one of Vietnam’s top five dairy companies. Petrovietnam Technical Services : 3.4% of the fund’s assets are invested in this company. ROE has averaged near 20% since 2012, and the company has increased revenue and earnings since 2012. The company is a valuation gem , as its P/E is 5.3 and its P/B in 0.85. The company has historically proven its ability to cope amidst low oil prices, as both its earnings and revenue increased in 2009. Source: Vietstock PetroVietnam Drilling and Well Services : 3% of the fund’s assets are invested in this company. Like PetroVietnam Technical Services, the company’s share price has fallen drastically due to the low oil price environment, creating its extremely low valuation; its P/E is 5.74 and its P/B is 1.03. The company’s revenue did not fall in 2009, while its earnings fell slightly, indicating its ability to cope in a low oil price environment. Source: Vietstock Au Giang Pharmaceuticals : 2.9% of the fund’s assets are invested in Au Giang Pharmaceuticals, a very strategic move since Vietnam’s pharmaceutical industry is projected to have CAGR of 15.4% until 2020. Century 21 : 3.1% of the fund’s assets are invested in Century 21 , a real estate company that operates resorts, and also has operations in the tourism industry. Khang Dien House : 3.7% of the fund’s assets are invested in Khang Dien House, a real estate and development company. The diverse portfolio approach, coupled with the low valuation created from irrational sell-offs, both greatly attribute to the fund’s upside potential. The VOF is successfully prepositioned for the growth ahead of Vietnam, and it is very reasonable to conclude that the discount of both Vietnam and the VOF will not be long lived. Conclusion VinaCapital’s Vietnam Opportunity Fund is an excellent vehicle to access Vietnam’s growth, and I would further argue that Vietnam is a superior site for investment in Asia. Vietnam’s superiority has been displayed by its relatively strong performing currency this August, its low valuation, extremely high economic growth, high FDI, and the newly emerging benefits of the TPP and FOL removal. Furthermore, actively managed funds in Vietnam are certainly superior to the Market Vectors Vietnam ETF (NYSEARCA: VNM ), and there are substantial benefits associated with investment in funds that have long been on the ground in Vietnam. Investors can take advantage of Vietnam’s discount, as well as the discount of this fund, and leverage from the growth that is certainly ahead for Vietnam. Vietnam is a bright spot in emerging markets in Asia, and the selloff has created extremely low valuation. An approach to Vietnam should be a long-term hold, with the willingness to utilize bottom-cost averaging, as the market is extremely volatile. A long-term hold of Vietnam will certainly be fruitful, which is clearly displayed by the country’s discount and flurry of economic advantages that are ahead. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.